UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended

September 30, 2006

Eagle Materials Inc.

Delaware
(State of Incorporation)

75-2520779
(I.R.S. Employer Identification No.)

3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas 75219
(Address of principal executive offices)

(214) 432-2000
(Registrant’s telephone number)

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 þ No o

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 filer þ     Accelerated filer o     Non-accelerated filer o

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

Yes o No þ

As of November 2, 2006, the number of outstanding shares of common stock was:

Class		Outstanding Shares
Common Stock, $.01 Par Value		48,311,281

 

 

Eagle Materials Inc. and Subsidiaries
Form 10-Q
September 30, 2006

Table of Contents

				Page
PART I. FINANCIAL INFORMATION (unaudited)
Item 1.		Consolidated Financial Statements -
		Consolidated Statements of Earnings for the Three and Six Months Ended September 30, 2006 and 2005			1
		Consolidated Balance Sheets as of September 30, 2006 and March 31, 2006			2
		Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2006 and 2005			3
		Notes to Consolidated Financial Statements			4
Item 2.		Management’s Discussion and Analysis of Results of Operations and Financial Condition			14
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			27
Item 4.		Controls and Procedures			27
PART II. OTHER INFORMATION
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 4.		Submission of Materials to a Vote of Security Holders			28
Item 6.		Exhibits			28
SIGNATURES					29
Certification of the Chief Executive Officer
Certification of the Chief Financial Officer
Certification of the Chief Executive Officer
Certification of the Chief Financial Officer

Eagle Materials Inc. and Subsidiaries

Consolidated Statements of Earnings

(dollars in thousands, except per share data)

(unaudited)

		For the Three Months								For the Six Months
		Ended September 30,								Ended September 30,
		2006				2005				2006				2005
REVENUES
Gypsum Wallboard		$	137,587			$	117,105			$	285,274			$	221,944
Cement			70,085				60,458				138,385				117,794
Paperboard			18,825				18,908				38,316				37,997
Concrete and Aggregates			27,517				24,158				51,188				46,569
Other, net			2,454				1,155				3,279				2,279
			256,468				221,784				516,442				426,583
COSTS AND EXPENSES
Gypsum Wallboard			78,769				80,030				162,481				157,018
Cement			46,118				44,699				98,459				91,533
Paperboard			14,635				11,820				28,859				24,745
Concrete and Aggregates			22,506				20,932				42,402				39,891
Corporate General and Administrative			5,133				3,963				9,412				7,065
Interest Expense, net			1,116				1,494				2,879				2,830
			168,277				162,938				344,492				323,082
EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT VENTURE			11,001				6,883				16,998				12,410
EARNINGS BEFORE INCOME TAXES			99,192				65,729				188,948				115,911
Income Taxes			33,097				22,407				63,761				37,681
NET EARNINGS		$	66,095			$	43,322			$	125,187			$	78,230
EARNINGS PER SHARE
Basic		$	1.33			$	0.81			$	2.51			$	1.45
Diluted		$	1.32			$	0.80			$	2.47			$	1.44
AVERAGE SHARES OUTSTANDING
Basic			49,584				53,247				49,957				53,779
Diluted			50,222				54,006				50,684				54,486
CASH DIVIDENDS PER SHARE		$	0.175			$	0.10			$	0.35			$	0.20

See notes to unaudited consolidated financial statements.

Eagle Materials Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands)

		September 30,				March 31,
		2006				2006
		(unaudited)
ASSETS
Current Assets –
Cash and Cash Equivalents		$	76,317			$	54,766
Accounts and Notes Receivable, net			97,563				94,061
Inventories			67,641				67,799
Total Current Assets			241,521				216,626
Property, Plant and Equipment –			919,170				856,227
Less: Accumulated Depreciation			(316,488	)			(298,665	)
Property, Plant and Equipment, net			602,682				557,562
Investment in Joint Venture			35,096				27,847
Goodwill and Intangible Assets			67,536				67,854
Other Assets			17,930				19,027
		$	964,765			$	888,916
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities –
Accounts Payable		$	51,484			$	51,562
Federal Income Taxes Payable			12,437				—
Accrued Liabilities			57,669				53,137
Total Current Liabilities			121,590				104,699
Long-term Debt			200,000				200,000
Deferred Income Taxes			115,288				119,479
Stockholders’ Equity –
Preferred Stock, Par Value $0.01; Authorized 5,000,000 Shares;
None Issued			—				—
Common Stock, Par Value $0.01; Authorized 100,000,000 Shares; Issued and Outstanding 49,058,188 and 50,318,797 Shares, respectively			491				503
Accumulated Other Comprehensive Losses			(1,404	)			(1,404	)
Retained Earnings			528,800				465,639
Total Stockholders’ Equity			527,887				464,738
		$	964,765			$	888,916

See notes to the unaudited consolidated financial statements.

Eagle Materials Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited – dollars in thousands)

		For the Six Months Ended
		September 30,
		2006				2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net Earnings		$	125,187			$	78,230
Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities, Net of Effect of Non-Cash Activity –
Depreciation, Depletion and Amortization			19,830				18,986
Deferred Income Tax Provision			(4,191	)			(3,296	)
Stock Compensation Expense			2,694				2,961
Equity in Earnings of Unconsolidated Joint Venture			(16,998	)			(12,410	)
Excess Tax Benefits from Share Based Payment Arrangements			(1,702	)			—
Distributions from Joint Venture			9,749				14,251
Changes in Operating Assets and Liabilities -
Accounts and Notes Receivable			(3,502	)			(21,101	)
Inventories			158				2,555
Accounts Payable and Accrued Liabilities			4,673				7,809
Other Assets			1,355				1,677
Income Taxes Payable			15,779				1,042
Net Cash Provided by Operating Activities			153,032				90,704
CASH FLOWS FROM INVESTING ACTIVITIES
Property, Plant and Equipment Additions			(66,481	)			(39,616	)
Net Cash Used in Investing Activities			(66,481	)			(39,616	)
CASH FLOWS FROM FINANCING ACTIVITIES
Reduction in Long-term Debt			—				(9,000	)
Addition to Note Payable			—				17,400
Dividends Paid to Stockholders			(17,625	)			(10,868	)
Purchase and Retirement of Common Stock			(50,153	)			(46,543	)
Proceeds from Stock Option Exercises			1,076				1,747
Excess Tax Benefits from Share Based Payment Arrangements			1,702				—
Net Cash Used in Financing Activities			(65,000	)			(47,264	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			21,551				3,824
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			54,766				7,221
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	76,317			$	11,045

See notes to the unaudited consolidated financial statements.

Eagle Materials Inc. and Subsidiaries

(A) BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements as of and for the three and six month periods ended September 30, 2006, include the accounts of Eagle Materials Inc. and its wholly owned subsidiaries (“EXP,” the “Company” or “we”) and have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 2, 2006.

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

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recently Issued Accounting Standard

     In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation requires that we recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, and we will adopt FIN 48 as of April 1, 2007. We are currently evaluating the impact of this standard on our consolidated financial statements.

     In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires employers to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other post-retirement benefit plans. SFAS No. 158 requires prospective application; thus, the recognition and disclosure requirements are effective for our fiscal year ending March 31, 2007. Additionally, SFAS No. 158 requires companies to measure plan assets and obligations at their year-end balance sheet date. This requirement is effective for our fiscal year ending March 31, 2009. We are currently evaluating the impact of this standard on our financial condition and results of operations.

(B) STOCK-BASED EMPLOYEE COMPENSATION

     Share Based Payments. Effective April 1, 2005, the Company adopted SFAS 123R, “Share-Based Payment” utilizing the modified prospective approach. Under the modified prospective approach, SFAS 123R applies to new awards and to awards that were outstanding on April 1, 2005 and are subsequently modified or

cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of April 1, 2005, will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes previously disclosed under SFAS 123 “Accounting for Stock-Based Compensation.” Prior periods were not restated to reflect the impact of adopting the new standard.

Long-Term Compensation

     Options. During the six month period ended September 30, 2006, the Company granted a target number of stock options to certain individuals that may be earned, in whole or in part, by meeting certain performance conditions related to both financial and operational performance. These stock options were valued at the grant date using the Black-Scholes option pricing model. The weighted-average assumptions used in the Black-Scholes model to value the option awards in fiscal 2007 are as follows: annual dividend rate of $0.70 per share, expected volatility of 30%, risk free interest rate of 4.93% and expected life of 9 years. At the end of fiscal 2007, one third of the options earned will become immediately vested, with the remaining earned options vesting ratably on March 31, 2008 and 2009. The Company is expensing the fair value of the options granted over a three year period, as adjusted for forfeitures. For the three month and six month periods ended September 30, 2006 we expensed approximately $1.2 million and $1.9 million, respectively, as compared to $0.9 million and $1.6 million for the three month and six month periods ended September 30, 2005, respectively. At September 30, 2006, there was approximately $5.9 million of unrecognized compensation cost related to outstanding stock options which is expected to be recognized over a weighted-average period of 2.8 years.

     The following table represents stock option activity for the six months ended September 30, 2006:

		Number				Weighted-
		of				Average
		Shares				Exercise Price
Outstanding Options at Beginning of Period			1,816,865			$	15.74
Granted			150,364			$	49.16
Exercised			(102,773	)		$	10.44
Cancelled			(66,888	)		$	25.78
Outstanding Options at End of Period			1,797,568			$	16.76
Options Exercisable at End of Period			1,232,883
Weighted-Average Fair Value of Options Granted During the Period		$	21.88

     The following table summarizes information about stock options outstanding at September 30, 2006:

		Options Outstanding												Options Exercisable
						Weighted
						Average				Weighted								Weighted
		Number of				Remaining				Average				Number of				Average
Range of Exercise		Shares				Contractual				Exercise				Shares				Exercise
Prices		Outstanding				Life				Price				Outstanding				Price
$6.80 — $8.15			312,736			4.1 years				$	7.40				284,525			$	7.33
$9.57 — $10.54			211,488			3.1 years				$	10.29				199,524			$	10.33
$11.04 — $18.88			616,201			5.1 years				$	12.09				475,412			$	12.02
$21.52 — $29.59			425,814			6.9 years				$	25.68				224,100			$	24.57
$34.67 — $39.54			164,522			5.4 years				$	37.18				49,322			$	34.99
$62.83			66,807			9.6 years				$	62.83				—			$	—
			1,797,568			5.3 years				$	18.46				1,232,883			$	13.86

     At September 30, 2006, the aggregate intrinsic value of options outstanding was $27.4 million, and the aggregate intrinsic value of exercisable options was approximately $24.4 million. The total intrinsic value of options exercised during the six month period ended September 30, 2006 was approximately $4.5 million.

Restricted Stock Units. The Company granted a target level of restricted stock units to employees during the three and six month periods ended September 30, 2006. The ultimate number of restricted stock units earned from the grant will not be known until the end of fiscal 2007, and, similar to the stock option grants described above, will be based on the achievement of certain criteria during the year. Any unearned shares at the end of fiscal 2007 will be forfeited. The value of the shares granted is generally being amortized over a three year period. Expense related to restricted stock units was approximately $335,000 and $699,000 for the three month and six month periods ended September 30, 2006, respectively, as compared to $194,000 and $391,000 for the three month and six month periods ended September 30, 2005, respectively. At September 30, 2006 there was approximately $2.9 million of unearned compensation from restricted stock units that will be recognized over a weighted-average period of 3.4 years.

     Shares available for future stock option and restricted stock unit grants under existing plans were 1,990,192 at September 30, 2006.

(C) PENSION AND EMPLOYEE BENEFIT PLANS

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

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

		For the Three Months								For the Six Months
		Ended September 30,								Ended September 30,
		2006				2005				2006				2005
		(dollars in thousands)
Service Cost – Benefits Earned during the Period		$	124			$	125			$	248			$	250
Interest Cost of Benefit Obligations			192				190				384				380
Amortization of Unrecognized Prior-Service Cost			35				34				70				68
Credit for Expected Return on Plan Assets			(211	)			(205	)			(422	)			(410	)
Actuarial Loss			60				58				120				116
Net Period Cost		$	200			$	202			$	400			$	404

(D) COMPUTATION OF EARNINGS PER SHARE

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

		For the Three Months								For the Six Months
		Ended September 30,								Ended September 30,
		2006				2005				2006				2005
Weighted-Average Shares of Common Stock Outstanding			49,583,882				53,247,195				49,957,401				53,778,648
Common Equivalent Shares:
Assumed Exercise of Outstanding Dilutive Options			1,566,239				1,963,155				1,566,239				1,963,155
Less Shares Repurchased from Proceeds of Assumed Exercised Options			(997,823	)			(1,249,938	)			(911,399	)			(1,298,796	)
Restricted Shares			69,493				45,417				71,789				42,846
Weighted-Average Common and Common Equivalent Shares Outstanding			50,221,791				54,005,829				50,684,030				54,485,853

     For the three and six month periods ended September 30, 2006, 231,329 and 149,877 stock options, respectively, were excluded from the diluted earnings per share calculation, as their effect was anti-dilutive.

(E) STOCKHOLDERS’ EQUITY

     A summary of changes in stockholders’ equity follows:

		For the Six Months
		Ended September 30, 2006
		(dollars in thousands)
Common Stock –
Balance at Beginning of Period		$	503
Retirement of Common Stock			(14	)
Stock Option Exercises			2
Balance at End of Period			491
Capital in Excess of Par Value –
Balance at Beginning of Period			—
Retirement of Common Stock			(5,519	)
Shared Based Activity			4,446
Stock Option Exercises			1,073
Balance at End of Period			—
Retained Earnings –
Balance at Beginning of Period			465,639
Dividends Declared to Stockholders			(17,406	)
Retirement of Common Stock			(44,620	)
Net Earnings			125,187
Balance at End of Period			528,800
Accumulated Other Comprehensive Losses –
Balance at Beginning of Period			(1,404	)
Balance at End of Period			(1,404	)
Total Stockholders’ Equity		$	527,887

     The following is a summary of shares repurchased during the three and six month periods ended September 30, 2006 and 2005, respectively:

For the Three Months

For the Three Months

Ended September 30, 2006

Ended September 30, 2005

Shares

Average Price

Shares

Average Price

Purchased

Paid Per Share

Purchased

Paid Per Share

Common Stock

1,376,800

$

36.43

312,310

$

32.09

For the Six Months

For the Six Months

Ended September 30, 2006

Ended September 30, 2005

Shares

Average Price

Shares

Average Price

Purchased

Paid Per Share

Purchased

Paid Per Share

Common Stock

1,376,800

$

36.43

1,557,363

$

29.87

(F) CASH FLOW INFORMATION — SUPPLEMENTAL

     Cash payments made for interest were $5.8 million and $3.1 million for the six months ended September 30, 2006 and 2005, respectively. Net payments made for federal and state income taxes during the six months ended September 30, 2006 and 2005, were $50.1 million and $36.3 million, respectively.

(G) COMPREHENSIVE INCOME

     Comprehensive income for the three month and six month periods ended September 30, 2006 and 2005 was identical to net income for the same periods.

     As of September 30, 2006, the Company has an accumulated other comprehensive loss of $1.4 million, net of income taxes of $0.8 million, in connection with recognizing an additional minimum pension liability. The minimum pension liability relates to the accumulated benefit obligation in excess of the fair value of plan assets of the defined benefit retirement plans.

(H) INVENTORIES

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

		As of
		September 30, 2006				March 31, 2006
		(dollars in thousands)
Raw Materials and Material-in-Progress		$	12,457			$	15,494
Gypsum Wallboard			9,816				6,621
Finished Cement			9,299				10,978
Aggregates			3,946				3,536
Paperboard			4,531				5,579
Repair Parts and Supplies			25,946				23,962
Fuel and Coal			1,646				1,629
		$	67,641			$	67,799

(I) CREDIT FACILITIES

Bank Credit Facility -

     The Company entered into a $350.0 million credit facility on December 16, 2004. On June 30, 2006, we amended the Bank Credit Facility (the “Bank Credit Facility”) to extend the expiration date from December 2009 to June 2011, and to reduce the borrowing rates and commitment fees. Borrowings under the Bank Credit Facility are guaranteed by all major operating subsidiaries of the Company. Outstanding principal amounts on the Bank Credit Facility bear interest, at the option of the Company, at a variable rate equal to: (i) LIBOR, plus an agreed margin (ranging from 55 to 100 basis points), which is established quarterly based upon the Company’s ratio of consolidated EBITDA to its consolidated indebtedness; or (ii) an alternate base rate which is the higher of (a) the prime rate or (b) the federal funds rate plus ¹/2% per annum. Interest payments are payable monthly or at the end of the LIBOR advance periods, which can be up to a period of six months at the option of the Company. Under the Bank Credit Facility, we are required to adhere to a number of financial and other covenants, including covenants relating to the Company’s interest coverage ratio and consolidated funded indebtedness ratio. At September 30, 2006, the Company had $342.3 million of borrowings available under the Bank Credit Facility.

Senior Notes -

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

Principal

Maturity Date

Interest Rate

Tranche A

$40 million

November 15, 2012

5.25

%

Tranche B

$80 million

November 15, 2015

5.38

%

Tranche C

$80 million

November 15, 2017

5.48

%

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

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

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

(J) NET INTEREST EXPENSE

     The following components are included in interest expense, net:

		For the Three Months								For the Six Months
		Ended September 30,								Ended September 30,
		2006				2005				2006				2005
		(dollars in thousands)
Interest Income		$	(740	)		$	(25	)		$	(1,328	)		$	(59	)
Interest Expense			2,796				1,408				5,610				2,667
Other Expenses			111				111				211				222
Capitalized Interest			(1,051	)			—				(1,614	)			—
Interest Expense, net		$	1,116			$	1,494			$	2,879			$	2,830

     Interest income includes interest on investments of excess cash and interest on notes receivable. Components of interest expense include interest associated with the Senior Notes and commitment fees based on the unused portion of the Bank Credit Facility. Other expenses include amortization of debt issue costs and bank credit facility costs. Interest capitalized relates to the expansion project at Illinois Cement Company and construction of a new wallboard facility by American Gypsum Company.

(K) COMMITMENTS AND CONTINGENCIES

     The Company has certain deductible limits under its workers’ compensation and liability insurance policies for which reserves are established based on the undiscounted estimated costs of known and anticipated claims. We have entered into standby letter of credit agreements relating to workers’ compensation and auto and general liability self-insurance. At September 30, 2006, we had contingent liabilities under these outstanding letters of credit of approximately $7.7 million.

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

		As of and for the Three Months								As of and for the Six Months
		Ended September 30,								Ended September 30,
		2006				2005				2006				2005
		(dollars in thousands)
Accrual Balances at Beginning Period		$	5,853			$	5,559			$	5,456			$	4,905
Insurance Expense Accrued			899				1,093				2,143				2,292
Payments			(464	)			(878	)			(1,311	)			(1,423	)
Accrual Balance at End of Period		$	6,288			$	5,774			$	6,288			$	5,774

     The Company is currently contingently liable for performance under $6.9 million in performance bonds required by certain states and municipalities, and their related agencies. The bonds are principally for certain reclamation obligations and mining permits. We have indemnified the underwriting insurance company against any exposure under the performance bonds. In the Company’s past experience, no material claims have been made against these financial instruments.

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

(L) INCOME TAXES

     Income taxes for the interim period presented have been included in the accompanying financial statements on the basis of an estimated annual effective tax rate. In addition to the amount of tax resulting from applying the estimated annual effective tax rate to pre-tax income, the Company, when appropriate, includes certain items treated as discrete events to arrive at an estimated overall tax amount. The effective tax rate for the three months ended September 30, 2006 was 33.4%. As of September 30, 2006, the estimated overall tax rate for fiscal 2007 was 33.7%.

(M) SEGMENT INFORMATION

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

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

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

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

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

		For the Three Months								For the Six Months
		Ended September 30,								Ended September 30,
		2006				2005				2006				2005
		(dollars in thousands)
Revenues -
Gypsum Wallboard		$	137,587			$	117,105			$	285,274			$	221,944
Cement			91,534				78,108				180,302				153,897
Paperboard			32,981				33,446				67,699				67,397
Concrete and Aggregates			27,959				24,568				51,947				47,426
Other, net			2,454				1,155				3,279				2,279
Sub-total			292,515				254,382				588,501				492,943
Less: Intersegment Revenues			(17,179	)			(16,628	)			(34,979	)			(33,535	)
Less: Joint Venture Revenues			(18,868	)			(15,970	)			(37,080	)			(32,825	)
Net Revenues		$	256,468			$	221,784			$	516,442			$	426,583

		For the Three Months								For the Six Months
		Ended September 30,								Ended September 30,
		2006				2005				2006				2005
		(dollars in thousands)
Intersegment Revenues –
Cement		$	2,581			$	1,679			$	4,837			$	3,277
Paperboard			14,156				14,538				29,383				29,400
Concrete and Aggregates			442				411				759				858
		$	17,179			$	16,628			$	34,979			$	33,535
Cement Sales Volumes (M tons) –
Wholly Owned			715				681				1,422				1,352
Joint Venture			209				206				412				433
			924				887				1,834				1,785

		For the Three Months								For the Six Months
		Ended September 30,								Ended September 30,
		2006				2005				2006				2005
		(dollars in thousands)
Operating Earnings –
Gypsum Wallboard		$	58,818			$	37,075			$	122,793			$	64,926
Cement			34,968				22,642				56,924				38,671
Paperboard			4,190				7,088				9,457				13,252
Concrete and Aggregates			5,011				3,226				8,786				6,678
Other, net			2,454				1,155				3,279				2,279
Sub-total			105,441				71,186				201,239				125,806
Corporate General and Administrative			(5,133	)			(3,963	)			(9,412	)			(7,065	)
Earnings Before Interest and Income Taxes			100,308				67,223				191,827				118,741
Interest Expense, net			(1,116	)			(1,494	)			(2,879	)			(2,830	)
Earnings Before Income Taxes		$	99,192			$	65,729			$	188,948			$	115,911
Cement Operating Earnings –
Wholly Owned		$	23,967			$	15,759			$	39,926			$	26,261
Joint Venture			11,001				6,883				16,998				12,410
		$	34,968			$	22,642			$	56,924			$	38,671
Capital Expenditures(1) –
Gypsum Wallboard		$	16,340			$	1,302			$	44,484			$	1,904
Cement			7,572				11,750				16,178				23,329
Paperboard			2,145				634				3,569				2,565
Concrete and Aggregates			1,403				4,399				2,211				6,458
Other			39				5,360				39				5,360
		$	27,499			$	23,445			$	66,481			$	39,616
Depreciation, Depletion and Amortization(1) –
Gypsum Wallboard		$	4,169			$	4,187			$	8,341			$	8,347
Cement			2,641				2,522				5,297				4,879
Paperboard			2,064				2,017				4,142				4,001
Concrete and Aggregates			806				709				1,627				1,440
Other, net			214				16				423				319
		$	9,894			$	9,451			$	19,830			$	18,986

		As of
		September 30,				March 31,
		2006				2006
Identifiable Assets(1) –
Gypsum Wallboard		$	362,496			$	335,985
Cement			286,423				257,976
Paperboard			172,544				179,776
Concrete and Aggregates			53,874				46,799
Corporate and Other			89,428				68,380
		$	964,765			$	888,916

     Segment operating earnings, including the proportionately consolidated 50% interest in the revenues and expenses of the Joint Venture, represent revenues less direct operating expenses, segment depreciation, and segment selling, general and administrative expenses. Corporate assets consist primarily of cash and cash equivalents, general office assets and miscellaneous other assets. The segment breakdown of goodwill is as follows:

		As of
		September, 30,				March 31,
		2006				2006
		(dollars in thousands)
Gypsum Wallboard		$	37,842			$	37,842
Cement			5,359				5,359
Paperboard			2,446				2,446
		$	45,647			$	45,647

     Combined summarized financial information for the Joint Venture operation for the three and six month periods ended September 30, 2006 and 2005, that are not consolidated, is set out below (this combined summarized financial information includes the total amounts for the Joint Venture and not the Company’s 50% interest in those amounts):

		For the Three Months								For the Six Months
		Ended September 30,								Ended September 30,
		2006				2005				2006				2005
		(dollars in thousands)
Revenues		$	36,317			$	31,940			$	71,277			$	65,650
Gross Margin		$	18,335			$	14,533			$	31,328			$	26,579
Earnings Before Income Taxes		$	22,022			$	13,700			$	33,997			$	24,753

		As of
		September 30,				March 31,
		2006				2006
Current Assets		$	44,494			$	36,056
Non-Current Assets		$	48,044			$	29,104
Current Liabilities		$	23,384			$	10,503

     Included in current liabilities is a $6.0 million note payable to the Company, which is expected to be repaid by March 31, 2007.

(N) INSURANCE PROCEEDS

     During June 2005, the Company suffered a loss at one of its cement plants when certain equipment failed. The failure of the equipment caused the Company to operate below its capacity for approximately two months until appropriate replacement equipment could be received and installed. The Company filed a business interruption claim with its insurance carrier during the fourth quarter of fiscal 2006 with respect to this loss. During September 2006, the Company received approximately $2.6 million in insurance proceeds, which it classified as a reduction of cement costs and expenses in the consolidated statement of earnings during the three month period ended September 30, 2006.

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

OVERVIEW

     Eagle Materials Inc. is a diversified producer of basic building products used in residential, industrial, commercial and infrastructure construction. Information presented for the three and six month periods ended September 30, 2006 and 2005, reflects the Company’s four business segments, consisting of Gypsum Wallboard, Cement, Recycled Paperboard and Concrete and Aggregates.

     A majority of our revenues are from customers who are in industries and businesses that are cyclical in nature and subject to changes in general economic conditions. In addition, since our operations occur in a variety of geographic markets, our businesses are subject to the economic conditions in each such geographic market. Our wallboard operations are more national in scope than our cement, concrete and aggregates businesses, and wallboard shipments are made throughout the continental U.S., except for the Northeast; however, our primary markets are in the Southwestern U.S. Demand for wallboard varies between regions with the East and West Coasts representing the largest demand centers. Our cement markets are located in geographic areas west of the Mississippi River and the Chicago, Illinois metropolitan area. Due to the low value-to-weight ratio of cement, cement is usually shipped within a 150 mile radius of the plants. Concrete and aggregates are even more regional as those operations serve the areas immediately surrounding Austin, Texas and north of Sacramento, California. Therefore, demand for cement, concrete and aggregates is tied more closely to the economies of the local markets, which may fluctuate more widely than the nation as a whole.

     Slowing residential construction during the quarter resulted in a decrease in gypsum wallboard sales volume during the three and six month periods ended September 30, 2006 as compared to the similar periods in 2005. Spending for infrastructure remains historically strong; however, and we reported increases in sales volume for our cement and concrete operations for the three and six month periods ended September 30, 2006 as compared to the similar period in 2005. Sales volume for aggregates declined for the three and six month periods ended September 30, 2006, as compared to the similar periods in 2005, largely due to a slowdown in the residential market in northern California and severe weather conditions during the month of April 2006.

     Gypsum Wallboard sales volume was down 8% and 1% for the three and six months ended September 30, 2006; however, operating earnings increased 59% and 89% over the same periods due to increased average sales prices. The Gypsum Association reported approximately 27.4 billion square feet of wallboard was shipped in the first six months of calendar 2006, a 1% increase over the prior record year. Shipments declined during the three months ended September 30, 2006 as compared to 2005 creating downward pressure on pricing. Volume and pricing is anticipated to decline further during the remainder of fiscal 2007.

     Cement sales volumes increased by 4% and 3%, and operating earnings increased 54% and 47%, for the three and six month periods ended September 30, 2006, as compared to the similar periods in 2005. These increases are due to strong demand and higher prices, partially offset by increased purchased cement costs.

     Total recycled paperboard sales volumes increased slightly for the three and six month periods; however, operating earnings declined due to a reduction in average sales price, which was caused primarily by an increase in the amount of lower priced containerboard sold as a percentage of total sales.

     Concrete and Aggregates operating earnings improved by 55% and 32% for the three and six month periods ended September 30, 2006 as compared to the similar periods in 2005, due primarily to price increases during fiscal 2007 for both concrete and aggregates.

     Continued declines in the residential homebuilding sector, both nationally and in the regions where we have operations, including downturns in the non residential construction industry, could have an adverse effect on our business, financial condition and results of operations for the fiscal year ended March 31, 2007 and future fiscal years.

     The Company conducts one of its cement operations through a Joint Venture, Texas Lehigh Cement Company LP, which is located in Buda, Texas. The Company owns a 50% interest in the Joint Venture and accounts for its interest under the equity method of accounting. However, for purposes of the Cement segment information presented, we proportionately consolidate our 50% share of the cement Joint Venture’s revenues and operating earnings, which is the way management organizes the segment within the Company for making operating decisions and assessing performance.

RESULTS OF OPERATIONS

Consolidated Results

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

		For the Three Months								For the Six Months
		Ended September 30,								Ended September 30,
		2006				2005				2006				2005
		(dollars in thousands)
REVENUES
Gypsum Wallboard		$	137,587			$	117,105			$	285,274			$	221,944
Cement (2)			91,534				78,108				180,302				153,897
Paperboard			32,981				33,446				67,699				67,397
Concrete & Aggregates			27,959				24,568				51,947				47,426
Other, net			2,454				1,155				3,279				2,279
Sub-total			292,515				254,382				588,501				482,943
Less: Intersegment Revenues			(17,179	)			(16,628	)			(34,979	)			(33,535	)
Less: Joint Venture Revenues			(18,868	)			(15,970	)			(37,080	)			(32,825	)
Total		$	256,468			$	221,784			$	516,442			$	426,583

		For the Three Months								For the Six Months
		Ended September 30,								Ended September 30,
		2006				2005				2006				2005
		(dollars in thousands)
OPERATING EARNINGS(1)
Gypsum Wallboard		$	58,818			$	37,075			$	122,793			$	64,926
Cement (2)			34,968				22,642				56,924				38,671
Paperboard			4,190				7,088				9,457				13,252
Concrete & Aggregates			5,011				3,226				8,786				6,678
Other, net			2,454				1,155				3,279				2,279
Total		$	105,441			$	71,186			$	201,239			$	125,806

Operating Earnings.

     Consolidated operating earnings increased 48% and 60% over the prior year quarter and year-to-date periods, respectively due primarily to increased average sales prices for Gypsum Wallboard and Cement. Additionally, Cement volumes were at record year-to-date and second quarter levels and pricing continued to be stable. Price increases have been offset somewhat by increased costs of energy and transportation. The average net sales price of concrete increased approximately 15% and 16%, respectively, for the quarter and year-to-date as compared to the corresponding year ago periods, offset somewhat by the increased costs of cement.

Other Income.

     Other income consists of a variety of items that are non-segment in nature and includes non-inventoried aggregates income, gypsum wallboard distribution center income, asset sales and other miscellaneous income and cost items. The increase in other income during the three and six month periods ended September 30, 2006 as compared to 2005 is due primarily to the receipt of anti-dumping duties received in September 2006.

Corporate Overhead.

     Corporate general and administrative expenses for the second quarter of fiscal 2006 were $5.1 million compared to $4.0 million for the comparable prior year period and $9.4 million compared to $7.1 million for the prior year to date period. The increase is primarily the result of increased stock and incentive compensation expenses.

Net Interest Expense.

     Net interest expense was $1.1 million and $1.5 million for the three months ended September 30, 2006 and 2005, respectively, and $2.9 million and $2.8 million for the six months ended September 30, 2006 and 2005, respectively. Decreases in interest expense are due primarily to the increase in interest income from increased cash levels, the capitalization of interest related to the expansion and modernization at Illinois Cement Company and the startup of construction on the greenfield wallboard plant in Georgetown, South Carolina, partially offset by increased interest expense from the increase in borrowings.

Income Taxes.

     Income taxes for the interim period presented have been included in the accompanying financial statements on the basis of an estimated annual effective tax rate. The effective tax rate for the three months ended September 30, 2006 was 33.4%, less than the 33.7% effective rate for the six months ended September 30, 2006. Income tax expense during the first quarter was impacted by the recording of Texas margin tax in accordance with the new state law. As of September 30, 2006, the estimated overall tax rate for fiscal 2007 was 33.7%.

Net Income.

     Net earnings of $66.1 million increased 53% from net earnings of $43.3 million for last fiscal year’s second quarter. Diluted earnings per share of $1.32 were 65% higher than the $0.80 for last year’s same quarter. Year-to-date net earnings of $125.2 million increased 60% from net earnings of $78.2 million for the comparable year ago period.

GYPSUM WALLBOARD OPERATIONS

		For the Three Months Ended												For the Six Months Ended
		September 30,								Percentage				September 30,								Percentage
		2006				2005				Change				2006				2005				Change
		(dollars in thousands, except for square footage amounts)
Gross Revenues, as Reported		$	137,587			$	117,105				17	%		$	285,274			$	221,944				29	%
Freight and Delivery Costs Billed to Customers			(22,221	)			(22,903	)			(3	)%			(46,516	)			(44,647	)			4	%
Net Revenues		$	115,366			$	94,202				22	%		$	238,758			$	177,297				35	%
Sales Volume (MMSF)			657				712				(8	)%			1,392				1,409				(1	)%
Average Net Sales Price		$	175.69			$	132.35				33	%		$	171.55			$	125.83				36	%
Freight (MMSF)		$	33.84			$	32.18				5	%		$	33.42			$	31.69				5	%
Operating Margin		$	89.57			$	52.09				72	%		$	88.23			$	46.08				91	%
Operating Earnings		$	58,818			$	37,075				59	%		$	122,793			$	64,926				89	%

Revenues:		Wallboard sales revenues increased during the three and six month periods ended September 30, 2006 as compared to 2005 due to price increases realized during the latter part of fiscal 2006 and early part of fiscal 2007, partially offset by a reduction in sales volumes during the three month period ended September 30, 2006. The reduction in sales volume during the three month period ended September 30, 2006 is due primarily to a slowing of the residential homebuilding sector, particularly in the months of August and September of 2006 as compared to similar periods in 2005.
Operating Margins:		Wallboard operating margins increased during the three and six month periods ended September 30, 2006 as compared to the three and six month periods ended September 30, 2005 primarily due to increased sales prices.
Outlook:		Single family residential housing, which consumes approximately half of our wallboard production, has begun to slow from historic highs, which resulted in a decline in sales volume during the months of August and September 2006 as compared to 2005. This slowdown has not significantly impacted our results during the first six months of fiscal 2007; however, continued decreases in demand may result in declining industry capacity utilization and lower industry pricing.

CEMENT OPERATIONS ⁽¹⁾

		For the Three Months Ended												For the Six Months Ended
		September 30,								Percentage				September 30,								Percentage
		2006				2005				Change				2006				2005				Change
		(dollars in thousands, except for per ton amounts)
Gross Revenues, Including Intersegment		$	91,534			$	78,108				17	%		$	180,303			$	153,897				17	%
Freight and Delivery Costs Billed to Customers			(5,844	)			(4,845	)			21	%			(11,818	)			(10,132	)			17	%
Net Revenues		$	85,690			$	73,263				17	%		$	168,485			$	143,765				17	%
Sales Volume (M Tons)			924				887				4	%			1,834				1,785				3	%
Average Net Sales Price		$	92.68			$	82.55				12	%		$	91.86			$	80.54				14	%
Operating Margin		$	37.82			$	25.51				48	%		$	31.04			$	21.66				43	%
Operating Earnings		$	34,968			$	22,642				54	%		$	56,924			$	38,671				47	%

Revenues:		The increase in revenue for the current three and six month periods, as compared to the prior periods, is due primarily to price increases in all markets, coupled with record sales volumes.
Operating Margins:		Operating margins increased during the three and six month periods ended September 30, 2006 as compared to the similar periods in 2005, primarily due to increased sales prices coupled with record sales volumes. The increase in the sales prices was partially offset by an increase in cost of sales. Purchased cement, which remained consistent at 24% of the total cement volume in both periods, increased in cost by approximately $10.00 per ton during the six months of fiscal 2007, resulting in an increase of approximately $3.00 in total cost of sales. Increases in the cost of manufactured cement were primarily due to increased fuel and electricity costs.
Outlook:		National demand for cement also remains at a record high level with imports projected to fulfill approximately 30% of the U.S. construction industry demand this year. Due to the strength in road and bridge construction along with growing demand from commercial construction, shipments of Portland cement in the U.S. have increased 4.1% through July 2006, versus the same period in the prior record year. High cost imports and strong demand in each of the Company’s markets, with the exception of northern California, continue to put upward pressure on cement pricing resulting in fiscal 2007 pricing being the highest in our history. Price increases of $10 to $12 per ton have been announced for the next calendar year in many U.S. markets, including most of those served by our cement facilities.

RECYCLED PAPERBOARD OPERATIONS

		For the Three Months Ended												For the Six Months Ended
		September 30,								Percentage				September 30,								Percentage
		2006				2005				Change				2006				2005				Change
		(dollars in thousands, except for per ton amounts)
Gross Revenues, Including Intersegment		$	32,981			$	33,446				(1	)%		$	67,699			$	67,397				—	%
Freight and Delivery Costs Billed to Customers			(812	)			(652	)			(25	)%			(1,690	)			(1,407	)			20	%
Net Revenues		$	32,169			$	32,794				(2	)%		$	66,009			$	65,990				—	%
Sales Volume (M Tons)			70				69				1	%			147				142				4	%
Average Net Sales Price		$	457.64			$	471.39				(3	)%		$	448.46			$	464.39				(3	)%
Operating Margin		$	64.25			$	101.89				(37	)%		$	59.60			$	93.26				(36	)%
Operating Earnings		$	4,190			$	7,088				(41	)%		$	9,457			$	13,252				(29	)%

Revenues:		Sales revenue remained flat despite slight increases in sales volume, due to a decline in the percentage of sales of higher priced gypsum paper during the three and six months ended September 30, 2006 as compared to the similar periods in 2005.
Operating Margins:		Operating margins were adversely affected by lower average sales prices for the three and six month periods ended September 30, 2006 as compared to the three and six month periods ended September 30, 2005. The lower sales price is due primarily to a reduction in gypsum paper as a percentage of total paper sold. This decline is due to the slowdown in single family residential housing, which has resulted in the decline in wallboard paper sales volume for the three and six months ended September 30, 2006 as compared to the same periods in 2005. Additionally, increases in the cost of chemicals and fiber adversely affected the operating margin, particularly during the three month period ended September 30, 2006 as compared to the three month period ended September 30, 2005.
Outlook:		Similar to the decline in Gypsum Wallboard volume, market demand for gypsum paper continues to decline and may adversely impact future earnings by shifting production from gypsum paper to lower priced containerboard. Increases in the cost of recycled fiber may also adversely impact future earnings.

CONCRETE AND AGGREGATES OPERATIONS

		For the Three Months Ended												For the Six Months Ended
		September 30,								Percentage				September 30,								Percentage
		2006				2005				Change				2006				2005				Change
		(dollars in thousands, except for cubic yard and per ton amounts)
Gross Revenues, Including Intersegment		$	27,959			$	24,568				14	%		$	51,947			$	47,426				10	%
Sales Volume –
M Cubic Yards of Concrete			248				240				3	%			471				473				—	%
M Tons of Aggregates			1,469				1,616				(9	)%			2,768				3,188				(13	)%
Average Net Sales Price
Concrete – per cubic yard		$	70.80			$	61.58				15	%		$	69.83			$	60.00				16	%
Aggregates – per ton		$	6.98			$	5.89				19	%		$	6.79			$	5.79				17	%
Operating Earnings		$	5,011			$	3,226				55	%		$	8,786			$	6,678				32	%