SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
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FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For Quarter Ended September 30, 2002 Commission File Number 1-5341
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ELKCORP
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(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.)
14643 DALLAS PARKWAY
SUITE 1000, WELLINGTON CENTRE, DALLAS, TEXAS 75254-8890
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 851-0500
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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 November 1, 2002, Registrant had outstanding
19,469,810 shares of Common Stock, par value $1 per share.
ELKCORP AND SUBSIDIARIES
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
INDEX
<Table>
<Caption>
Page
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PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2002 and June 30, 2002 1
Consolidated Statements of Operations for the Three Months Ended
September 30, 2002 and 2001 2
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 2002 and 2001 3
Notes to Consolidated Financial Statements 4-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
CERTIFICATIONS 21-22
</Table>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELKCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, $ in thousands)
<Table>
<Caption>
September 30, June 30,
ASSETS 2002 2002
- ------ -------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 21,148 $ 12,436
Trade receivables, less allowance of $786 and $734 79,687 94,764
Inventories -
Finished goods 46,701 36,888
Work-in-process 696 538
Raw materials 9,809 9,484
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Total inventories 57,206 46,910
-------------- --------------
Prepaid expenses and other 6,316 9,474
Deferred income taxes 3,887 5,727
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Total current assets 168,244 169,311
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PROPERTY, PLANT AND EQUIPMENT, AT COST 328,270 320,695
Less - accumulated depreciation (118,759) (114,216)
-------------- --------------
Property, plant and equipment, net 209,511 206,479
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OTHER ASSETS 12,280 5,638
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$ 390,035 $ 381,428
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 25,750 $ 27,418
Accrued liabilities 19,854 24,655
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Total current liabilities 45,604 52,073
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LONG-TERM DEBT 125,989 119,718
DEFERRED INCOME TAXES 34,321 33,545
SHAREHOLDERS' EQUITY -
Common stock ($1 par, 19,988,074 shares issued) 19,988 19,988
Paid-in-capital 58,391 58,419
Accumulated other comprehensive income 15 31
Retained earnings 114,794 106,772
-------------- --------------
193,188 185,210
Less - Treasury stock (524,811 and 527,076 shares, at cost) (9,067) (9,118)
-------------- --------------
Total shareholders' equity 184,121 176,092
-------------- --------------
$ 390,035 $ 381,428
============== ==============
</Table>
See accompanying notes to consolidated financial statements.
1
ELKCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, $ in thousands
except per share data)
<Table>
<Caption>
Three Months Ended
September 30,
------------------------
2002 2001
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SALES $ 120,082 $ 143,219
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COST AND EXPENSES
Cost of sales 95,428 116,504
Selling, general and administrative 14,102 15,040
Noncash stock option compensation (5,378) 1,437
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INCOME FROM OPERATIONS 15,930 10,238
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OTHER EXPENSE
Interest expense, net 1,680 2,280
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INCOME BEFORE INCOME TAXES 14,250 7,958
Provision for income taxes 5,254 3,058
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NET INCOME $ 8,996 $ 4,900
========== ==========
NET INCOME PER SHARE-BASIC $ .46 $ .25
========== ==========
NET INCOME PER SHARE-DILUTED $ .46 $ .25
========== ==========
DIVIDENDS PER COMMON SHARE $ .05 $ .05
========== ==========
AVERAGE COMMON SHARES OUTSTANDING (000'S)
Basic 19,461 19,231
========== ==========
Diluted 19,595 19,464
========== ==========
</Table>
See accompanying notes to consolidated financial statements.
2
ELKCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, $ in thousands)
<Table>
<Caption>
Three Months Ended
September 30,
--------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,996 $ 4,900
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 4,550 4,580
Deferred income taxes 2,615 1,114
Changes in assets and liabilities:
Trade receivables 15,077 (14,175)
Inventories (10,296) 13,629
Prepaid expenses and other 3,158 3,637
Accounts payable and accrued liabilities (6,187) 13,304
-------- --------
Net cash provided by operating activities 17,913 26,989
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CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (7,575) (2,822)
Other (676) 116
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Net cash used for investing activities (8,251) (2,706)
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayments on Revolving Credit Facility, net -- (23,300)
Dividends on common stock (973) (962)
Treasury stock transactions and other, net 23 55
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Net cash used for financing activities (950) (24,207)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 8,712 76
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,436 128
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,148 $ 204
======== ========
</Table>
See accompanying notes to consolidated financial statements.
3
ELKCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
Effective September 1, 2002, the company changed its corporate name from
Elcor Corporation to ElkCorp to better identify itself with the Elk brand name
of its principal Building Products subsidiaries.
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
2002 Annual Report on Form 10-K. 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 ending September 30, 2002 and 2001, but
are, however, subject to year-end audit by the company's independent auditors.
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 company is segregated and managed as two segments: Elk Premium
Building Products (Building Products) and Elk Technologies (Other,
Technologies). The Building Products group consists of the various operating
subsidiaries of Elk Premium Building Products, Inc. (collectively Elk). These
companies manufacture (1) premium laminated fiberglass asphalt shingles and (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. Building Products accounted for 91% of consolidated sales in
fiscal 2002 and 94% of consolidated sales during the three months ended
September 30, 2002.
The Other, Technologies segment consists of the operations that are not
part of the Building Products segment. These dissimilar operations were combined
into one segment beginning in fiscal 2002, as none individually met the
materiality criteria for separate segment reporting. The businesses aggregated
together as the Other, Technologies segment accounted for 9% of consolidated
sales in fiscal 2002 and 6% of consolidated sales during the three months ended
September 30, 2002.
The operations included as Other, Technologies are (1) the operating
subsidiaries of Cybershield, Inc. (collectively Cybershield), which apply
precise conductive metal coatings to plastic components utilized in electronics
enclosures to control the electromagnetic and radio frequency emissions of such
devices, and to create circuitry and antennae for digital wireless cellular
phones, consumer electronics equipment, and various other industries; (2)
Chromium Corporation (Chromium), which is a leading provider of hard chrome and
other surface finishes for the railroad, marine and various other industries;
4
and (3) Ortloff Engineers, LTD (Ortloff), a leading supplier of proprietary
technologies and related engineering services to the natural gas processing
industry. A fourth operation, Elk Technologies, Inc., was incorporated to
develop and market fabrics featuring VersaShield(R) fire retardant coatings for
use outside of traditional building products applications, including mattresses,
furniture, curtains and bed clothing. This business has not yet produced
commercial sales.
Financial information by company segment is summarized as follows:
<Table>
<Caption>
(In thousands)
Three Months Ended
September 30,
------------------------
2002 2001
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SALES
Building Products $ 113,316 $ 131,025
Other, Technologies 6,766 12,194
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$ 120,082 $ 143,219
========== ==========
OPERATING PROFIT (LOSS)
Building Products $ 14,498 $ 14,625
Other, Technologies (1,089) 93
Corporate and other, excluding noncash stock option compensation (2,857) (3,043)
Noncash stock option compensation 5,378 (1,437)
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15,930 10,238
Interest expense, net (1,680) (2,280)
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Income before income taxes $ 14,250 $ 7,958
========== ==========
DEPRECIATION AND AMORTIZATION
Building Products $ 3,415 $ 3,380
Other, Technologies 452 531
Corporate 683 669
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$ 4,550 $ 4,580
========== ==========
CAPITAL EXPENDITURES
Building Products $ 6,994 $ 2,293
Other, Technologies 146 458
Corporate 435 71
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$ 7,575 $ 2,822
========== ==========
</Table>
<Table>
<Caption>
September 30, June 30,
2002 2002
-------------- --------------
IDENTIFIABLE ASSETS
Building Products $ 314,334 $ 314,668
Other, Technologies 32,697 32,420
Corporate 43,004 34,340
-------------- --------------
$ 390,035 $ 381,428
============== ==============
</Table>
5
NOTE 3 - 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. The following table sets forth the computation of basic and diluted
earnings per share:
<Table>
<Caption>
(In thousands)
Three Months Ended
September 30,
-------------------
2002 2001
-------- --------
Net income $ 8,996 $ 4,900
======== ========
Denominator for basic earnings per share - weighted
average shares outstanding 19,461 19,231
Effect of dilutive securities:
Employee stock options 134 233
-------- --------
Denominator for dilutive earnings per share - adjusted
weighted average shares and assumed issuance of shares
purchased under incentive stock option plan using the
treasury stock method 19,595 19,464
======== ========
Basic earnings per share $ .46 $ .25
======== ========
Diluted earnings per share $ .46 $ .25
======== ========
</Table>
NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive income for the three-month periods ended September
30, 2002 and September 30, 2001 were as follows:
<Table>
<Caption>
(In thousands)
Three Months Ended
September 30,
-------------------
2002 2001
-------- --------
Net income $ 8,996 $ 4,900
Derivative transactions (16) --
-------- --------
Total comprehensive income $ 8,980 $ 4,900
======== ========
</Table>
6
NOTE 5 - NONCASH STOCK OPTION COMPENSATION
Prior to fiscal 2002, the company followed the "fixed" method of
accounting for all employee stock options under 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."
Accordingly, no compensation expense was recorded prior to fiscal 2002 with
respect to the company's stock option plan as options were granted with an
exercise price equal to the stock's fair market value at date of grant.
The company's 1998 Incentive Stock Option Plan contained a cashless
exercise provision that permitted an optionee to relinquish vested options to
the company in exchange for common shares having a current market value equal to
the net exercised market value of the relinquished options. Under APB No. 25,
the aforementioned cashless relinquishment feature can cause options issued
under the 1998 Plan to be considered stock appreciation rights ("SAR's") in
substance, if not in form, unless past experience and economic incentives
indicate that optionees are more likely to exercise, rather than relinquish, the
options. Under APB No. 25, SAR's are accounted for using "variable" accounting
whereby income is charged (or credited) during each accounting period to reflect
any excess of the market value of shares underlying vested SAR's, over the
exercise price of vested SAR's.
It was never the company's intention to issue SAR's under the 1998 Plan.
Prior to March 2002, no optionee ever utilized the cashless relinquishment
alternative, and a total of only three optionees, none being executive officers
of the company, utilized this exercise alternative. The company believed that
its prior use of "fixed" accounting for options outstanding under the 1998 Plan
was appropriate. However, in fiscal 2002 the company determined that options
granted under the 1998 Plan should have been accounted for using "variable"
option accounting. The impact of variable accounting on each year prior to
fiscal 2002 was not material. Net income as previously reported for each quarter
of fiscal 2002 has been restated for the change from the "fixed" method to the
"variable" method of stock option accounting. For the quarter ended September
30, 2001, net income was previously reported as $5,834,000. After recording
noncash stock option compensation of $934,000, net of tax, net income was
restated as $4,900,000 for that period.
In keeping with the company's original intent, effective August 13, 2002,
the Compensation Committee of the Board of Directors terminated the availability
of the relinquishment alternative under the 1998 Plan, thereby removing any
question regarding the appropriateness of "fixed" accounting for these employee
stock options thereafter. Based on this action, together with a decline in the
company's share price subsequent to June 30, 2002, the company recorded a
reversal of fiscal 2002 noncash stock option compensation expense of $5,378,000
in the first quarter of fiscal 2003. Subsequent to August 13, 2002, the company
will again utilize the "fixed" method of stock option accounting.
NOTE 6 - LONG-TERM DEBT
In June 2002, the company issued $120,000,000 of Senior Notes (Notes). Of
the Notes, $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
conjunction with the sale of the Notes, the company reduced its Revolving Credit
Facility (Facility) to $100,000,000 of primary credit, including up to a maximum
of $10,000,000 in letters of credit through November 30, 2005. At
7
September 30, 2002, letters of credit totaling $2,584,000 were outstanding. No
borrowings were outstanding on the Facility at September 30, 2002. In June 2002,
the company entered into a receive fixed, pay floating interest rate swap to
effectively convert the interest rate from fixed to floating on $60,000,000 of
debt 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.
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.
Long-term debt is summarized as follows:
<Table>
<Caption>
September 30, June 30,
(In thousands) 2002 2002
- -------------- -------------- --------------
Senior Notes $ 120,000 $ 120,000
Fair value of interest rate swap 5,989 (282)
Revolving Credit Facility -- --
-------------- --------------
$ 125,989 $ 119,718
============== ==============
</Table>
NOTE 7 - ENVIRONMENTAL RISK
Chromium has engaged in limited remediation activities at its former
plating operation, closed in 1999, at what is now Cybershield's Lufkin, Texas
manufacturing facility. Soil sampling results from a pre-closing environmental
evaluation of the site indicated localized problems. 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 clean up 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 submitted a work plan, which the TCEQ has approved, for a
supplemental groundwater and soil assessment at the facility. The plan was
designed to, among other things, further define the problems at the site.
Chromium is preparing to implement that plan. Once the investigation is
complete, Chromium intends to clean up the site under the VCP to a site specific
risk-based cleanup standard as prescribed by the Texas Risk Reduction Program.
Until Chromium has the results from its supplemental assessment and TCEQ
approval of a cleanup plan, it is unable to estimate and provide reserves for
remediation costs, which may or may not be material.
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
remediation activities in accordance with SFAS No. 5, "Accounting for
Contingencies," when appropriate.
8
NOTE 8 - LEGAL PROCEEDINGS
In February 2000, Wedgewood Knolls Condominium Association filed a
purported class action in the United States District Court in Newark, New Jersey
which, as amended, names two Elk subsidiaries. The purported nationwide class
would include purchasers or current owners of buildings with certain Elk asphalt
shingles installed between January 1, 1980 and present. The suit alleges, among
other things, that the shingles were uniformly defective. It seeks various
remedies including damages and reformation of the limited warranty applicable to
the shingles on behalf of the plaintiff and the purported class. In late March
2002, the United States District Court for the District of New Jersey issued its
opinion denying the plaintiff's motion for class certification in the Wedgewood
Knolls lawsuit pending against Elk.
In June 2000, an individual homeowner filed a purported class action,
Lastih v. Elk Corporation of Alabama, in the Judicial District of Hartford,
Connecticut. The Lastih suit involves similar class allegations and claims to
those asserted in the Wedgewood Knolls suit described above.
Elk has denied the claims asserted in both actions, and vigorously
defended them. Elk has reached an agreement to settle with all plaintiffs
represented by the law firm prosecuting the Wedgewood Knolls and Lastih cases,
including without limitation Wedgewood Knolls Condominium Association, Lastih
and several other individual plaintiffs. The settlement is not a class
settlement and does not have a material adverse effect on the company's
consolidated results of operations, financial condition or liquidity. The
settlement is still subject to the completion of a definitive written settlement
agreement.
On April 3, 2002, CertainTeed Corporation filed suit in the United States
District Court for the Eastern District of Pennsylvania, Philadelphia,
Pennsylvania for alleged patent infringement against the company and two of its
Elk affiliates. The suit, in essence, claims that Elk's Capstone shingle
infringes three CertainTeed patents, and seeks preliminary and permanent
injunctive relief, damages and attorneys' fees. Elk has filed a motion for
summary judgment seeking dismissal of the case, which is still in the discovery
stage. The company believes that the suit is meritless and intends to vigorously
defend it. It believes that the company and its named affiliates have strong
defenses to the suit, but the company cannot predict with certainty whether the
suit will have a material adverse effect on its consolidated results of
operations, financial position or liquidity.
The company and its subsidiaries are involved in various other legal
actions and claims, including claims arising in the ordinary course of business.
Based on advice from legal counsel, management believes such litigation and
claims will be resolved without material adverse effect on the consolidated
financial statements.
9
NOTE 9 - NEW ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." The company adopted SFAS No. 142, effective July 1, 2002.
Accordingly, goodwill must be tested for impairment annually and recorded
goodwill is not amortized. At September 30, 2002, the company had no unamortized
goodwill or other significant intangible assets covered by SFAS No. 142. The
adoption of SFAS No. 142 did not significantly impact the company's financial
position or results of operations.
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement is effective for the company in fiscal 2004. SFAS
No. 143 requires legal obligations associated with the retirement of long-lived
assets to be recognized at their fair value at the time that the obligations are
incurred. Upon initial recognition of a liability, that cost is capitalized as
part of the related long-lived asset and allocated to expense over the useful
life of the asset. Based on current circumstances, the company does not believe
the adoption of SFAS No. 143 will have a material impact on the company's
financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Lived Assets." This statement supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" and the accounting and reporting provision of
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions."
SFAS No. 144 became effective for the Company on July 1, 2002. The adoption of
SFAS No. 144 did not have a material impact on the company's financial position
or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at a date of a commitment to an exit or disposal plan. SFAS
No. 146 is to be applied prospectively to exit or disposal activities after
December 31, 2002. The company has no currently anticipated exit or disposal
activities.
NOTE 10 - SUBSEQUENT EVENT
On October 16, 2002, a newly formed wholly owned indirect subsidiary of
the company purchased substantially all of the assets of Advanced Composites
Technologies, L.L.C. (ACT), a start-up stage manufacturer of advanced composite
building products. The total purchase price was approximately $2,200,000, plus
contingent future earn-out payments based upon the profitability of the newly
formed subsidiary above certain thresholds. Existing cash resources were used to
fund the acquisition. The company is currently finalizing the allocation of the
purchase price. The operating results will be included in the company's
consolidated financial statements beginning at the date of acquisition. ACT's
sales were not significant in its most recent fiscal year.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERALL PERFORMANCE
Sales of $120,082,000 during the first three months of fiscal 2003 were
16% lower than $143,219,000 in the first three months of fiscal 2002. During the
three-month period ended September 30, 2002, net income of $8,996,000 was 84%
higher than $4,900,000 for the same period in the prior fiscal year. For the
quarter ended September 30, 2001, net income was previously reported as
$5,834,000. After recording noncash stock option compensation of $934,000, net
of tax, net income was restated as $4,900,000 for that period.
In fiscal 2002, the company changed its accounting for certain stock
options from fixed awards with no compensation expense to variable awards, which
generally results in periodic expense or income, as the company determined that
variable accounting is more appropriate for such stock options. Pursuant to
variable option accounting, income is charged or credited during each accounting
period to reflect any excess of the market value of shares underlying vested
options, over the exercise price of vested options. Based on a decline in the
company's share price subsequent to June 30, 2002 and actions taken by the Board
of Directors to terminate the feature of the 1998 Incentive Stock Option Plan
that caused certain stock options to be accounted for as variable awards, the
company recorded a reversal of the majority of fiscal 2002 noncash stock option
compensation in the first quarter of fiscal 2003. ElkCorp now has no options
subject to variable stock option accounting, and therefore, income in future
quarters will no longer be affected by changes in the company's share price.
Consolidated operating income of $15,930,000 in the quarter ended
September 30, 2002 was 56% higher than $10,238,000 in the first quarter in the
prior fiscal year. Operating income for the current fiscal year period increased
$5,378,000 as a result of a credit for noncash stock option compensation,
compared to a $1,437,000 charge for this noncash item in the first quarter last
year. Excluding the impact of noncash stock option compensation, operating
income for the first three months of fiscal 2003 was $10,552,000 compared to
$11,675,000 for the same prior year period. As a percentage of sales, operating
income (excluding the impact of noncash stock option compensation on the
periods), was 8.8% in the first quarter of fiscal 2003 compared to 8.2% for the
same quarter in the prior fiscal year. Selling, general and administrative
(SG&A) costs in the three-month period ended September 30, 2002 were
significantly lower than in the first quarter of fiscal 2002, primarily as a
result of lower promotional costs. In the first quarter last year, the company
introduced its "A Whole Different Animal(TM)" promotional campaign. The first
quarter of the current fiscal year included approximately $1,000,000 in the
Building Products segment for litigation accruals which resulted, in part, from
the favorable settlement of several lawsuits. As a percentage of sales, SG&A
costs were 11.7% in the first quarter of fiscal 2002, compared to 10.5% in the
same quarter last year.
Interest expense was $1,680,000 in the first quarter of fiscal 2003
compared to $2,280,000 in the same prior year period. In the first quarter of
fiscal 2003, interest expense of $47,000 was capitalized related to the
expansion of the Tuscaloosa, Alabama shingle plant. No interest cost was
capitalized in the fiscal 2002 period.
11
RESULTS OF BUSINESS SEGMENTS
Sales in the Building Products segment decreased 14% to $113,316,000 for
the three months ended September 30, 2002 compared to $131,025,000 in the same
prior year period. Lower sales in the current year period were reflective of a
general slowing in the roofing market, inventory reductions by roofing
distributors, and a reluctance by the company to participate in aggressive
discount pricing in some markets. Average product prices increased about 2% in
the first quarter of fiscal 2003 compared to the same quarter last year.
However, sales price per unit was relatively flat due to a lower sales mix (i.e.
more sales from lower-margin product categories).
Operating income for the Building Products segment of $14,498,000 for the
three-month period ended September 30, 2002 was relatively flat compared to
$14,625,000 operating income achieved in the first three months of fiscal 2002.
Despite lower sales volumes, and significantly higher asphalt costs, margins on
product shipments improved in the current year quarter, primarily as a result of
significantly lower freight costs, lower unit manufacturing costs and good
expense control at the company's roofing plants. Although shingle shipments were
relatively weak during the first two months of the current year quarter, in the
month of September 2002, shingle shipments exceeded shipment levels in the month
of September 2001 by over 12%. Management believes that inventory reductions at
the distributor level have essentially run their course and that this momentum
continued into October 2002. However, management also believes that pricing
pressure may continue over the near term, as manufacturers' inventories remain
ample relative to current demand. Looking forward to the spring and summer
quarters, management believes that the industry will require stronger demand
resulting from traditional factors to spur good full year-over-year shipment
growth. Asphalt costs remain stubbornly high with no relief in sight. Current
asphalt costs exceed average fiscal 2002 asphalt costs by more than $9,000,000
on an annual basis. Management believes that improved operational effectiveness
and likely price increases should help to overcome higher asphalt costs during
the second half of fiscal 2003.
Sales for the Other, Technologies segment decreased 45% to $6,766,000 in
the first quarter of fiscal 2003 compared to $12,194,000 in the same prior year
quarter. A continuation of unfavorable market conditions caused Cybershield's
sales to decline significantly in the three months ended September 30, 2002
compared to the same period last year. Cellular handset production previously in
the United States and Latin America has largely shifted to Asia where the
company has no significant operations. Commercialization of EXACT(TM), a
proprietary process for applying precise conductive metal patterns to plastics
or other components, is expected to be a key factor for generating new sales,
together with other strategic moves including marketing partnerships with key
supply chain partners and utilizing a network of manufacturing representatives
to augment Cybershield's internal sales force. Chromium's and Ortloff's sales
were also lower in the first three months of fiscal 2002 compared to the prior
year quarter. Chromium continues to see good momentum for its new wear plate and
tile products to partially offset lower volumes as railroads continue to defer
maintenance expenditures. Ortloff recorded no significant license fees in the
three-month period ended September 30, 2002. However, Ortloff's active project
pipeline remains strong and one significant license agreement was secured in
October 2002.
Primarily as a result of lower sales, the Other, Technologies segment
reported a $1,089,000 operating loss in the first quarter of fiscal 2003
compared to a $93,000 operating profit in the first quarter of the prior fiscal
year. Cybershield and Ortloff had operating losses of approximately $600,000 and
$500,000, respectively during the current year quarter and Chromium was
marginally profitable. Excluding severance payments, Cybershield was profitable
in the month of September 2002 and its quarterly loss was its third consecutive
quarter of diminishing quarterly losses. Cost reductions
12
have significantly reduced Cybershield's breakeven sales level and management
expects this subsidiary to return to profitability by the fourth quarter of
fiscal 2003. Management expects both Chromium and Ortloff to be profitable for
the fiscal year ended June 30, 2003.
FINANCIAL CONDITION
Cash flows from operating activities are generally the result of net
income, deferred taxes, depreciation and amortization, and changes in working
capital. During the first three months of fiscal 2003, the company generated
cash flows of $17,913,000 compared to $26,989,000 for the first three months in
the prior fiscal year. The decrease in cash flows generated in the first quarter
of fiscal 2003 was primarily the result of changing dynamics in the significant
components of working capital compared to the prior fiscal year.
Trade receivables at September 30, 2002 were $15,077,000 lower than at
June 30, 2002, primarily due to lower sales volumes in the first quarter of
fiscal 2003, together with collection of $8,608,000 of deferred trade
receivables from promotional programs to certain customers in the quarter. In
the prior year first quarter, receivables were $14,175,000 higher than at June
30, 2001 as a result of rapidly increasing sales volumes during the prior year
period.
At September 30, 2002, inventories were $10,296,000 higher than at June
30, 2002 as production at the company's roofing plants continued at high rates
throughout the quarter while sales volumes declined. The company believes that
current year inventories are at desired levels, representing less than 1.5
months of anticipated full year unit roofing shipments. In the prior year,
extremely strong sales volumes had reduced roofing product inventories to less
than desired levels.
The decrease in current liabilities at September 30, 2002 compared to
June 30, 2002 is primarily the result of the reversal of an accrual for noncash
stock option compensation during the quarter. In the prior year, cash flows were
generated from an increase in trade payables that resulted from advantageous
cash management strategies that were not beneficial in the current year due to
the company's cash position.
The current ratio was 3.7 to 1 at September 30, 2002 compared to 3.3 to 1
at June 30, 2002. Historically, working capital requirements fluctuate during
the year because of seasonality in some market areas. Generally, working capital
requirements and related borrowings are higher in the spring and summer months,
and lower in the fall and winter months.
Cash flows from investing activities primarily reflect the company's cash
expenditure strategy. Approximately $5,700,000 of current year capital
expenditures relate to construction of a second shingle manufacturing line at
the Tuscaloosa, Alabama roofing plant. The company plans to invest approximately
$77,000,000 over a two year period to construct this shingle manufacturing line
and to install certain infrastructure and material handling improvements
designed to enhance the overall efficiency of the expanded facility.
Approximately $34,000,000 of the planned investment is projected to be expended
in fiscal 2003 and the remaining $43,000,000 to be incurred in fiscal 2004. In
addition, the company intends to invest approximately $11,000,000 in fiscal 2003
for productivity enhancements at certain of its other roofing plants.
13
Cash flows from financing activities generally reflect changes in the
company's borrowings during the period, together with dividends paid on common
stock, treasury stock transactions and exercises of stock options. Net cash used
for financing activities was $950,000 in the first quarter of fiscal 2003
compared to $24,207,000 in fiscal 2002. In June 2002, the company sold
$120,000,000 in Senior Unsecured Notes in a private placement transaction with a
group of institutional investors. The proceeds of the notes were used to repay
indebtedness outstanding under the company's existing Revolving Credit Facility.
There was no outstanding balance on the Revolving Credit Facility at September
30, 2002.
The increase in long-term debt during the first quarter of fiscal 2003
was the result of a $5,989,000 noncash adjustment in the fair value of long-term
debt resulting from a receive fixed, pay floating interest rate swap to
effectively convert the interest rate from fixed to floating on $60,000,000 of
long-term debt through 2012. This fair market adjustment is offset by recording
a corresponding noncash amount in other assets for the value of the interest
rate swap instrument.
The changes in the company's debt structure were made to extend the
maturity structure of the company's debt on favorable terms, increase the
company's total committed borrowing availability and better diversify the
company's funding sources. At September 30, 2002, liquidity consisted of
$21,148,000 of cash and cash equivalents and $97,416,000 of available borrowings
under its $100,000,000 committed Revolving Credit Facility. The debt to capital
ratio (after deducting cash and marketable securities from $120,000,000 of
principal debt) was 34.9%. The company has no off-balance sheet arrangements or
transactions with unconsolidated, special purpose entities.
The company's Board of Directors has authorized the purchase of common
stock from time to time on the open market. As of September 30, 2002, the
company has repurchase authority of approximately $10,600,000 remaining.
On October 16, 2002, a newly formed indirect subsidiary of ElkCorp,
acquired substantially all of the assets of Advanced Composites Technologies,
L.L.C., (ACT), a start-up stage manufacturer of advanced composite building
products. The purchase price was approximately $2,200,000 in cash, plus
contingent future earn-out payments based upon profitability of the acquired
operation above certain thresholds. The company intends to invest an additional
$3,000,000 in equipment for this new subsidiary in the current fiscal year. See
footnote 10 on page 10 of this Form 10-Q for additional information relating to
this acquisition.
See footnote 7 on page 8 on this Form 10-Q for a summary of the company's
environmental risk and footnote 9 on page 10 for a discussion of new accounting
standards.
FORWARD-LOOKING STATEMENTS
In an effort to give investors a well-rounded view of the company's
current condition and future opportunities, management's discussion and analysis
of financial condition and results of operations contain "forward-looking
statements" that involve risks and uncertainties about its 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,"
"outlook," "believe," "estimate," "potential," "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 the company believes are reasonable; however, actual
results could differ materially from those discussed here as a result of a
member of factors, including the following:
14
1. The company's building products business is substantially
non-cyclical, but can be affected by weather, the availability of
financing, insurance claims paying practices, and general economic
conditions. In addition, the asphalt roofing products
manufacturing business is 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 amount of inclement weather could result in
decreased demand for the company's 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, or increases in costs that may not be
passed through to customers.
2. In the building products business, the significant raw materials
are ceramic-coated granules, asphalt, glass fibers, resins and
mineral filler. Increased costs of raw materials can result in
reduced margins, as can higher energy, trucking and rail costs.
Furthermore, temporary shortages or disruption in supply of raw
materials or transportation do result from time to time from a
variety of causes. Historically, the company has been able to pass
some of the higher raw material, energy and transportation costs
through to the customer. Should the company be unable to recover
higher raw material, energy and/or transportation costs from price
increases of its products, or if the company experiences temporary
shortages or disruption of supply of raw materials or
transportation, operating results could be adversely affected
and/or lower than projected.
3. The company has 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 adversely affected.
4. Certain facilities of the company's subsidiaries must utilize
hazardous materials in their production process. As a result, the
company could incur costs for remediation activities at its
facilities or off-site, and other related exposures from time to
time in excess of established reserves for such activities.
5. The company's litigation is subject to inherent and case-specific
uncertainty. The outcome of such litigation depends on numerous
interrelated factors, many of which cannot be predicted.
6. Although the company currently anticipates that most of its needs
for new capital in the near future will be met with internally
generated funds or borrowings under its available credit
facilities, significant increases in interest rates could
substantially affect its borrowing costs or its cost of
alternative sources of capital.
7. Each of the company's businesses, especially Cybershield's
business, 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 the company's technology, products and services, or the
method and profitability of the method of distribution or delivery
of such technology, products and services. In addition, the
company's businesses each could suffer significant setbacks in
revenues and operating
15
income if it lost one or more of its largest customers, or if its
customers' plans and/or markets should change significantly.
Cybershield has lost substantial business as a result of most
cellular handset production moving to Asia where Cybershield has
no significant presence. Low labor costs make other coating
processes competitive with those Cybershield would use.
Cybershield's future viability may depend on the successful
commercialization of the EXACT process, or other value added
services, which are unproven as yet on a large commercial scale.
8. Although the company insures itself against physical loss to its
manufacturing facilities, including business interruption losses,
natural or other disasters and accidents, including but not
limited to fire, earthquake, damaging winds, and explosions,
operating results could be adversely affected if any of its
manufacturing facilities became inoperable for an extended period
of time due to such events.
9. Each of the company's businesses is actively involved in the
development of new products, processes and services which are
expected to contribute to the company's ongoing long-term growth
and earnings. If such development activities are not successful,
market demand is less than expected, or the company cannot provide
the requisite financial and other resources to successfully
commercialize such developments, the growth of future sales and
earnings may be adversely affected.
Parties are cautioned not to rely on any such forward-looking beliefs or
judgments in making investment decisions.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to the risks inherent in its operations, the company is
exposed to financial, market, political and economic risks. The following
discussion provides additional detail regarding the company's exposure to the
risks of changing commodity prices and interest rates. The company has 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. The company has entered into derivative transactions
related to interest rate risk and its exposure to natural gas used in its
manufacturing plants, as summarized in the following paragraphs.
The company is required to purchase natural gas for use in its
manufacturing facilities. These purchases expose the company to the risk of
higher natural gas prices. To hedge this risk, the company entered into
hedge transactions to fix the price on 50% of its projected natural gas usage.
These hedge commitments expired in October 2002. It is anticipated that similar
hedging strategies will be utilized in the future. The fair value of the hedges
for natural gas was a gain of approximately $25,000 ($15,000 net of tax) at
September 30, 2002.
The company uses interest rate swaps to help maintain a reasonable
balance between fixed and floating rate debt. The company has entered into a
receive fixed, pay floating interest rate swap on $60,000,000, or 50% of the
outstanding face amount of Senior Notes at June 30, 2002. The fair value of this
swap was a gain of $5,989,000 at September 30, 2002. Based on outstanding debt
at September 30, 2002, the company's interest costs would increase or decrease
$600,000 for each theoretical 1% increase or decrease in the floating interest
rate.
ITEM 4. CONTROLS AND PROCEDURES
In October 2002, the company carried out 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 the company's disclosure controls and procedures
pursuant to Exchange Act Rules 13a-14 and 15d-14. Based upon that evaluation,
the Chief Executive Officer and the Chief Financial Officer concluded that the
company's disclosure controls and procedures are effective to timely alert them
to any material information relating to the company (including its consolidated
subsidiaries) that must be included in the company's periodic SEC filings. There
have been no significant changes in the company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation.
17
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In February 2000, Wedgewood Knolls Condominium Association filed a
purported class action in the United States District Court in Newark, New Jersey
which, as amended, names two Elk subsidiaries. The purported nationwide class
would include purchasers or current owners of buildings with certain Elk asphalt
shingles installed between January 1, 1980 and present. The suit alleges, among
other things, that the shingles were uniformly defective. It seeks various
remedies including damages and reformation of the limited warranty applicable to
the shingles on behalf of the plaintiff and the purported class. In late March
2002, the United States District Court for the District of New Jersey issued its
opinion denying the plaintiff's motion for class certification in the Wedgewood
Knolls lawsuit pending against Elk.
In June 2000, an individual homeowner filed a purported class action,
Lastih v. Elk Corporation of Alabama, in the Judicial District of Hartford,
Connecticut. The Lastih suit involves similar class allegations and claims to
those asserted in the Wedgewood Knolls suit described above.
Elk has denied the claims asserted in both actions, and vigorously
defended them. Elk has reached an agreement to settle with all plaintiffs
represented by the law firm prosecuting the Wedgewood Knolls and Lastih cases,
including without limitation Wedgewood Knolls Condominium Association, Lastih
and several other individual plaintiffs. The settlement is not a class
settlement and does not have a material adverse effect on the company's
consolidated results of operations, financial condition or liquidity. The
settlement is still subject to the completion of a definitive written settlement
agreement.
On April 3, 2002, CertainTeed Corporation filed suit in the United States
District Court for the Eastern District of Pennsylvania, Philadelphia,
Pennsylvania for alleged patent infringement against the company and two of its
Elk affiliates. The suit, in essence, claims that Elk's Capstone shingle
infringes three CertainTeed patents, and seeks preliminary and permanent
injunctive relief, damages and attorneys' fees. Elk has filed a notion for
summary judgment seeking dismissal of the case, which is still in the discovery
stage. The company believes that the suit is meritless and intends to vigorously
defend it. It believes that the company and its named affiliates have strong
defenses to the suit, but the company cannot predict with certainty whether the
suit will have a material adverse effect on its consolidated results of
operations, financial position or liquidity.
The company and its subsidiaries are involved in various other legal
actions and claims, including claims arising in the ordinary course of business.
Based on advice from legal counsel, management believes such litigation and
claims will be resolved without material adverse effect on the consolidated
financial statements.
18
ITEM 6: EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits:
99.1 Certification of the Chief Executive Officer of ElkCorp
99.2 Certification of the Chief Financial Officer of ElkCorp
(b) The company filed two reports on Form 8-K during the quarter ended
September 30, 2002. The company filed a Form 8-K on August 15,
2002 relating to a press release containing preliminary fiscal
2002 operating results and other matters, including
"forward-looking" statements about its prospects for the future.
The company filed a Form 8-K on August 26, 2002 relating to a
press release containing final fiscal 2002 operating results and
information pertaining to changing its accounting for employee
stock options.
19
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ElkCorp
DATE: November 13, 2002 /s/ Harold R. Beattie, Jr.
----------------------- -------------------------------------
Harold R. Beattie, Jr.
Senior Vice President,
Chief Financial Officer and Treasurer
/s/ Leonard R. Harral
-------------------------------------
Leonard R. Harral
Vice President and Chief
Accounting Officer
20
CERTIFICATIONS
I, Thomas D. Karol, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ElkCorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the company as of, and for, the periods presented in this
quarterly report;
4. The company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the company and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the company's auditors and the audit committee
of company's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the company's
ability to record, process, summarize and report financial data
and have identified for the company's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the company's
internal controls; and
6. The company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 13, 2002 By /s/ Thomas D. Karol
---------------------------------
Thomas D. Karol
Chief Executive Officer
21
I, Harold R. Beattie, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of ElkCorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the company as of, and for, the periods presented in this
quarterly report;
4. The company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the company and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the company's auditors and the audit committee
of company's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the company's
ability to record, process, summarize and report financial data
and have identified for the company's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the company's
internal controls; and
6. The company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 13, 2002 By /s/ Harold R. Beattie, Jr.
---------------------------------
Harold R. Beattie, Jr.
Chief Financial Officer
22
INDEX TO EXHIBITS
<Table>
<Caption>
Exhibit
No. Description
------- -----------
99.1 Certification of the Chief Executive Officer of ElkCorp
99.2 Certification of the Chief Financial Officer of ElkCorp
</Table>