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

December 31, 2006

Commission File Number 1-12984

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 January 31, 2007, the number of outstanding shares of common stock was:

Class		Outstanding Shares
Common Stock, $.01 Par Value		48,328,341

 

 

Eagle Materials Inc. and Subsidiaries
Form 10-Q
December 31, 2006

Table of Contents

PART I.  FINANCIAL INFORMATION (unaudited)
				Page
Item 1.		Consolidated Financial Statements
		Consolidated Statements of Earnings for the Three and Nine Months Ended December 31, 2006 and 2005			1
		Consolidated Balance Sheets as of December 31, 2006 and March 31, 2006			2
		Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2006 and 2005			3
		Notes to Consolidated Financial Statements			4
Item 2.		Management’s Discussion and Analysis of Results of Operations and Financial Condition			16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			27
Item 4.		Controls and Procedures			27
PART II. OTHER INFORMATION
Item 1A.		Risk Factors			28
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 5.		Other Information			30
Item 6.		Exhibits			31
SIGNATURES					32
Certification of CEO Pursuant to Rules 13a-14 and 15d-14
Certification of CFO Pursuant to Rules 13a-14 and 15d-14
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

Eagle Materials Inc. and Subsidiaries

Consolidated Statements of Earnings

(dollars in thousands, except per share data)
(unaudited)

		For the Three Months								For the Nine Months
		Ended December 31,								Ended December 31,
		2006				2005				2006				2005
REVENUES
Gypsum Wallboard		$	114,411			$	122,450			$	399,685			$	344,394
Cement			56,408				50,311				194,793				168,105
Paperboard			18,632				17,156				56,948				55,153
Concrete and Aggregates			24,245				21,598				75,433				68,167
Other			483				—				3,762				2,279
			214,179				211,515				730,621				638,098
COSTS AND EXPENSES
Gypsum Wallboard			72,834				83,594				235,315				240,611
Cement			47,360				36,306				145,819				127,839
Paperboard			13,641				12,961				42,501				37,706
Concrete and Aggregates			19,926				20,277				62,327				60,168
Corporate General and Administrative			5,622				3,835				15,034				10,900
Interest Expense, net			1,041				1,380				3,920				4,210
Other			—				348				—				348
			160,424				158,701				504,916				481,782
EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT VENTURES			7,596				6,052				24,594				18,461
EARNINGS BEFORE INCOME TAXES			61,351				58,866				250,299				174,777
Income Taxes			20,434				19,879				84,195				57,560
NET EARNINGS		$	40,917			$	38,987			$	166,104			$	117,217
EARNINGS PER SHARE
Basic		$	0.85			$	0.74			$	3.36			$	2.20
Diluted		$	0.83			$	0.73			$	3.31			$	2.17
AVERAGE SHARES OUTSTANDING
Basic			48,354,882				52,556,763				49,415,067				53,369,853
Diluted			49,011,353				53,238,468				50,117,681				54,068,484
CASH DIVIDENDS PER SHARE		$	0.175			$	0.10			$	0.525			$	0.30

See notes to unaudited consolidated financial statements.

Eagle Materials Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands)

		December 31,				March 31,
		2006				2006
		(unaudited)
ASSETS
Current Assets —
Cash and Cash Equivalents		$	61,797			$	54,766
Accounts and Notes Receivable, net			69,363				94,061
Inventories			66,663				67,799
Total Current Assets			197,823				216,626
Property, Plant and Equipment —			954,411				856,227
Less: Accumulated Depreciation			(325,436	)			(298,665	)
Property, Plant and Equipment, net			628,975				557,562
Notes Receivable			8,565				—
Investment in Joint Venture			42,692				27,847
Goodwill and Intangible Assets			67,377				67,854
Other Assets			18,503				19,027
		$	963,935			$	888,916
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities —
Accounts Payable		$	42,982			$	51,562
Federal Income Taxes Payable			8,864				—
Accrued Liabilities			59,365				53,137
Total Current Liabilities			111,211				104,699
Long-term Debt			200,000				200,000
Deferred Income Taxes			115,442				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 48,316,090 and 50,318,797 Shares, respectively			483				503
Capital in Excess of Par Value			—				—
Accumulated Other Comprehensive Losses			(1,404	)			(1,404	)
Retained Earnings			538,203				465,639
Total Stockholders’ Equity			537,282				464,738
		$	963,935			$	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 Nine Months Ended
		December 31,
		2006				2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net Earnings		$	166,104			$	117,217
Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities, Net of Effect of Non-Cash Activity —
Depreciation, Depletion and Amortization			29,681				28,815
Deferred Income Tax (Benefit) Provision			(4,054	)			(2,528	)
Stock Compensation Expense			4,207				2,138
Equity in Earnings of Unconsolidated Joint Ventures			(24,594	)			(18,461	)
Excess Tax Benefit from Share Based Payment Arrangements			(1,969	)			—
Distributions from Joint Ventures			9,749				21,000
Changes in Operating Assets and Liabilities:
Accounts and Notes Receivable			16,133				(9,279	)
Inventories			1,136				(3,629	)
Accounts Payable and Accrued Liabilities			(2,003	)			23,738
Other Assets			703				2,168
Income Taxes Payable			12,473				2,759
Net Cash Provided by Operating Activities			207,566				163,938
CASH FLOWS FROM INVESTING ACTIVITIES
Property, Plant and Equipment Additions			(102,342	)			(51,956	)
Net Cash Used in Investing Activities			(102,342	)			(51,956	)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Senior Notes			—				200,000
Reduction of Long-term Debt			—				(54,000	)
Reduction of Note Payable			—				(30,800	)
Dividends Paid to Stockholders			(26,210	)			(16,191	)
Purchase and Retirement of Common Stock			(75,522	)			(159,637	)
Proceeds from Stock Option Exercises			1,570				1,599
Excess Tax Benefit from Share Based Payment Arrangements			1,969				—
Net Cash Used in Financing Activities			(98,193	)			(59,029	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			7,031				52,953
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			54,766				7,221
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	61,797			$	60,174

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 nine month periods ended December 31, 2006, include the accounts of Eagle Materials Inc. and its majority 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 for the fiscal year ended March 31, 2006 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.

     Certain prior period amounts have been reclassified to conform to the current year’s presentation.

     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 Standards

     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) NOTES RECEIVABLE

     The Company has notes receivable totaling $10,843 and $1,829 at December 31, 2006 and March 31, 2006, respectively. The current portion of the notes receivable is $2,278 and $1,829 at December 31, 2006 and March 31, 2006, respectively. The notes receivable at December 31, 2006 generally bear interest at the prime rate plus 0.5%, and are payable in quarterly installments of $225 thousand, with any unpaid amounts, plus accrued interest, due on October 17, 2011. The notes are collateralized by certain assets of the borrower, namely property and equipment.

(C) STOCK-BASED EMPLOYEE COMPENSATION

     Share Based Payments. Effective April 1, 2005, the Company adopted SFAS 123R, “Share-Based Payment” (“SFAS 123R”) 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 to awards that 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 previously calculated for pro forma disclosure purposes 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 nine month period ended December 31, 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 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 nine month periods ended December 31, 2006 we expensed approximately $1.2 million and $3.1 million, respectively, as compared to $0.2 million and $1.8 million for the three month and nine month periods ended December 31, 2005, respectively. At December 31, 2006, there was approximately $5.0 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 nine months ended December 31, 2006:

		Number				Weighted-
		of				Average Exercise
		Shares				Price
Outstanding Options at Beginning of Period			1,816,865			$	15.74
Granted			150,364			$	49.16
Exercised			(140,675	)		$	11.15
Forfeited			(66,888	)		$	25.78
Outstanding Options at End of Period			1,759,666			$	18.58
Options Exercisable at End of Period			1,231,420
Weighted-Average Fair Value of Options Granted During the Period		$	21.88

     The following table summarizes information about stock options outstanding at December 31, 2006:

		Options Outstanding												Options Exercisable
						Weighted
						Average				Weighted								Weighted
		Number of				Remaining				Average				Number of				Average
		Shares				Contractual				Exercise				Shares				Exercise
Range of Exercise Prices		Outstanding				Life				Price				Outstanding				Price
$6.80 - $8.15			311,098			3.9 years				$	7.40				282,887			$	7.33
$9.57 - $10.54			210,488			2.9 years				$	10.29				198,524			$	10.33
$11.04 - $18.88			580,937			4.9 years				$	12.01				440,148			$	11.91
$21.52 - $29.59			425,814			6.6 years				$	25.68				225,600			$	24.56
$34.67 - $39.54			164,522			5.1 years				$	37.18				84,261			$	36.33
$62.83			66,807			9.4 years				$	62.83				—			$	—
			1,759,666			5.1 years				$	18.58				1,231,420			$	14.59

     At December 31, 2006, the aggregate intrinsic value of options outstanding was approximately $43.4 million, and the aggregate intrinsic value of exercisable options was approximately $35.3 million. The total intrinsic value of options exercised during the nine month period ended December 31, 2006 was approximately $5.4 million.

     Restricted Stock Units. The Company granted a target level of restricted stock units (“RSU’s”) to employees during the three and nine month periods ended December 31, 2006. The ultimate number of RSU’s 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 performance 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 RSU’s was approximately $356,000 and $1,055,000 for the three and nine month periods ended December 31, 2006, respectively, as compared to $292,000 and $684,000 for the three and nine month periods ended December 31, 2005, respectively. At December 31, 2006 there was approximately $2.6 million of unearned compensation from RSU’s 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 2,580,869 at December 31, 2006.

(D) 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 plans:

		For the Three Months								For the Nine Months
		Ended December 31,								Ended December 31,
		2006				2005				2006				2005
		(dollars in thousands)
Service Cost — Benefits Earned during the Period		$	124			$	125			$	372			$	375
Interest Cost of Benefit Obligations			192				190				576				570
Amortization of Unrecognized Prior-Service Cost			35				34				105				102
Credit for Expected Return on Plan Assets			(211	)			(205	)			(633	)			(615	)
Actuarial Loss			60				58				180				174
Net Period Cost		$	200			$	202			$	600			$	606

(E) STOCKHOLDERS’ EQUITY

     A summary of changes in stockholders’ equity follows:

		For the Nine Months
		Ended December 31, 2006
		(dollars in thousands)
Common Stock —
Balance at Beginning of Period		$	503
Retirement of Common Stock			(22	)
Stock Option Exercises			2
Balance at End of Period			483
Capital in Excess of Par Value —
Balance at Beginning of Period			—
Retirement of Common Stock			(7,820	)
Share Based Activity			6,252
Stock Option Exercises			1,568
Balance at End of Period			—
Retained Earnings —
Balance at Beginning of Period			465,639
Dividends Declared to Stockholders			(25,861	)
Retirement of Common Stock			(67,679	)
Net Earnings			166,104
Balance at End of Period			538,203
Accumulated Other Comprehensive Losses —
Balance at Beginning of Period			(1,404	)
Balance at End of Period			(1,404	)
Total Stockholders’ Equity		$	537,282

     The following is a summary of shares repurchased during the three and nine month periods ended December 31, 2006 and 2005, respectively:

For the Three Months

For the Three Months

Ended December 31, 2006

Ended December 31, 2005

Shares

Average Price

Shares

Average Price

Purchased

Paid Per Share

Purchased

Paid Per Share

Common Stock

780,000

$

32.52

2,850,600

$

39.65

For the Nine Months

For the Nine Months

Ended December 31, 2006

Ended December 31, 2005

Shares

Average Price

Shares

Average Price

Purchased

Paid Per Share

Purchased

Paid Per Share

Common Stock

2,156,800

$

35.02

4,407,963

$

36.21

(F) CASH FLOW INFORMATION — SUPPLEMENTAL

     Cash payments made for interest were $11.4 million and $4.0 million for the nine months ended December 31, 2006 and 2005, respectively. Net payments made for federal and state income taxes during the nine months ended December 31, 2006 and 2005, were $75.4 million and $52.3 million, respectively.

(G) COMPREHENSIVE INCOME

     Comprehensive income for the three and nine month periods ended December 31, 2006 and 2005 was identical to net income for the same periods.

     As of December 31, 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
		December 31, 2006				March 31, 2006
		(dollars in thousands)
Raw Materials and Material-in-Progress		$	13,354			$	15,494
Gypsum Wallboard			7,855				6,621
Finished Cement			8,433				10,978
Aggregates			5,132				3,536
Paperboard			3,851				5,579
Repair Parts and Supplies			25,543				23,962
Fuel and Coal			2,495				1,629
		$	66,663			$	67,799

(I) COMPUTATION OF EARNINGS PER SHARE

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

		For the Three Months								For the Nine Months
		Ended December 31,								Ended December 31,
		2006				2005				2006				2005
Weighted-Average Shares of Common Stock Outstanding			48,354,882				52,556,763				49,415,067				53,369,853
Common Equivalent shares:
Assumed Exercise of Outstanding Dilutive Options			1,604,967				1,720,437				1,621,639				1,801,842
Less Shares Repurchased from Proceeds of Assumed Exercised Options			(1,018,219	)			(1,094,406	)			(989,804	)			(1,150,344	)
Restricted Shares			69,723				55,674				70,779				47,133
Weighted-Average Common and Common Equivalent Shares Outstanding			49,011,353				53,238,468				50,117,681				54,068,484

     For the three and nine month periods ended December 31, 2006, 154,699 and 150,945 stock options, respectively, were excluded from the diluted earnings per share calculation, as their effect was anti-dilutive.

(J) 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 December 31, 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 Senior 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 Purchase 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.

(K) 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 Nine Months
		Ended December 31,								Ended December 31,
		2006				2005				2006				2005
						(dollars in thousands)
Revenues -
Gypsum Wallboard		$	114,411			$	122,450			$	399,685			$	344,394
Cement			77,738				66,549				258,040				220,446
Paperboard			29,913				31,478				97,612				98,875
Concrete and Aggregates			24,712				21,904				76,659				69,331
Other, net			483				—				3,762				2,279
Sub-total			247,257				242,381				835,758				735,325
Less: Intersegment Revenues			(14,402	)			(15,973	)			(49,381	)			(49,508	)
Less: Joint Ventures			(18,676	)			(14,893	)			(55,756	)			(47,719	)
Net Revenues		$	214,179			$	211,515			$	730,621			$	638,098

		For the Three Months								For the Nine Months
		Ended December 31,								Ended December 31,
		2006				2005				2006				2005
		(dollars in thousands)
Intersegment Revenues –
Cement		$	2,654			$	1,345			$	7,491			$	4,622
Paperboard			11,281				14,322				40,664				43,722
Concrete and Aggregates			467				306				1,226				1,164
		$	14,402			$	15,973			$	49,381			$	49,508
Cement Sales Volumes (M tons) –
Wholly Owned			572				556				1,994				1,908
Joint Ventures			207				190				619				623
			779				746				2,613				2,531

		For the Three Months								For the Nine Months
		Ended December 31,								Ended December 31,
		2006				2005				2006				2005
						(dollars in thousands)
Operating Earnings –
Gypsum Wallboard		$	41,577			$	38,856			$	164,370			$	103,782
Cement			16,644				20,057				73,568				58,727
Paperboard			4,990				4,195				14,447				17,447
Concrete and Aggregates			4,320				1,321				13,106				7,999
Other, net			483				(348	)			3,762				1,932
Sub-total			68,014				64,081				269,253				189,887
Corporate General and Administrative			(5,622	)			(3,835	)			(15,034	)			(10,900	)
Earnings Before Interest and Income Taxes			62,392				60,246				254,219				178,987
Interest Expense, net			(1,041	)			(1,380	)			(3,920	)			(4,210	)
Earnings Before Income Taxes		$	61,351			$	58,866			$	250,299			$	174,777
Cement Operating Earnings –
Wholly Owned		$	9,048			$	14,005			$	48,974			$	40,266
Joint Ventures			7,596				6,052				24,594				18,461
		$	16,644			$	20,057			$	73,568			$	58,727
Capital Expenditures(1) –
Gypsum Wallboard		$	25,747			$	355			$	70,231			$	2,259
Cement			5,578				9,241				21,756				32,570
Paperboard			1,382				859				4,951				3,424
Concrete and Aggregates			3,151				1,869				5,362				8,327
Other			3				16				42				5,376
		$	35,861			$	12,340			$	102,342			$	51,956
Depreciation, Depletion and Amortization(1) –
Gypsum Wallboard		$	4,137			$	4,217			$	12,478			$	12,564
Cement			2,623				2,547				7,920				7,426
Paperboard			2,080				2,021				6,222				6,022
Concrete and Aggregates			795				738				2,422				2,178
Other, net			216				306				639				625
		$	9,851			$	9,829			$	29,681			$	28,815

		As of
		December 31,				March 31,
		2006				2006
Identifiable Assets(1) –
Gypsum Wallboard		$	373,401			$	335,985
Cement			285,925				257,976
Paperboard			172,320				179,776
Concrete and Aggregates			53,140				46,799
Corporate and Other			79,149				68,380
		$	963,935			$	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:

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

     On January 19, 2007, the Company paid an additional $3.0 million in connection with its purchase of the 50% interest in Illinois Cement Company which it did not own. Based on the original purchase agreement, the Company is required pay an additional $3.0 million if Illinois Cement Company completed expansion prior to January 11, 2010. The $3.0 million paid will increase the amount of goodwill attributable to the Cement segment to $8,359.

     Combined summarized financial information for the Joint Venture operation for the three and nine month periods ended December 31, 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 Nine Months
		Ended December 31,								Ended December 31,
		2006				2005				2006				2005
						(dollars in thousands)
Revenues		$	36,317			$	28,217			$	107,594			$	90,216
Gross Margin		$	16,203			$	13,189			$	47,531			$	39,768
Earnings Before Income Taxes		$	15,192			$	12,103			$	49,189			$	36,817

		As of
		December 31,				March 31,
		2006				2006
Current Assets		$	46,044			$	36,056
Non-Current Assets		$	51,313			$	29,104
Current Liabilities		$	12,918			$	10,503

(L) NET INTEREST EXPENSE

     The following components are included in interest expense, net:

		For the Three Months								For the Nine Months
		Ended December 31,								Ended December 31,
		2006				2005				2006				2005
						(dollars in thousands)
Interest (Income)		$	(542	)		$	(501	)		$	(1,870	)		$	(560	)
Interest Expense			2,847				2,230				8,457				4,897
Interest Capitalized			(1,374	)			(569	)			(2,988	)			(569	)
Other Expenses			110				220				321				442
Interest Expense, net		$	1,041			$	1,380			$	3,920			$	4,210

     Interest income includes interest on investments of excess cash and interest on notes receivable. Components of interest expense include interest associated with bank borrowings, Senior Notes, the accounts receivable securitization facility 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 projects at Illinois Cement Company and American Gypsum Company. During the quarter ended December 31, 2006 the expansion project at Illinois Cement Company was completed, therefore no additional interest will be capitalized with respect to this project.

(M) 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 December 31, 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 Nine Months
		Ended December 31,								Ended December 31,
		2006				2005				2006				2005
		(dollars in thousands)
Accrual Balances at Beginning of Period		$	6,288			$	5,774			$	5,456			$	4,905
Insurance Expense Accrued			791				1,186				2,934				3,478
Payments			(448	)			(674	)			(1,759	)			(2,097	)
Other			—				—				—				—
Accrual Balances at End of Period		$	6,631			$	6,286			$	6,631			$	6,286

     The Company is currently contingently liable for performance under $7.5 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, it is the opinion of management that these indemnifications are not expected to have a material adverse effect on our consolidated financial position or results of operations. The Company currently has no outstanding guarantees.

     The Internal Revenue Service (“IRS”) is in the process of conducting an audit of the Company’s federal income tax returns for the fiscal years ended March 31, 2001, 2002 and 2003. Although the IRS has not yet proposed any adjustments to the Company’s tax returns, it has informally indicated it may propose adjustments to the depreciation deductions claimed by the Company with respect to the increased tax basis in strategic assets acquired by the Company from Republic Group LLC in November 2000. The Company has recognized tax benefits of approximately $44 million related to these assets for the periods under audit. The IRS has not indicated it has any other issues in the audit. The Company believes that it has a substantial basis for its tax positions and intends to contest any adjustments that may be proposed by the IRS.

(N) 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 December 31, 2006 was 33.3%. As of December 31, 2006, the estimated overall tax rate for fiscal 2007 was 33.6%.

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 materials and construction products used in residential, industrial, commercial and infrastructure construction. Information presented for the three and nine months ended December 31, 2006 and 2005, reflects the Company’s four businesses segments, consisting of Gypsum Wallboard, Cement, Recycled Paperboard and Concrete and Aggregates. Certain information for each of Concrete and Aggregates is broken out separately in the segment discussions.

     Our operations, depending on each business segment, range from local in nature to national businesses; therefore, we have operations in a variety of geographic markets, subjecting our businesses to the economic conditions in each such geographic market. General economic downturns or localized downturns in the regions where we have operations could have a material adverse effect on our business, financial condition and results of operations. Our Wallboard and Paperboard operations are more national in scope and 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 companies 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 are tied more closely to the economies of the local and regional markets, which may fluctuate more widely than the nation as a whole.

     Nationally, total construction spending remains strong; however, the severe slowdown in residential construction is causing downward pressure on sales prices and volumes. Total wallboard shipments declined 3% during calendar 2006 as compared to 2005, with the majority of the decline occurring in the last six months of the calendar year. This decline has caused industry shipments for the quarter ended December 31, 2006 to decline approximately 16% as compared to the same quarter in 2005. We expect continued declines in wallboard sales and production during calendar 2007, with average industry utilization expected to be in the low to mid 80% range. Cement demand remains strong nationally, with imported cement accounting for approximately 30% of the total cement shipments. This demand, coupled with the increase in price for purchased cement, continues to place upward pressure on the sales price of finished cement.

     Continued declines in the residential homebuilding sector, both nationally and in the regions where we have operations, or 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 ending 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 Nine Months
		Ended December 31,								Ended December 31,
		2006				2005				2006				2005
		(dollars in thousands)
REVENUES
Gypsum Wallboard		$	114,411			$	122,450			$	399,685			$	344,394
Cement (2)			77,738				66,549				258,040				220,446
Paperboard			29,913				31,478				97,612				98,875
Concrete & Aggregates			24,712				21,904				76,659				69,331
Other, net			483				—				3,762				2,279
Sub-total			247,257				242,381				835,758				735,325
Less: Intersegment Revenues			(14,402	)			(15,973	)			(49,381	)			(49,508	)
Less: Joint Venture Revenues			(18,676	)			(14,893	)			(55,756	)			(47,719	)
Total		$	214,179			$	211,515			$	730,621			$	638,098

		For the Three Months								For the Nine Months
		Ended December 31,								Ended December 31,
		2006				2005				2006				2005
		(dollars in thousands)
OPERATING EARNINGS(1)
Gypsum Wallboard		$	41,577			$	38,856			$	164,370			$	103,782
Cement (2)			16,644				20,057				73,568				58,727
Paperboard			4,990				4,195				14,447				17,447
Concrete & Aggregates			4,320				1,321				13,106				7,999
Other, net			483				(348	)			3,762				1,932
Total		$	68,014			$	64,081			$	269,253			$	189,887

Operating Earnings.

     Consolidated operating earnings increased 6% and 42% for the three and nine month periods ended December 31, 2006, respectively, as compared to the similar periods ended December 31, 2005. The primary reason for the increases was that all of our segments, with the exception of Recycled Paperboard, have been positively impacted by increased net sales prices during the three and nine month periods ended December 31, 2006 as compared to the similar periods in 2005. During the three month period ended December 31, 2006, the Company’s cement plant in Illinois was down for forty-five days as part of the completion of the plant expansion, resulting in a decline in cement operating earnings during the three month period. The increased sales prices experienced during the three and nine month periods ended December 31, 2006 have been partially offset by increased purchased cement costs and transportation, as well as declines in sales volumes for the Wallboard and Aggregates segments.

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 nine month period ended December 31, 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 three months ended December 31, 2006 were $5.6 million compared to $3.8 million for the comparable prior year period and $15.0 million for the nine month period ended December 31, 2006 compared to $10.9 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 $1.0 million and $1.4 million for the three months ended December 31, 2006 and 2005, respectively, and $3.9 million and $4.2 million for the nine months ended December 31, 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 December 31, 2006 was 33.3%, less than the 33.6% effective rate for the nine months ended December 31, 2006. The increase in the overall rate as compared to the rate for the three months ended December 31, 2006 is due to the recording in the first quarter of fiscal 2007 of Texas margin tax in accordance with the new state law. As of December 31, 2006, the estimated overall tax rate for fiscal 2007 was 33.6%.

Net Income.

     Pre-tax earnings of $61.4 million were 4% above last year’s third quarter pre-tax earnings of $58.9 million. Net earnings of $40.9 million increased 5% from net earnings of $39.0 million for last fiscal year’s third quarter. Diluted earnings per share of $0.83 were 14% higher than the $0.73 for last year’s same quarter. Year-to-date net earnings of $166.1 million increased 42% from net earnings of $117.2 million for the comparable year ago period.

GYPSUM WALLBOARD OPERATIONS

		For the Three Months Ended												For the Nine Months Ended
		December 31,								Percentage				December 31,								Percentage
		2006				2005				Change				2006				2005				Change
		(dollars in thousands, except for square footage amounts)
Gross Revenues, as Reported		$	114,411			$	122,450				(7	%)		$	399,685			$	344,394				16	%
Freight and Delivery Costs			(20,064	)			(21,872	)			(8	%)			(66,580	)			(66,520	)			—	%
Net Revenues		$	94,347			$	100,578				(6	%)		$	333,105			$	277,874				20	%
Sales Volume (MMSF)			590				699				(16	%)			1,982				2,108				(6	%)
Average Net Sales Price		$	159.73			$	143.98				11	%		$	168.03			$	131.85				27	%
Freight		$	34.01			$	31.29				9	%		$	33.59			$	31.56				6	%
Operating Margin		$	70.47			$	55.59				27	%		$	82.93			$	49.23				68	%
Operating Earnings		$	41,577			$	38,856				7	%		$	164,370			$	103,782				58	%

Revenues:		Wallboard sales revenues decreased during the three month period ended December 31, 2006 as compared to 2005 as a result of slowing residential homebuilding. Revenues for the nine month period ended December 31, 2006 increased over revenues for the comparable period in 2005 due primarily to higher average sales prices.
Operating Margins:		Wallboard operating margins increased during the three and nine month periods ended December 31, 2006 as compared to the same periods in 2005 primarily due to increased sales prices offset slightly by the increased costs of transportation and reduction in sales volume.
Outlook:		Single family residential housing, which consumes approximately 50% of our wallboard production, has slowed over the last six months of calendar 2006 from historic highs. This slowdown has not significantly impacted our results during the first nine months of fiscal 2007 as compared to fiscal 2006; 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 Nine Months Ended
		December 31,								Percentage		December 31,								Percentage
		2006				2005				Change		2006				2005				Change
										(dollars in thousands, except for per ton amounts)
Gross Revenues, Including Intersegment		$	77,738			$	66,549			17%		$	258,040			$	220,446			17%
Freight and Delivery Costs billed to customers			(4,638	)			(4,432	)		5%			(16,456	)			(14,565	)		13%
Net Revenues		$	73,100			$	62,117			18%		$	241,584			$	205,881			17%
Sales Volume (M Tons)			779				746			4%			2,613				2,531			3%
Average Net Sales Price		$	93.81			$	83.24			13%		$	92.45			$	81.34			14 %
Operating Margin		$	21.37			$	26.88			(20%)		$	28.15			$	23.20			21%
Operating Earnings		$	16,644			$	20,057			(17%)		$	73,568			$	58,727			25 %

(1) Total of wholly-owned subsidiaries and proportionately consolidated 50% interest of Joint Venture’s results.

Revenues:		Increases in cement revenues during the three and nine month periods ended December 31, 2006 as compared to 2005 are primarily due to record high sales prices and sales volumes during the quarter ended December 31, 2006.
Operating Margins:		The decline in operating margins during the three month period ended December 31, 2006 as compared to 2005 was due primarily to the increase in the amount of low margin purchased cement sold as a percentage of total cement sales, offset partially by the increase in average sales price. The Company shut down production of its Illinois Cement plant for approximately 45 days during November and December 2006 to complete the previously announced expansion project. During the shutdown, the Company continued to purchase clinker, which it converted to finished cement and sold, increasing the percentage of purchased cement sold as a percentage of total cement sales. Operating margins increased during the nine month period ended December 31, 2006 as compared to 2005 primarily as a result of increased sales prices and sales volume, partially offset by increased costs of fuel and power and a higher percentage of sales of purchased cement to total cement sold.
Outlook:		Nationally, demand for cement is expected to remain strong throughout calendar year 2007, with imports expected to fulfill approximately 30% of the U.S. construction industry demand. Strong infrastructure spending during calendar year 2006 continued to keep demand at a historical high, resulting in an increase in shipments of Portland cement in the U.S. of approximately 1% through October 2006 as compared to the similar period in the prior year. While pricing remains strong, poor weather in certain of the Company’s markets in the fourth quarter of fiscal 2007 has delayed previously announced price increases.

RECYCLED PAPERBOARD OPERATIONS

		For the Three Months Ended										For the Nine Months Ended
		December 31,								Percentage		December 31,								Percentage
		2006				2005				Change		2006				2005				Change
						(dollars in thousands, except for per ton amounts)
Gross Revenues, Including Intersegment		$	29,913			$	31,478			(5%)		$	97,612			$	98,875			(1%)
Freight and Delivery Costs billed to customers			(589	)			(620	)		(5%)			(2,278	)			(2,027	)		12%
Net Revenues		$	29.324			$	30,858			(5%)		$	95,334			$	96,848			(2%)
Sales Volume (M Tons)			65				67			(3%)			212				209			1%
Average Net Sales Price		$	455.82			$	462.95			(2%)		$	450.70			$	463.93			(3%)
Unit Production Costs		$	379.05			$	400.37			(5%)		$	382.55			$	380.45			1%
Operating Margin		$	76.77			$	62.61			23%		$	68.15			$	83.48			(18%)
Operating Earnings		$	4,990			$	4,195			19%		$	14,447			$	17,447			(17%)

Revenues:		Revenues for the three and nine month periods ended December 31, 2006 declined as compared to the similar periods in 2005 primarily due to the decrease in net sales price, offset slightly by the increase in volume.
Operating Margins:		Operating margins increased for the three month period ended December 31, 2006 as compared to 2005 primarily due to reductions in the cost of natural gas, partially offset by lower average net sales prices. Operating margins for the nine month period ended December 31, 2006 decreased as compared to the similar period in 2005 primarily due to lower net sales prices and increases in the cost of paper stock, partially offset by decreases in the cost of natural gas and chemicals.
Outlook:		Similar to the decline in demand for 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 margin containerboard. Additionally, any future changes in the price of natural gas or paper stock, both positively or negatively, may significantly impact our operating margins.

CONCRETE AND AGGREGATES OPERATIONS

		For the Three Months Ended										For the Nine Months Ended
		December 31,								Percentage		December 31,								Percentage
		2006				2005				Change		2006				2005				Change
						(dollars in thousands, except for cubic yard and per ton amounts)}
Gross Revenues, Including Intersegment		$	24,712			$	21,904			13%		$	76,659			$	69,331			11%
Sales Volume –
M Cubic Yards of Concrete			221				210			5%			692				683			1%
M Tons of Aggregates			1,201				1,396			(14%)			3,969				4,584			(13%)
Average Net Sales Price
Concrete – per cubic yard		$	73.34			$	64.32			14%		$	70.95			$	61.32			16%
Aggregates – per ton		$	6.97			$	5.91			18%		$	6.84			$	5.83			17%
Operating Earnings		$	4,320			$	1,321			227%		$	13,106			$	7,999			64%