Elkcorp 10-Q 2006 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2005

OR

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. Yesþ. Noo.

     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):

Large accelerated filero Accelerated filerþ Non-accelerated filero

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso. Noþ.

     As of close of business on January 31, 2006, the Registrant had outstanding 20,412,207 shares of Common Stock, par value $1 per share.

ElkCorp and Subsidiaries

For the Quarter Ended December 31, 2005

Table of Contents

	Page
Part I. FINANCIAL INFORMATION (unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2005 and June 30, 2005		1
Consolidated Statements of Operations for the Three Months and Six Months Ended December 31, 2005 and 2004		2
Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2005 and 2004		3
Consolidated Statements of Shareholders’ Equity for the Six Months Ended December 31, 2005 and 2004		4
Notes to Consolidated Financial Statements		5-13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk		22
Item 4. Controls and Procedures		22
Part II. OTHER INFORMATION
Item 1A. Risk Factors		23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 4. Submission of Matters to a Vote of Security Holders		23
Item 6. Exhibits		24
SIGNATURES		25
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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ELKCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, $ in thousands, except per share data)

	December 31,			June 30,
	2005			2005
Assets
Current Assets
Cash and cash equivalents	$	5,385		$	9,261
Short-term investments		61,700			69,160
Trade receivables, less allowance of $633 and $695		137,725			148,928
Inventories		89,804			71,467
Prepaid expenses and other		8,035			8,223
Deferred income taxes		8,287			7,849
Discontinued operations		2,606			1,193
Total current assets		313,542			316,081
Property, Plant and Equipment, at cost		468,623			440,989
Less — Accumulated depreciation		(173,067	)		(156,901	)
Property, plant and equipment, net		295,556			284,088
Goodwill and Intangible Assets		23,350			2,186
Other Assets		6,354			7,496
Discontinued Operations — Noncurrent		2,251			3,718
	$	641,053		$	613,569
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	51,266		$	56,742
Accrued liabilities		35,004			31,171
Current maturities on long-term debt		971			381
Discontinued operations		881			937
Total current liabilities		88,122			89,231
Long-Term Debt		202,985			200,146
Deferred Income Taxes		53,150			53,382
Commitments and Contingencies
Shareholders’ Equity
Common stock ($1 par, 20,432,038 and 20,297,905 shares issued)		20,432			20,298
Paid-in capital		81,818			70,412
Unearned compensation – stock-based compensation		(11,176	)		(5,620	)
Retained earnings		205,886			186,388
		296,960			271,478
Less — Treasury stock (4,164 and 22,761 shares, at cost)		(164	)		(668	)
Total shareholders’ equity		296,796			270,810
	$	641,053		$	613,569

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					Six Months Ended
	December 31,					December 31,
	2005			2004		2005			2004
Sales	$	228,949		$	194,099	$	444,806		$	357,111
Cost and Expenses
Cost of sales		186,812			152,897		362,941			286,319
Selling, general and administrative		21,521			15,880		41,627			31,061
Operating Income from Continuing Operations		20,616			25,322		40,238			39,731
Interest Expense and Other, Net		2,968			2,382		5,825			4,476
Income From Continuing Operations Before Income Taxes		17,648			22,940		34,413			35,255
Provision for income taxes		6,567			8,742		12,805			13,397
Income From Continuing Operations		11,081			14,198		21,608			21,858
Gain (Loss) From Discontinued Operations, Net of Income Taxes		(66	)		128		(66	)		(723	)
Net Income	$	11,015		$	14,326	$	21,542		$	21,135
Income (Loss) Per Share — Basic
Continuing operations	$	.54		$	.72	$	1.07		$	1.11
Discontinued operations		—			.01		—			(.04	)
Net income	$	.54		$	.73	$	1.07		$	1.07
Income (Loss) Per Share — Diluted
Continuing operations	$	.54		$	.70	$	1.05		$	1.09
Discontinued operations		—			.01		—			(.04	)
Net income	$	.54		$	.71	$	1.05		$	1.05
Dividends Per Common Share	$	.05		$	.05	$	.10		$	.10
Average Common Shares Outstanding (000’s)
Basic		20,270			19,697		20,227			19,684
Diluted		20,595			20,154		20,586			20,035

See accompanying notes to consolidated financial statements

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ELKCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, $ in thousands)

	Six Months Ended
	December 31,
	2005			2004
Cash Flows From Operating Activities
Income from continuing operations	$	21,608		$	21,858
Adjustments to reconcile income from continuing operations to net cash provided by continuing operations:
Depreciation and amortization		12,766			11,457
Deferred income taxes		(842	)		5,508
Stock-based compensation		4,040			1,399
Changes in assets and liabilities, net of acquisition:
Trade receivables		16,911			(26,832	)
Inventories		(11,428	)		(5,155	)
Prepaid expenses and other		517			(85	)
Accounts payable and accrued liabilities		(14,904	)		14,029
Net cash provided by continuing operations		28,668			22,179
Net cash provided by (used for) discontinued operations		(68	)		1,628
Net cash provided by operating activities		28,600			23,807
Cash Flows From Investing Activities
Additions to property, plant and equipment		(9,538	)		(21,181	)
Purchases of short-term investments		(191,500	)		(53,910	)
Sales and redemptions of short-term investments		198,960			19,850
Acquisition, net of cash acquired		(24,285	)		—
Other, net		(1,974	)		(872	)
Net cash used for investing activities		(28,337	)		(56,113	)
Cash Flows From Financing Activities
Proceeds from sale of Senior Notes		—			50,000
Repayments on Revolving Credit Facility, net		—			(10,300	)
Payments on other borrowings		(4,542	)		—
Dividends paid on common stock		(2,044	)		(1,995	)
Purchases of common stock		(1,444	)		(587	)
Exercises of stock options		3,474			1,198
Excess tax benefits of stock option exercises		417			—
Net cash provided by (used for) financing activities		(4,139	)		38,316
Net Increase (Decrease) in Cash and Cash Equivalents		(3,876	)		6,010
Cash and Cash Equivalents at Beginning of Year		9,261			273
Cash and Cash Equivalents at End of Period	$	5,385		$	6,283

See accompanying notes to consolidated financial statements.

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ELKCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited, $ in thousands)

			Additional												Total
	Common		Paid-in			Unearned			Retained			Treasury			Shareholders’
	Stock		Capital			Compensation			Earnings			Stock			Equity
Balance, June 30, 2004	$	19,988	$	57,852		$	(628	)	$	143,540		$	(5,710	)	$	215,042
Net income		—		—			—			21,135			—			21,135
Exercises of stock options		—		(23	)		—			—			1,220			1,197
Restricted stock grants		—		1,223			(3,450	)		—			2,227			—
Restricted stock vesting		—		—			591			—			—			591
Performance stock grants		—		4,806			(4,806	)		—			—			—
Performance stock amortization		—		—			808			—			—			808
Purchases of treasury stock		—		—			—			—			(587	)		(587	)
Dividends		—		—			—			(1,995	)		—			(1,995	)
Other		—		(7	)		—			—			7			—
Balance, December 31, 2004	$	19,988	$	63,851		$	(7,485	)	$	162,680		$	(2,843	)	$	236,191

			Additional											Total
	Common		Paid-in		Unearned			Retained			Treasury			Shareholders’
	Stock		Capital		Compensation			Earnings			Stock			Equity
Balance, June 30, 2005	$	20,298	$	70,412	$	(5,620	)	$	186,388		$	(668	)	$	270,810
Net income		—		—		—			21,542			—			21,542
Stock option grants		—		6,209		(6,209	)		—			—			—
Exercises of stock options		113		1,636		—			—			1,725			3,474
Excess tax benefit of stock option exercises		—		417		—			—			—			417
Stock option vesting		—		—		2,288			—			—			2,288
Restricted stock grants		21		628		(857	)		—			208			—
Restricted stock vesting		—		—		700			—			—			700
Performance stock grants		—		2,331		(2,331	)		—			—			—
Performance stock amortization		—		—		1,053			—			—			1,053
Purchases of treasury stock		—		—		—			—			(1,444	)		(1,444	)
Dividends		—		—		—			(2,044	)		—			(2,044	)
Other		—		185		(200	)		—			15			—
Balance, December 31, 2005	$	20,432	$	81,818	$	(11,176	)	$	205,886		$	(164	)	$	296,796

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ELKCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – General

     The attached consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. 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 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, 2005. 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 six-month periods ended December 31, 2005 and 2004. 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

     ElkCorp’s primary strategic focus is on its building products platforms, which consist of Elk Premium Building Products, Inc. and its operating subsidiaries. The Premium Roofing Products segment manufactures premium laminated fiberglass asphalt shingles and accessory products. The segment includes RGM Products, Inc. (RGM), which was acquired in August 2005, and manufactures high-profile hip and ridge and other roofing related products. The Composite Building Products segment manufactures composite wood decking, railing, marine dock, fencing and other OEM products. The Specialty Fabric Technologies segment is a marketing operation developed to create brand awareness and promote increased sales of Elk’s nonwoven specialty fabric products, which includes external sales of coated and uncoated nonwoven fabrics used in fire barrier technologies, various applications for other industries and in asphalt shingles. Fire barrier technologies feature VersaShield fire retardant coatings designed for use in bedding, home furnishings, and other consumer products. The Surface Finishes segment includes hard chrome and other finishes designed to extend the life of steel machinery components operating in abrasive environments. In prior periods, fire barrier technologies and the Surface Finishes segment were combined and shown as Other, Technologies. External sales of coated and uncoated nonwoven fabrics were previously included in the Premium Roofing Products segment. Corporate and Other represents corporate office expenses and other expense items not allocated to the operating segments. In fiscal 2005, both Cybershield, Inc. (Cybershield) and Ortloff Engineers, LTD (Ortloff) were sold. Both companies are reported as discontinued operations in all periods presented.

     Financial information by company segment is summarized as follows:

	(In thousands)						(In thousands)
	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2005			2004			2005			2004
Sales from Continuing Operations
Premium Roofing Products	$	205,642		$	179,823		$	400,359		$	327,416
Composite Building Products		8,678			3,259			13,758			6,242
Specialty Fabric Technologies		12,336			8,791			26,080			18,794
Surface Finishes		2,293			2,226			4,609			4,659
	$	228,949		$	194,099		$	444,806		$	357,111
Operating Profit (Loss) from Continuing Operations
Premium Roofing Products	$	26,160		$	32,034		$	53,719		$	49,813
Composite Building Products		(1,398	)		(3,183	)		(5,518	)		(3,900	)
Specialty Fabric Technologies		1,373			648			2,883			1,346
Surface Finishes		171			(184	)		444			143
Corporate and Other		(5,690	)		(3,993	)		(11,290	)		(7,671	)
		20,616			25,322			40,238			39,731
Interest expense and other, net		2,968			2,382			5,825			4,476
Income from continuing operations before income taxes	$	17,648		$	22,940		$	34,413		$	35,255

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Note 3 – Cash, Cash Equivalents and Short-Term Investments

     Cash equivalents represent money market funds subject to daily redemption. Short-term investments consist of Auction Rate Securities (ARS) and Variable Rate Demand Notes (VRDN). The company’s ARS and VRDN investments are tax-exempt instruments of high credit quality. The primary objectives of both types of investments are safety, preservation of invested funds and liquidity sufficient to meet cash flow requirements. Both ARS and VRDN securities have variable rates tied to short-term interest rates. Interest rates on ARS securities reset through a modified Dutch auction process at predetermined short-term intervals, either every 7, 28, or 35 days. Interest rates on VRDN securities reset weekly and can be tendered for sale upon notice (of generally no longer than seven days) to the remarketing agent in the secondary market to other investors. Although both ARS and VRDN securities are issued and rated as long-term securities, they are priced and traded as short-term instruments. The company classifies these short-term investments as available for sale in accordance with SFAS No. 115, “Accounting for Certain Instruments in Debt and Equity Securities.” The investments are carried at cost or par value which approximates the fair market value.

      The company reflects disbursements as trade accounts payable until such time as payments are presented to the bank for payment. At December 31, 2005 and June 30, 2005, disbursements totaling approximately $14,000,000 and $23,000,000, respectively, had not been presented for payment to the bank.

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 (or loss) 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 anti-dilutive to their respective basic per share amounts. Performance share awards have been excluded from the calculation of diluted earnings per share, as the conditions necessary for their issuance have not been satisfied as of the end of the reporting period. The following table sets forth the computation of basic and diluted earnings per share from continuing operations:

	(In thousands, except per share data)
	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2005		2004		2005		2004
Income from continuing operations	$	11,081	$	14,198	$	21,608	$	21,858
Denominator for basic earnings per share — weighted average shares outstanding		20,270		19,697		20,227		19,684
Effect of dilutive securities:
Unvested restricted shares and outstanding stock options		325		457		359		351
Denominator for dilutive earnings per share — adjusted weighted average shares and assumed issuance of shares purchased under stock option plans and vesting of restricted shares using the treasury stock method		20,595		20,154		20,586		20,035
Basic earnings per share from continuing operations	$	.54	$	.72	$	1.07	$	1.11
Diluted earnings per share from continuing operations	$	.54	$	.70	$	1.05	$	1.09
Stock options excluded from computation of diluted earnings per share due to anti-dilutive effect		—		—		—		365

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Note 5 – Inventories

     Inventories consist of the following:

	(In thousands )
	December 31,		June 30,
	2005		2005
Raw materials	$	21,172	$	15,380
Work-in-process		222		219
Finished goods		68,410		55,868
	$	89,804	$	71,467

Note 6 – Long-Term Debt

     Long-term debt is summarized as follows:

	(In thousands)
	December 31,		June 30,
	2005		2005
Senior Notes	$	195,000	$	195,000
Revolving Credit Facility		—		—
Fair value of interest rate swaps		1,670		4,463
Other debt		7,286		1,064
		203,956		200,527
Less: Current maturities		971		381
	$	202,985	$	200,146

     The company has issued Senior Notes (Notes) summarized as follows (in thousands):

Principal
Amount		Maturity	Interest Rate
$	25,000	July 2007		4.69	%
$	60,000	June 2009		6.99	%
$	60,000	June 2012		7.49	%
$	50,000	November 2014		6.28	%
$	195,000

     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 June 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 December 31, 2005, the fair value of the derivative was $2,072,000 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 2007. This interest rate swap is also a fair value hedge with the same accounting and reporting as the aforementioned interest rate swap. At December 31, 2005, the fair value of the derivative was a liability of $402,000 and is recorded in accrued liabilities and as a decrease in the fair value of long-term debt.

     At December 31, 2005, 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 December 31, 2005, there were no borrowings outstanding on the Facility and $3,852,000 of letters of credit were outstanding.

     Both the Notes and the Facility contain financial covenants which 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. At December 31, 2005, the company was in compliance with all these financial covenants.

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     Other debt includes various mortgage debt and notes payable assumed in connection with acquisitions. The majority of these obligations, which included both fixed rate and variable rate instruments, are secured by liens on the assets acquired, and are due at various dates through June 2020.

Note 7 – Stock-Based Compensation

     The Compensation Committee of the Board of Directors has established a current practice of awarding ElkCorp officers 75% of a long-term incentive compensation award in the form of performance shares (as described below) and 25% in the form of stock options, with three-year vesting and a ten-year term. Other key employees receive their long-term incentive compensation in the form of awards of performance shares and stock loan grants. Stock-based compensation is granted to officers, directors and certain key employees in accordance with the provisions of the shareholder approved 2004 Amended and Restated ElkCorp Equity Incentive Compensation Plan (Equity Incentive Compensation Plan). This plan provides for grants of stock options, performance shares and restricted stock.

Stock Options -

     The company’s Equity Incentive Compensation Plan provides for the granting of incentive and nonqualified stock options to directors, officers and key employees of the company for purchase of the company’s common stock. Stock options are generally granted for a ten-year term. Options granted to officers and key employees generally vest ratably over three-year or five-year periods. Options granted to nonemployee directors fully vest at grant date. Options granted prior to July 1, 2005 to employees who have reached retirement age are amortized over the applicable vesting period until such time that they announce their intention to retire. At that time, remaining unrecognized compensation is recorded as compensation expense.

     Prior to fiscal 2006, the company accounted for its stock options under the recognition and measurement provisions of APB Opinion No. 25 and related interpretations. Effective July 1, 2005, the company adopted the provisions of SFAS No. 123 (Revised 2004), “Share-Based Payments” (SFAS 123 (R)), and selected the modified prospective method to initially report stock-based compensation amounts in the consolidated financial statements. The company is currently using the Black-Scholes option pricing model to determine the fair value of all option grants. For option grants issued in the six-month period ended December 31, 2005, the following weighted-average assumptions were used:

Dividend yield:		0.85	%
Risk-free interest rate:		4.15	%
Expected market price volatility:		.39
Expected life of options:	8 years
Fair value of grants:	$	13.37

     For the three-month and six-month periods ended December 31, 2005, the company recorded $1,212,000 and $2,288,000, respectively, for stock-based compensation expense related to stock option grants. This amount is recorded in selling, general and administrative expense. The company issues treasury shares, if available, to satisfy stock option exercises. If treasury shares are unavailable, new shares are issued. At December 31, 2005, there is $3,920,000 of total unrecognized compensation cost related to unvested stock options remaining to be recognized. Of this total, $1,987,000 will be recognized in the last six-months of fiscal 2006 and $1,933,000 will be recognized in subsequent years through fiscal 2008. Beginning July 1, 2005, any tax deductions in excess of recognized compensation costs are reported as financing cash flows rather than operating cash flows as was prescribed prior to the adoption of SFAS 123(R). For the six-month period ended December 31, 2005, $417,000 of excess tax benefits relating to stock option exercises were recorded. There were no excess tax benefits from the exercise of options in the six-month period ended December 31, 2004.

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Performance Stock Awards -

     In December 2004 and July 2005, the company entered into Performance Stock Award agreements (PSA Agreements) granting performance stock awards (PSAs) to certain of the company’s officers and other key employees under the Equity Incentive Compensation Plan. The PSAs consist of a contingent right to receive whole shares of the company’s common stock if the company meets specified performance criteria over a three-year performance period. The performance criteria for 70% of the total PSA is based on the company’s return on equity (ROE) measured against all New York Stock Exchange (NYSE) listed companies, and 30% of the total PSA is based on the company’s total shareholder return (TSR), or stock appreciation plus dividends, measured against all NYSE listed companies.

     The company currently estimates that the probable number of shares to be issued at the end of the three-year performance period ending June 30, 2007, will be 139,630 shares. The maximum potential number of shares that can be issued for this performance period is 209,445 shares. For the three-year performance period ending June 30, 2008, the company estimates that the probable number of shares to be issued will be 123,340 shares. The maximum potential number of shares that can be issued for this second performance period is 185,010 shares. Prior to July 1, 2005, the initial award was accounted for using variable accounting as prescribed by APB No. 25, “Accounting for Stock Issued to Employees”, and related interpretations, and the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”. Under APB 25, performance shares were accounted for by charging a ratable portion of compensation expense during each accounting period based on the probable number of shares to be issued times the price of ElkCorp common stock at the end of each period. Beginning July 1, 2005, all performance shares are accounted for at fair value in accordance with the provisions of SFAS No. 123(R) multiplied by the probable number of shares to be issued. During the three-month and six-month periods ended December 31, 2005, $526,000 and $1,053,000, respectively, was charged to compensation expense for performance shares, based on the probable number of shares that will be issued at the end of the applicable performance periods. During the three-month and six-month periods ended December 31, 2004, $808,000 was charged to compensation expense for performance shares. At December 31, 2005, there is $4,135,000 of total unrecognized compensation cost related to performance stock awards remaining to be recognized. Of this total, $1,053,000 will be recognized in the last six-months of fiscal 2006 and $3,082,000 will be recognized in subsequent years through fiscal 2008. Compensation expense attributable to performance stock awards is classified as selling, general and administrative expense based on the currently estimated probable number of shares to be issued.

Restricted Stock –

     The Equity Incentive Compensation Plan also provides for grants of restricted stock to directors and employees of the company. Grantees generally have all rights of a shareholder except that unvested shares are held in escrow. Restricted shares either vest 33 1/3% per year over a three-year restriction period or 20% per year over a five-year restriction period. In the six-month period ended December 31, 2005, 27,805 restricted shares were granted at market prices ranging from $30.18 to $31.83 per share. At grant date, the value of restricted stock is reflected as unearned compensation in shareholders’ equity and is amortized over the applicable restriction period. Restricted stock issued to directors vest in full three years after grant date. In the three-month and six-month periods ended December 31, 2005, compensation expense of $334,000 and $700,000, respectively, was recognized relating to restricted stock awards. In the three-month and six-month periods ended December 31, 2004, compensation expense of $309,000 and $591,000, respectively, was recognized relating to restricted stock awards. At December 31, 2005, there is $3,121,000 of total unrecognized compensation cost related to unvested restricted stock remaining to be recognized. Of this total $743,000 will be recognized in the last six-months of fiscal 2006 and $2,378,000 will be recognized in subsequent years through fiscal 2011. Compensation expense attributable to restricted shares is classified as selling, general and administrative expense.

Stock/Loan Plan –

     Under the company’s Stock/Loan Plan, certain employees are granted loans based on a percentage of their salaries, the performance of their operating units, and also as long-term incentive compensation awards, for the purpose of purchasing the company’s common stock. Under the Stock/Loan Plan, a ratable portion of the loans, which are unsecured, and any accrued interest are forgiven and recognized as compensation expense over five years of continuing service with the company. If employment is terminated for any reason except death, disability or retirement, the balance of the loan becomes due and payable. Loans outstanding at December 31, 2005, and June 30, 2005, totaling $4,211,000 and $2,963,000, respectively, are included in other assets. In compliance with certain provisions of the Sarbanes-Oxley Act of 2002, no loans have been granted to executive officers of ElkCorp since the passage of the Sarbanes-Oxley Act of 2002.

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Prior Year Pro Forma Disclosure -

     If compensation cost for stock-based compensation plans had been determined for the three-month and six-month periods ended December 31, 2004 using the fair value method, pro forma net income, stock option compensation expense and basic and diluted earnings per common share would have been as follows:

	(In thousands, except per share data)
	Three Months			Six Months
	Ended			Ended
	December 31,			December 31,
	2004			2004
Net income as reported	$	14,326		$	21,135
Add: Stock-based employee compensation expense included in reported net income under APB No. 25, net of related tax effects		525			525
Deduct: Total stock-based compensation expense determined under fair value based method, net of related tax effects		(1,075	)		(1,683	)
Pro forma earnings	$	13,776		$	19,977
Earnings per common share:
Basic – as reported	$	.73		$	1.07
Basic – pro forma	$	.70		$	1.01
Diluted – as reported	$	.71		$	1.05
Diluted – pro forma	$	.68		$	1.00

Note 8 – Product Warranties

     The company provides its customers with limited warranties on certain products. Limited warranties relating to products sold by the Premium Roofing Products segment generally range from 30 to 50 years and the warranties relating to Composite Building Products are generally for 20 years. Warranties relating to Specialty Fabric Technologies and Surface Finishes 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:

(In thousands)	Warranty Liability
Balance, June 30, 2005	$	4,902
Warranties of acquired business		167
Accrued for new warranties		1,180
Changes in estimates for pre-existing warranties		1,064
Warranty settlements during the period		(1,734	)
Balance, December 31, 2005	$	5,579

Note 9 – Environmental Risk

     ElkCorp and its subsidiaries are subject to federal, state and local requirements regulating the discharge of materials into the environment, the handling and disposal of solid and hazardous wastes, and protection of the public health and the environment generally (collectively, Environmental Laws). Certain facilities of our subsidiaries ship waste products to various waste management facilities for treatment or disposal. Governmental authorities have the power to require compliance with these Environmental Laws, and violators may be subject to civil or criminal penalties, injunctions or both. Third parties may also have the right to sue for damages and/or to enforce compliance and to require remediation of contamination. If there are releases or if these facilities do not operate in accordance with Environmental Laws, or their owners or operators become financially unstable or insolvent, our subsidiaries are subject to potential liability.

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     The company and its subsidiaries are also subject to Environmental Laws that impose liability for the costs of cleaning up contamination resulting from past spills, disposal, and other releases of hazardous substances. In particular, an entity may be subject to liability under the Federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) and similar state laws that impose liability — without a showing of fault, negligence, or regulatory violations — for the generation, transportation or disposal of hazardous substances that have caused, or may cause, environmental contamination. In addition, an entity could be liable for cleanup of property it owns or operates even if it did not contribute to the contamination of such property. From time to time, the company and its subsidiaries may incur such remediation and related costs at company-owned plants and certain offsite locations maintained by other parties.

     Chromium Corporation (Chromium), one of the company’s subsidiaries, has engaged in limited remediation activities at the site of its former plating operation 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 clean-up 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.

     In fiscal 2004, Chromium completed a supplemental groundwater and soil assessment at the Lufkin 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 has received approval from the TCEQ for a Remediation Action Plan that describes remediation activities and engineering controls to clean up the site under the VCP to a site specific risk-based clean-up standard as prescribed by the Texas Risk Reduction Program. The company believes that current findings indicate that remediation activities will be similar to a plan utilized at another Chromium plant. This assessment, in conjunction with projections developed in finalizing the RAP that are site specific, resulted in the company recording an accrued liability of $700,000 in fiscal 2005. Of this amount, $400,000 was recorded in the second quarter of fiscal 2005. Certain other scenarios, none of which are reasonably expected at this time, could potentially result in material costs to the company.

     The company’s operations are subject to extensive Environmental Laws. Other than the possible costs associated with the previously described Chromium matter, management does not believe the company will be required to expend amounts which will have a material adverse effect on the company’s consolidated results of operations, financial position or liquidity. The company establishes and maintains reserves for such known or probable remediation activities in accordance with SFAS No. 5 and AICPA Statement of Position 96-1. Such environmental laws are frequently changed and could result in significantly increased cost of compliance. The company anticipates that its subsidiaries will incur costs to comply with Environmental Laws, including remediating any existing non-compliance with such laws and achieving compliance with anticipated future standards for air emissions and reduction of waste streams. Such subsidiaries expend funds to minimize the discharge of materials into the environment and to comply with governmental regulations relating to the protection of the environment. Further, certain of our manufacturing operations utilize hazardous materials in their production processes. As a result, the company and its subsidiaries incur costs for recycling or disposal of such materials and may incur costs for remediation activities at company facilities and off-site from time to time.

Note 10 – Acquisitions

     On August 25, 2005, Elk Premium Building Products, Inc., acquired the outstanding shares of RGM Products, Inc. (RGM), a privately-held manufacturer of high-profile hip and ridge and other roofing related products and certain other assets related to RGM’s business. The acquisition enhances ElkCorp’s current roofing accessory business and allows the company to offer the broadest ridge product line in its industry. The purchase price of the acquisition was $24,285,000, together with the assumption of certain related indebtedness and costs of acquisition.

     The allocation of the purchase price to assets acquired and liabilities assumed is preliminary and is subject to further analysis. Any modification of purchase price will result in an increase or decrease in the allocation to goodwill. On a preliminary basis, the purchase price was allocated to $27,759,000 for net tangible assets, $10,700,000 of identifiable intangible assets and $10,758,000 of goodwill, taking into account indebtedness and current liabilities assumed. The results of RGM’s operations are included in the results of operations prospectively from the date of

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acquisition. Pro forma financial information has not been presented, as the effects were not material to ElkCorp’s historical financial statements.

Note 11 – Goodwill and Intangible Assets

     The change in the carrying amount of goodwill for the six-month period ended December 31, 2005 was (in thousands):

Balance, June 30, 2005	$	1,497
Goodwill acquired		10,816
Balance, December 31, 2005	$	12,313

     The changes in intangible assets for the six months ended December 31, 2005 were (in thousands):

	Intangible Assets, Gross						Accumulated Amortization						Net Book Value
	June 30,				Dec. 31,		June 30,				Dec. 31,		June 30,		Dec. 31,
(in thousands)	2005		Additions		2005		2005		Expense		2005		2005		2005
Patents	$	724	$	5,400	$	6,124	$	35	$	148	$	183	$	689	$	5,941
Customer relationships		—		3,700		3,700		—		123		123		—		3,577
Trademarks		—		600		600		—		14		14		—		586
Noncompete agreement		—		1,000		1,000		—		67		67		—		933
	$	724	$	10,700	$	11,424	$	35	$	352	$	387	$	689	$	11,037

Weighed average useful lives are as follows:
Patents – 14 years
Customer relationships – 10 years
Trademarks – 14 years
Noncompete agreement – 5 years

Note 12 – 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. On August 10, 2004, the company sold substantially all assets of Cybershield, excluding its 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. In the first quarter of fiscal 2005, the company recorded a pretax impairment charge of $651,000 on remaining Canton assets. In the third quarter of fiscal 2005, the Canton land, building and certain equipment was sold at a price that approximated book value.

     Ortloff Engineers, LTD (Ortloff) was engaged in licensing proprietary technologies and providing related engineering services to the natural gas processing industries, with particular emphasis on the natural gas liquids recovery, sulfur recovery and liquefied natural gas segments. Although Ortloff had a long history of success and profitability, in fiscal 2005 the company concluded that it did not fit into its focus on building products platforms and it was positioned for sale. In the fourth quarter of fiscal 2005, Ortloff was sold to a financial buyer for cash. The company will not participate in Ortloff’s management or ongoing operation in any manner, although ElkCorp retained $4,400,000 in long-term license receivables, which the purchaser will collect on the company’s behalf for a service fee. In addition, ElkCorp retained a portion of contingent license fees on certain projects that were in process at the date of sale. The maximum future benefit of contingent license fees is approximately $2,100,000, although there is no assurance that any of these contingent fees will ultimately be realized.

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     The results of both Cybershield and Ortloff are classified as discontinued operations in the Consolidated Financial Statements. Summary operating results of discontinued operations are summarized as follows:

	(In thousands)					(In thousands)
	Three Months Ended					Six Months Ended
	Dec. 31,					Dec. 31,
	2005			2004		2005			2004
Sales	$	—		$	1,059	$	—		$	2,075
Cost of sales		—			105		—			840
Selling, general and administrative		106			747		106			1,711
Impairment of assets		—			—		—			651
Operating income (loss)		(106	)		207		(106	)		(1,127	)
Provision (credit) for income taxes		(40	)		79		(40	)		(404	)
Net income (loss) from discontinued operations	$	(66	)	$	128	$	(66	)	$	(723	)

Note 13 – Income Taxes

     The American Jobs Creation Act of 2004 (the Act) provides tax relief to U.S. domestic manufacturers. The Financial Accounting Standards Board (FASB) directed its staff to issue Financial Staff Position (FSP) FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004.” FSP FAS 109-1 states that a manufacturers’ deduction provided for under the act should be accounted for as a special deduction in accordance with SFAS No. 109 and not as a tax rate reduction. The effective tax rate of 37.2% includes the estimated tax deduction for this item for fiscal 2006.

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

Executive Overview

     This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included elsewhere herein and our Annual Report on Form 10-K for the year ended June 30, 2005. ElkCorp sustained its successful operating performance in the first half of fiscal 2006. Following an outstanding year in fiscal 2005, in which we achieved our fourth consecutive year of double-digit earnings growth, the demand for laminated shingles continued at a high level in the first half of fiscal 2006. However, due to rapidly escalating transportation, energy, raw material costs (especially asphalt costs) and operating expenses, our margins have been decreasing as we have been able to pass along only a portion of these higher costs through higher net selling prices. This situation became more problematic during the quarter ended December 31, 2005. Compared to the first half of the prior fiscal year, shingle shipments in the first six months of fiscal 2006 increased 11% and average selling prices increased 5%. Backlog remains strong and inventories are lower than seasonal norms in the Southwest United States due to the increased demand from the areas damaged by storms in 2005. Significant shipments into areas of Florida affected by Hurricane Wilma have not yet begun but are expected in the third quarter of fiscal 2006 and are expected to continue through the remainder of calendar 2006. Backlog in other regions of the country have declined as of December 31, 2005, due primarily to the normal seasonal slowdown in roofing activity during the winter months.

     On August 25, 2005, we acquired RGM Products, Inc. (RGM), a privately-held manufacturer of high-profile hip and ridge and other roofing related products based in Fresno, California, for $24,285,000 in cash and the assumption of certain related indebtedness and costs of acquisition. This acquisition enhances our current roofing accessories business and allows us to offer the broadest ridge product line in the industry. The RGM acquisition has been accretive to results since the date of acquisition.

     Our Composite Building Products platform reported an operating loss in both the three-month and six-month periods ended December 31, 2005. However, decking sales continue to increase quarter over quarter and operating results are showing progress. We remain committed to the ultimate success of this platform. We believe our investments in new capacity and enhancements to the management structure will allow us to achieve our long-term goals for this business platform.

     Beginning in fiscal 2006, we are reporting results for Specialty Fabric Technologies, a marketing division developed to create brand awareness and promote increased sales of our nonwoven specialty fabrics products and Versashield fire barrier technology, as a separate segment. Our Surface Finishes business does not fit into our focus on building products platforms and is currently offered for sale. We currently plan for this business to remain as one of our business platforms if it is not sold.

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.

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2005			2004			2005			2004
Sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		81.6			78.8			81.6			80.2
Gross margin		18.4			21.2			18.4			19.8
Selling, general and administrative		9.4			8.2			9.4			8.7
Income from operations		9.0			13.0			9.0			11.1
Interest expense and other, net		1.3			1.2			1.3			1.2
Income from continuing operations before income taxes		7.7			11.8			7.7			9.9
Provision for income taxes		2.9			4.5			2.8			3.8
Income from continuing operations		4.8	%		7.3	%		4.9	%		6.1	%

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Changes in the Three-Month Period Ended December 31, 2005 Compared to the Three-Month Period Ended December 31, 2004

Overall Performance

     Sales from continuing operations of $228,949,000 during the three-month period ended December 31, 2005 were 18% higher than $194,099,000 in the same period in the prior fiscal year. Sales of premium roofing shingles and accessory products increased during the current year period as a result of continuing strong demand, particularly in those regions of the United States affected by hurricane damage in the early part of fiscal 2006. During the three-month period ended December 31, 2005, operating income from continuing operations of $20,616,000 was 19% lower than $25,322,000 for the same period last year. The reduction in operating income is primarily a result of higher transportation, energy, raw material costs and operating expenses.

     The percentage of cost of sales to sales increased to 81.6% in the three-month period ended December 31, 2005 compared to 78.8% for the same period last year. Escalating raw material, energy and transportation costs continue to pressure margins for our roofing plant operations. As anticipated, there has been short-term margin erosion in the quarter ended December 31, 2005, as we have been able to offset only a portion of higher costs for these items with price increases. Selling, general and administrative (SG&A) costs in the second quarter of fiscal 2006 were 35.5% higher than in the same period last year. As a percentage of sales, SG&A costs increased to 9.4% of net sales in the three-month period ended December 31, 2005, compared to 8.2% in the same three-month period in fiscal 2005. Much of the increase in year-to-year SG&A costs relates to newly acquired RGM being included in consolidated financial results and the ramp-up of operations for Composite Building Products. In addition, a significant component of the increased SG&A costs was stock-based compensation, as we implemented the provisions of SFAS No. 123(R) effective July 1, 2005. Total stock-based compensation in the second quarter of fiscal 2006 was $2,072,000 compared to $1,117,000 for the same quarter last year.

     Interest expense and other, net, was $2,968,000 in the second quarter of fiscal 2006 compared to $2,382,000, in the same prior year period. In the period ended December 31, 2005, no interest was capitalized, compared to $237,000 in the second quarter of fiscal 2005. Increased interest rates on variable rate debt accounted for the majority of the remaining year-to-year increase.

     Our effective tax rate from continuing operations was 37.2% in the second quarter of fiscal 2006 and is expected to approximate this rate for fiscal 2006. The effective tax rate was 38.1% for the same quarter in fiscal 2005. In fiscal 2006, we are able to benefit from the manufacturers’ deduction allowed by the American Jobs Creation Act of 2004.

     In fiscal 2005 we sold both Cybershield and Ortloff. The results for these two companies are presented as discontinued operations for each period presented.

Results of Business Segments

     Sales in the Premium Roofing Products segment increased 14% to $205,642,000 for the three months ended December 31, 2005 compared to $179,823,000 in the same prior year period. Sales of RGM products accounted for nearly two-thirds of the year-to-year increase. In the current year period, shingle unit volume continued to be strong, increasing 4% year-to-year, as demand remained robust in those regions of the United States affected by hurricane activity in fiscal 2005 and the early part of fiscal 2006. Damage to roofs from extreme weather such as hurricanes, hail and certain other weather events can result in higher demand for periods up to eighteen to twenty-four months depending on the extent of roof damage. Average shingle pricing in the current year quarter increased 4% compared to the year-ago period as a result of price increases necessary to offset rapidly escalating asphalt, energy and transportation costs. The price increases in the past year have been consistent with industry trends. Sales of accessory roofing products (other than RGM products) declined slightly in the fiscal 2006 period as compared to the same prior year period.

     Sales of Composite Building Products were $8,678,000 in the second quarter of fiscal 2006, compared to $3,259,000 in the second quarter of fiscal 2005. In December 2005, to assist our customers’ ability to begin building inventory for the upcoming decking season, we initiated shipments of composite building products with extended payment terms. Payments for products shipped during the winter and early spring months will generally be due during the early summer months.

     In the second quarter of fiscal 2006, Specialty Fabric Technologies sales increased 40% to $12,336,000 from $8,791,000 in the same quarter last year. External sales of nonwoven fabrics increased primarily as result of higher demand from outside roofing, facer and filtration customers. Sales of fire barrier products continue to increase but

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remain very small in relation to consolidated sales. Surface Finishes sales increased slightly in the second quarter of fiscal 2006 to $2,293,000 compared to $2,226,000 for the same quarter last year.

     Operating income for the Premium Roofing Products segment of $26,160,000 for the three-month period ended December 31, 2005 decreased 18% from $32,034,000 achieved in the second quarter of fiscal 2005. Despite strong demand and increased product shipments, transportation, energy and raw material costs in the quarter ended December 31, 2005 escalated at a rate in excess of our ability to achieve price increases to offset rising costs. To partially offset these increasing costs, we implemented an additional price increase effective January 9, 2006. Also, year-to-year margin comparisons were negatively affected by lower shipment volume into Florida storm areas in the current year quarter, as Florida is a relatively higher margin market. During its first full quarter of being included in Premium Roofing Products’ operating results, RGM contributed $652,000 to operating income for the quarter ended December 31, 2005.

     We incurred an operating loss of $1,398,000 for the Composite Building Products segment during the second quarter of fiscal 2006 compared to a $3,183,000 operating loss in the same period in the prior year. Progress toward achieving profitable results was made during the current year quarter for this business. Sales were significantly higher in the quarter ended December 31, 2005 compared to the same quarter in the prior fiscal year. Improvements in yield, operating performance and effective use of regrind scrap have partially offset increased costs of polypropylene. As the price of polypropylene stabilizes, these operating improvements should provide a foundation for improved operating results. We currently believe that the Composite Building Products segment of our business will achieve profitability in the fourth quarter of fiscal 2006 if sales momentum continues and raw material costs do not increase substantially.

     The Specialty Fabric Technologies marketing segment reported a $1,373,000 operating profit in the second quarter of fiscal 2006 compared to a $648,000 operating profit in the three-month period ended December 31, 2004, primarily as a result of increased sales volume, more favorable pricing and improved sales mix of higher margin products such as air filtration and carpet tile backing.

     The Surface Finishes segment had an operating profit of $171,000 in the second quarter this year compared to a $184,000 operating loss in the same quarter last year. Last year’s operating results included a $400,000 charge for environmental costs at a closed facility.

Changes in the Six-Month Period Ended December 31, 2005 Compared to the Six-Month Period Ended December 31, 2004

Overall Performance

     Sales from continuing operations of $444,806,000 during the six-month period ended December 31, 2005 were 25% higher than $357,111,000 in the same period in the prior fiscal year. Sales of premium roofing shingles and accessory products increased substantially during the current year period as a result of continuing strong demand, particularly in those regions of the United States affected by hurricane damage in fiscal 2005 and the early part of fiscal 2006. During the six-month period ended December 31, 2005, operating income from continuing operations of $40,238,000 was marginally higher than $39,731,000 for the same period last year.

     The percentage of cost of sales to sales increased to 81.6% in the six-month period ended December 31, 2005 compared to 80.2% for the same period last year. Escalating raw material, energy and transportation costs continue to pressure margins for our roofing plant operations. To date, we have been able to partially offset higher costs for these items with price increases. However, raw material and transportation costs tend to be volatile and difficult to predict. As a result, there can be short-term margin erosion from time-to-time when the impact of price increases lags rising costs. This dynamic occurred during the fall and early winter months of calendar 2005 when costs of raw materials and transportation increased faster than our ability to achieve price increases. Selling, general and administrative (SG&A) costs in the first half of fiscal 2006 were 34% higher than in the same period last year. As a percentage of net sales, SG&A costs were 9.4% in the current year period compared to 8.7% in the same period in the prior fiscal year. Increased selling cost, particularly in those areas affected by high demand created by hurricane damage, together with the addition of RGM and increased sales activity for Composite Building Products, are the primary factors in higher SG&A costs. Another significant component of the increased SG&A costs was stock-based compensation, as we implemented the provisions of SFAS No. 123(R) effective July 1, 2005. Total stock-based compensation in the first half of fiscal 2006 was $4,040,000 compared to $1,399,000 for the first six months of fiscal 2005.

     Interest expense and other, net, was $5,825,000 in the first six months of fiscal 2006 compared to $4,476,000 in the same prior year period. In the period ended December 31, 2005, no interest was capitalized, compared to $396,000

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in the first six months of fiscal 2005. Higher borrowings and increased interest rates on variable rate debt accounted for the majority of the remaining year-to-year increase.

     Our effective tax rate from continuing operations was 37.2% in the first half of fiscal 2006 and is expected to approximate this rate for fiscal 2006. The effective tax rate was 38.0% for the same period in fiscal 2005. In fiscal 2006, we are able to benefit from the manufacturers’ deduction allowed by the American Jobs Creation Act of 2004.

     In fiscal 2005 we sold both Cybershield and Ortloff. The results for these two companies are presented as discontinued operations for each period presented. Discontinued operations for the first half of fiscal 2005 included a $651,000 impairment of Cybershield’s Canton facility, which was sold in the third quarter of fiscal 2005.

Results of Business Segments

     Sales in the Premium Roofing Products segment increased 22% to $400,359,000 for the six months ended December 31, 2005 compared to $327,416,000 in the same prior year period. Current year results include sales from RGM products subsequent to its acquisition. RGM sales accounted for approximately one-third of increased sales in the current year period. In the first six months of fiscal 2006, shingle unit volume continued to be very strong, increasing 11% year-to-year, as demand remained strong in many regions of the United States, particularly those affected by hurricane activity in fiscal 2005 and the early part of fiscal 2006. Average shingle pricing increased 5% compared to the year-ago period as a result of price increases necessary to offset rapidly escalating asphalt, energy and transportation costs.

     Sales of Composite Building Products were $13,758,000 in the first six months of fiscal 2006, compared to $6,242,000 in the first half of fiscal 2005. Pricing and volume both improved year-to-year, and the number of distributors has increased to more than 100. We are committed to developing this business platform to take advantage of the opportunities created by increased awareness of the benefits of composite lumber compared to wood.

     In the first six months of fiscal 2006, Specialty Fabric Technologies sales increased 39% to $26,080,000 from $18,794,000 in the same period last year. External sales of nonwoven fabrics increased primarily as result of higher demand and improved pricing from outside roofing, facer and filtration customers. Sales of fire barrier products continue to increase but remain very small in relation to our consolidated sales total. Surface Finishes sales decreased slightly in the first half of fiscal 2006 to $4,609,000, compared to $4,659,000 for the same period last year.

     Operating income for the Premium Roofing Products segment of $53,719,000 for the six-month period ended December 31, 2005 increased 8% from $49,813,000 achieved in the first six months of fiscal 2005. We were able to achieve higher shingle sales volume as a result of continuing strong demand, together with better efficiency as we continue to increase production at our newest roofing plant in Tuscaloosa, Alabama. This plant was placed in service at the beginning of fiscal 2005. RGM, which was acquired August 25, 2005, added to this segment’s profitability in the period that it was included in our consolidated financial results. The silo failure in the granule storage system at our Myerstown, Pennsylvania facility encountered in the fourth quarter of fiscal 2005 did not significantly impact operating results in the first half of fiscal 2006. This plant operated at full capacity despite its damaged granule storage system. Initial repairs designed to correct the damaged areas at this roofing plant were completed during the quarter ended December 31, 2005. Various engineering refinements to eliminate machine productivity issues encountered in the fourth quarter of fiscal 2005 at the Tuscaloosa, Alabama roofing plant have been completed and productivity improvements have resumed.

     We incurred an operating loss of $5,518,000 for the Composite Building Products segment during the first half of fiscal 2006 compared to a $3,900,000 operating loss in the same period in the prior year, as we made adjustments for returned material and non-decking inventories for this developing business in the first quarter of the current fiscal year. The operating loss reported in the six-month period ended December 31, 2005, included an approximate $2,600,000 write-down of inventory and returned material taken in the quarter ended September 30, 2005. No additional returned material or inventory valuation adjustments were required in the three-month period ended December 31, 2005.

     The Specialty Fabric Technologies marketing segment reported a $2,883,000 operating profit in the first six months of fiscal 2006 compared to a $1,346,000 operating profit in the six-month period ended December 31, 2004. Higher sales volumes, improved pricing and changes in product mix due to increased demand for our new non-roofing products all contributed to improved profitability.

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     The Surface Finishes segment had an operating profit of $444,000 in the first six months of fiscal 2006 compared to $143,000 in the same period last year. Fiscal 2005 results included a $400,000 charge for estimated environmental costs at its former Lufkin, Texas plating operation.

Financial Condition

Overview

     Our liquidity needs generally arise principally from working capital requirements, capital expenditures, payment of dividends and interest payments. During the first six months of fiscal 2006, we relied on internally generated funds to finance our cash requirements. Our working capital requirements typically fluctuate significantly during the year because of seasonality in some market areas. Generally, working capital requirements are higher in the spring and summer months and lower in the fall and winter months. At December 31, 2005, we had $67,085,000 in cash, cash equivalents and short-term investments available to fund growth opportunities, capital expenditures and other cash requirements. We did not borrow under our revolving credit facility during the first half of fiscal 2006.

Operating Activities

     We generate cash flows from operating activities primarily from income from operations, after consideration of deferred taxes, stock-based compensation, depreciation and amortization. Cash flows from operating activities also either increase or decrease as a result of changes in working capital requirements. In the six months ended December 31, 2005, we generated cash of $28,600,000 from operating activities, compared to $23,807,000 in the same six-month period last year.

     After considering $5,708,000 of trade receivables acquired in the RGM acquisition in August 2005, trade receivables at December 31, 2005 were $16,911,000 lower than at June 30, 2005 due primarily to the seasonal slowdown of sales in certain markets, improvements in payment practices of certain slower paying customers, and the collection of extended term receivables. During the six-month period ended December 31, 2005, we collected $2,810,000 of extended term receivables outstanding at June 30, 2005. In accordance with normal industry practices, extended payment terms are granted to certain customers for roofing products and composite building products shipped during the late winter and early spring months, with payments generally due during the spring and early summer. At December 31, 2005, after considering $6,909,000 of inventories acquired in the RGM acquisition, inventories were $11,428,000 higher than at June 30, 2005, primarily due to the seasonal increase in inventory in those markets not affected by heavy levels of storm damage. Accounts payable and accrued liability balances, other than those assumed in the acquisition of RGM, were significantly lower at December 31, 2005 than at June 30, 2005, primarily as a result of the timing of the payment of trade payables. The current ratio was 3.6 to 1 at December 31, 2005, compared to 3.5 to 1 at June 30, 2005.

Investing Activities

     Cash flows from investing activities primarily reflect our capital expenditure strategy, together with activity relating to acquisitions and short-term investments. Net cash used for investing activities was $28,337,000 in the first six months of fiscal 2006 compared to $56,113,000 in the same period in fiscal 2005. Capital expenditures in the six-month period ended December 31, 2005 are representative of normal levels of capital expenditures, as major capacity initiatives undertaken over the past several years have been substantially completed. Other than major capacity initiatives, capital expenditures are expected to be approximately $20,000,000 per year. On August 25, 2005, we utilized $24,285,000 of available liquidity (primarily the sale of short-term investments) to finance the acquisition of RGM. During the first six months of fiscal 2006, we sold or redeemed $7,460,000 of short-term investments to supplement cash flows from operating activities.

Financing Activities

     Cash flows from financing activities generally reflect changes in our borrowings, together with dividends paid on common stock and exercises of stock options. Net cash used for financing activities was $4,139,000 in the first six months of fiscal 2006, compared to $38,316,000 of cash provided in the same period last year.

     At December 31, 2005, liquidity consisted of $67,085,000 of cash, cash equivalents, short-term investments and $121,148,000 of available borrowings under the $125,000,000 committed line of credit facility. The debt to capital ratio (after deducting cash, cash equivalents and short-term investments of $67,085,000 from $202,286,000 of principal debt) was 31.3%.

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     Our Board of Directors has authorized the repurchase of common stock from time to time on the open market. As of December 31, 2005, we have repurchase authority of approximately $10,600,000 remaining. We did not make any open market purchases of common stock in the six-month period ended December 31, 2005. However, on January 23, 2006, we announced our intention to spend up to $4,000,000 to acquire shares of our outstanding common stock under this repurchase authority.

Off-Balance Sheet Arrangements

     We have no off-balance sheet arrangements or transactions with unconsolidated, special purpose entities.

Critical Accounting Policies

     Our condensed consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions we believe are reasonable based on the information available. The accounting policies which we believe are the most critical to fully understanding and evaluating our reported financial results are:

– Collectibility of Accounts Receivable

– Accruals for Loss Contingencies, including Warranties

– Inventories

– Revenue Recognition

– Impairment of Long-Lived Assets

– Stock-Based Compensation

     These critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended June 30, 2005. There were no significant changes in critical accounting policies during the six-month period ended December 31, 2005.

Business Risks and Forward-Looking Statements

     In an effort to give investors a well-rounded view of our current condition and future opportunities, Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q contain “forward-looking statements” that involve risks and uncertainties about our prospects for the future. The statements that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements usually are accompanied by words such as “optimistic,” “vision,” “outlook,” “believe,” “estimate,” “potential,” “forecast,” “goal,” “project,” “expect,” “anticipate,” “plan,” “predict,” “could,” “should,” “may,” “likely,” or similar words that convey the uncertainty of future events or outcomes. These statements are based on judgments we believe are reasonable; however, ElkCorp’s actual results could differ materially from those discussed in such forward-looking statements. Factors that could cause or contribute to such differences could include, but are not limited to the following items. We undertake no obligation to update or revise publicly any forward-looking statements whether as a result of new information or future events.

Competitive Conditions

     Our building products businesses can be affected by weather, the availability of customer and/or end-user financing, insurance claims-paying practices, and general economic conditions. In addition, our building products manufacturing businesses are highly competitive. Actions of competitors, including changes in pricing, or slowing demand for asphalt roofing products due to general or industry economic conditions or the frequency and intensity of inclement weather could result in decreased demand for our products, lower prices received or reduced utilization of plant facilities. Further, changes in building and insurance codes and other standards from time to time can cause changes in demand, challenges in meeting refined product specifications, or increases in costs that may not be passed through to customers.

Higher Raw Material, Energy and Transportation Costs

     In our building products businesses, the significant raw materials are ceramic-coated granules, asphalt, glass fibers, resins, mineral filler, polypropylene, wood particles and various additives for product preservation. Increased costs of raw materials can result in reduced margins, as can higher energy, trucking and rail costs. Further, our largest long-term contracts for certain raw materials expired at the end of calendar year 2005. Negotiation of new contracts are

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in process, but there is no assurance that new contracts will be agreed upon. Certain raw materials are currently being purchased on a purchase order basis. Either alternative (new contracts or purchases using purchase orders) may result in higher or lower raw material costs. Historically, we have been able to pass some of the higher raw material, energy and transportation costs through to the customer. Should we be unable to recover higher raw material, energy and/or transportation costs, including higher trucking costs resulting from fuel surcharges and regulatory changes in the trucking industry, through price increases of our products, operating results could be adversely affected and/or lower than projected.

Temporary Shortages or Disruptions

     Temporary shortages or disruptions in the supply of raw materials or the availability of transportation do result from time to time from a variety of causes. In addition, supplies of asphalt can be affected by refiners’ decisions to process alternative products from the residuals in the refining of crude oil. If we experience temporary shortages or disruptions in the supply of raw materials or the availability of transportation, operating results could be lower than projected.

Productivity of New Facilities

     We have been involved in a significant expansion plan over the past several years, including the construction of new facilities and the expansion of existing facilities. Progress in achieving anticipated operating efficiencies and financial results is difficult to predict for new and expanded plant facilities. If such progress is slower than anticipated, or if demand for products produced at new or expanded plants does not meet current expectations, operating results could be lower than projected.

Utilization of Hazardous Materials

     Certain facilities of our subsidiaries must utilize hazardous materials in their production process. As a result, we could incur costs for remediation activities at our facilities or off-site and other related exposures from time to time in excess of established reserves for such activities.

Litigation and Claims

     We are involved in various legal proceedings and claims, including claims arising in the ordinary course of business. Our litigation and claims are subject to inherent and case-specific uncertainty. The outcome of such litigation and claims depends on numerous interrelated factors, many of which cannot be predicted.

Higher Interest Rates

     We currently anticipate that most of our needs for new capital in the near future will be met with current amounts of cash, cash equivalents and short-term investments, internally generated funds and borrowings under our available credit facilities. Significant increases in interest rates could substantially affect our borrowing costs or our cost of alternative sources of capital.

Loss of Key Customers

     The majority of our sales relate to our building products platforms, and our primary customers are building products distributors. The ten largest customers account for approximately 50% of annual consolidated sales and one customer accounts for approximately 19% of consolidated sales. Our businesses each could suffer significant setbacks in revenues and operating income if we lost one or more of our largest customers, or if our customers’ plans and/or markets should change significantly.

Physical Loss to Manufacturing Facilities

     Although we insure ourselves against physical loss to our manufacturing facilities, including business interruption losses, natural or other disasters and accidents, including but not limited to fire, earthquake, damaging winds, floods, explosions and other casualties, operating results could be adversely affected if any of our manufacturing facilities became inoperable for an extended period of time due to these insured events or other non-insured events, including but not limited to acts of God, war or terrorism.

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Development of New Products

     Each of our businesses is actively involved in the development of new products, processes and services which are expected to contribute to our ongoing long-term growth and earnings. Consumer products using VersaShield fire retardant coatings have produced a limited amount of commercial sales to date. VersaShield’s fire retardant coatings market potential may be dependent on the stringency of federal and state regulatory requirements, which are difficult to predict. Further, our composite building products operation is producing and selling a new generation of decking products. We believe that this new generation of products will allow this business to achieve sustained operating profitability. Our composite building products operation is also developing products for use in various industrial applications. If such developmental activities are not successful, regulatory requirements are less stringent than currently predicted, market demand is less than expected, we experience unanticipated product performance issues or delays in achieving target product specifications, or we cannot provide the requisite financial and other resources to successfully commercialize such developments, the growth of future sales and earnings may be adversely affected.

Technological Changes

     Each of our businesses is subject to the risks of technological changes and competition that is based on technology improvement or labor savings. These factors could affect the demand for or the relative cost of our technology, products and services, or the method and profitability of distribution or delivery of such technology, products and services.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     In addition to the risks inherent in our operations, we are exposed to financial, market, political and economic risks. The following discussion provides additional detail regarding our exposure to the risks of changing commodity prices and interest rates. We have no significant foreign exchange risk. Derivatives are held as part of a formally documented risk management program. Derivatives are held to mitigate uncertainty, volatility or to cover underlying exposures. No derivatives are held for trading purposes. We have from time to time entered into derivative transactions related to interest rate risk and our exposure to fluctuating prices of natural gas used in our manufacturing plants, as summarized in the following paragraphs.

     We are required to purchase natural gas for use in our manufacturing facilities. These purchases expose us to the risk of higher natural gas prices. To hedge this risk, we may enter into hedge transactions to fix the price on a portion of our projected natural gas usage. There are no natural gas hedge transactions in effect at December 31, 2005. However, it is anticipated that hedging strategies will likely be utilized in the future.

     We use interest rate swaps to help maintain a reasonable balance between fixed and floating rate debt. We currently have two interest rate swaps in effect. We have entered into interest rate swaps to effectively convert the interest rate from fixed to floating on $85,000,000 of our outstanding debt at December 31, 2005. The net fair value of these swaps was $1,670,000 at December 31, 2005. Based on outstanding debt at December 31, 2005, our annual interest costs would increase or decrease $850,000 for each theoretical 1% increase or decrease in the floating interest rate.

Item 4. Controls and Procedures

a)	Evaluation of Disclosure Controls and Procedures
	We completed an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely discussions regarding required disclosures.
b)	Changes in Internal Control Over Financial Reporting
	During the last fiscal quarter, there have been no changes in our internal controls over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, these controls subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II. OTHER INFORMATION

Item 1A. Risk Factors

     Information regarding risk factors appears in our MD&A under the heading “Business Risks and Forward-Looking Statements” in Part I. Item 2 of this report and in Part II. Item 7 of our Fiscal 2005 Form 10-K. There have been no material changes from the risk factors disclosed in the Fiscal 2005 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     The following table provides information with respect to purchases made by the company of its own stock during the quarter ended December 31, 2005.

							Maximum Number (or
							Approximate Dollar
					Total Number of		Value) of
	Total Number				Shares Purchased as		Shares that may yet be
	of Shares		Average		Part of Publicly		Purchased under the
	Purchased		Price Paid		Announced Plans or		Plans or
Period	(Note 1)		per Share		Programs		Programs (Note 2)
October, 2005		—		—	$	—	$	10,600,000
November, 2005		410	$	31.49	$	—	$	10,600,000
December, 2005		—		—	$	—	$	10,600,000
Total		410	$	31.49	$	—

(1)

Represents repurchases of 410 restricted shares from officers and employees for income tax withholding payments.

(2)

On September 28, 1998, the company’s Board of Directors authorized the purchase of up to $10,000,000 of common stock from time to time on the open market to be used for general corporate purposes. On August 28, 2000, the Board of Directors authorized the repurchase of an additional $10,000,000 of common stock. The authorizations did not specify an expiration date. Purchases may be increased, decreased or discontinued by the Board of Directors at any time without prior notice.

Item 4. Submission of Matters to a Vote of Security Holders

(a)	The company’s Annual Meeting of Shareholders was held on October 25, 2005 for the purpose of electing two directors and ratifying the appointment of the company’s independent auditors.
(b)	Directors Elected

	NUMBER OF VOTES
	FOR		AGAINST		WITHHELD
Steven J. Demetriou		19,005,301		21,596		492,590
Michael L. McMahan		19,006,002		20,895		492,590
Richard A. Nowak		18,727,410		299,487		492,590

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(c) Other Directors whose term continued after the meeting:

Thomas D. Karol
Dale V. Kesler
James E. Hall
Shauna R. King

	Effective October 25, 2005, Mr. David W. Quinn retired from the Board of Directors.
(d)	Other matters voted upon at the meeting and the number of affirmative votes, negative votes, and abstentions.

	NUMBER OF VOTES
	FOR		AGAINST		ABSENTIONS
Ratification of Grant Thornton LLP as independent auditors of the company for the fiscal year ending June 30, 2006.		19,346,994		19,271		153,222

Item 6. Exhibits

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certificate of the Chief Executive Officer of ElkCorp Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certificate of the Chief Financial Officer of ElkCorp Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ElkCorp
DATE: February 8, 2006	/s/ Gregory J. Fisher
	Gregory J. Fisher
	Senior Vice President, Chief Financial Officer and Controller
	/s/ Leonard R. Harral
	Leonard R. Harral
	Vice President,
	Chief Accounting Officer and Treasurer

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