(A)	BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements as of and for the three month period ended December 31, 2010, include the accounts of Eagle Materials Inc. and its majority owned subsidiaries (the "Company", "us" 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 our Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 27, 2010.

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 we believe that the disclosures are adequate to make the information presented not misleading. In our opinion, 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 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.

Certain prior period reclassifications have been made to conform to the current presentation.

We evaluated all events or transactions that occurred after December 31, 2010 through the filing of these financial statements.

Recent Accounting Pronouncements

We have adopted the disclosure requirements outlined in Accounting Standards Update 2010-20 as of December 31, 2010, which requires enhanced disclosures for finance receivables and allowance for credit losses. The disclosure did not impact profit or loss during the quarter.

(B)	CASH FLOW INFORMATION - SUPPLEMENTAL

Cash payments made for interest were $17.7 million and $18.2 million for the nine months ended December 31, 2010 and 2009, respectively. Net payments made for federal and state income taxes during the nine months ended December 31, 2010 and 2009, were $19.7 and $11.0 million, respectively.

(C)	ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable have been shown net of the allowance for doubtful accounts of $3.7 million at both December 31, 2010 and March 31, 2010. We perform ongoing credit evaluations of our customers' financial condition and generally require no collateral from our customers. The allowance for non-collection of receivables is based upon analysis of economic trends in the construction industry, detailed analysis of the expected collectability of accounts receivable that are past due and the expected collectability of overall receivables. We have no significant credit risk concentration among our diversified customer base.

 

We had notes receivable totaling approximately $15.0 million at December 31, 2010, of which approximately $1.8 million has been classified as current and presented with accounts receivable on the balance sheet. We lend funds to certain companies in the ordinary course of business, and the notes bear interest, on average, at the prime rate plus 1.5%. Existing notes in the aggregate are payable in quarterly installments of approximately $0.5 million. Remaining unpaid amounts, plus accrued interest, mature on various dates between 2011and 2017. The notes are collateralized by certain assets of the borrowers, namely property and equipment. We monitor the credit risk of each borrower by focusing on the timeliness of payments, review of credit history and credit metrics and interaction with the borrowers. At December 31, 2010, approximately $0.6 million of our allowance for doubtful accounts is related to our notes receivable.

(E)	COMPREHENSIVE INCOME

Comprehensive income for the nine month periods ended December 31, 2010 and 2009 was identical to net income for the same periods.

As of December 31, 2010, we had an accumulated other comprehensive loss of $3.5 million in connection with recognizing the difference between the fair value of the pension assets and the projected benefit obligation.

(F)	INVENTORIES

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

 

		As of
		December 31, 2010				March 31, 2010
		(dollars in thousands)
Raw Materials and Material-in-Progress		$	32,614			$	33,092
Finished Cement			11,785				11,639
Gypsum Wallboard			6,238				5,587
Paperboard			4,111				1,789
Aggregates			11,820				12,691
Repair Parts and Supplies			41,120				38,743
Fuel and Coal			3,324				2,330
		$	111,012			$	105,871

 

(G)	ACCRUED EXPENSES

Accrued expenses consist of the following:

 

		As of
		December 31, 2010				March 31, 2010
		(dollars in thousands)
Payroll and Incentive Compensation		$	5,169			$	8,507
Benefits			9,354				8,436
Interest			2,902				7,310
Insurance			6,911				6,384
Property Taxes			3,953				3,976
Other			7,630				9,431
		$	35,919			$	44,044

 

(H)	SHARE-BASED EMPLOYEE COMPENSATION

On January 8, 2004, our stockholders approved a new incentive plan (the "Plan") that combined and amended the two previously existing stock option plans. In August 2009, our shareholders approved an amendment to the Plan which, among other things, increased the number of shares available for award under the Plan by 3 million shares. Under the terms of the Plan, we can issue equity awards, including stock options, restricted stock units ("RSUs"), restricted stock and stock appreciation rights (collectively, the "Equity Awards") to employees of the Company and members of the Board of Directors. The Compensation Committee of our Board of Directors specifies the terms for grants of Equity Awards under the Plan.

 

Long-Term Compensation Plans -

Options. In May 2010, the Compensation Committee of the Board of Directors approved an incentive equity award of an aggregate of 163,000 performance-vesting stock options pursuant to the Plan to certain individuals that can be earned, in whole or in part, if certain performance conditions are satisfied (the "Fiscal 2011 Employee Stock Option Grant"). The performance and vesting criteria for the Fiscal 2011 Employee Stock Option Grant are based on the achievement of specified levels of operating earnings, as well as the achievement of certain safety and operational metrics, at each of our business segments for the fiscal year ending March 31, 2011. For those options earned based on the performance criteria, one third will vest immediately, one third will vest on March 31, 2012 and the final third will vest on March 31, 2013. The options have a term of ten years from the date of grant, and any options not earned at March 31, 2011 will be forfeited. In August 2010, we granted options to members of the Board of Directors (the "Fiscal 2011 Board of Directors Grant"). Options granted under the Fiscal 2011 Board of Directors Grant vested immediately, and can be exercised from the date of grant until their expiration at the end of seven years. The Fiscal 2011 Employee Stock Option Grant and Fiscal 2011 Board of Directors Grant were both valued at the grant date using the Black-Scholes option pricing model.

The average weighted-average assumptions used in the Black-Scholes model to value the option awards in fiscal 2011 are as follows:

 

		Fiscal 2010
Dividend Yield			2.0%
Expected Volatility			42.3%
Risk Free Interest Rate			2.75%
Expected Life			7.0 years

Stock option expense for all outstanding stock option awards totaled approximately $0.3 million and $1.5 million for the three and nine month periods ended December 31, 2010, respectively, and $0.3 million and $2.1 million for the three and nine month periods ended December 31, 2009, respectively. At December 31, 2010, there was approximately $2.6 million of unrecognized compensation cost related to outstanding stock options, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 3.8 years.

The following table represents stock option activity for the nine month period ended December 31, 2010:

 

		Number of Shares				Weighted- Average Exercise Price
Outstanding Options at Beginning of Period			3,446,452			$	33.32
Granted			269,502			$	28.45
Exercised			(98,727	)		$	28.34
Cancelled			(3,954	)		$	58.93
Outstanding Options at End of Period			3,613,273			$	34.10
Options Exercisable at End of Period			2,025,398
Weighted-Average Fair Value of Options Granted during the Period		$	10.88

 

The following table summarizes information about stock options outstanding at December 31, 2010:

 

		Outstanding Options												Exercisable Options
Range of Exercise Prices		Number of Shares Outstanding				Weighted  - Average Remaining Contractual Life				Weighted - Average Exercise Price				Number of Shares Outstanding				Weighted - Average Exercise Price
$ 8.15 - $ 13.43			455,440				1.65			$	11.37				455,440			$	11.37
$ 21.52 - $ 30.74			1,429,478				4.66			$	26.72				1,242,478			$	26.18
$ 34.09 -$ 40.78			315,670				2.94			$	37.83				262,670			$	38.12
$ 47.53 - $ 62.83			1,412,685				3.53			$	48.06				64,810			$	58.86
			3,613,273				3.69			$	34.13				2,025,398			$	25.44

At December 31, 2010, there was no net intrinsic value for outstanding options. The aggregate intrinsic value of exercisable options at that date was approximately $5.7 million. The total intrinsic value of options exercised during the nine month period ended December 31, 2010 was approximately $1.5 million.

Restricted Stock Units. In May 2010, the same employees receiving stock options also received an aggregate of 207,500 Restricted Stock Units ("RSUs"). The vesting criteria for the RSUs are the same as the vesting criteria for the Fiscal 2011 Employee Stock Option Grant. The value of the RSUs, net of expected forfeitures, is being expensed ratably over three years. Expense related to RSUs was approximately $0.1 million and $0.4 million for the three and nine month periods ended December 31, 2010, respectively, and none and $1.2 million for the three and nine month periods ended December 31, 2009, respectively. At December 31, 2010, there was approximately $1.5 million of unearned compensation from RSUs, net of estimated forfeitures, which will be recognized over a weighted-average period of 2.6 years.

(J)	COMPUTATION OF EARNINGS PER SHARE

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

 

		For the Three Months Ended December 31,								For the Nine Months Ended December 31,
		2010				2009				2010				2009
Weighted-Average Shares of Common Stock Outstanding			43,887,833				43,752,952				43,858,606				43,655,146
Common Equivalent Shares:
Assumed Exercise of Outstanding Dilutive Options			884,679				1,476,522				1,065,195				1,131,192
Less Shares Repurchased from Assumed Proceeds of Assumed Exercised Options			(666,876	)			(1,180,270	)			(817,976	)			(835,584	)
Restricted Shares			93,485				43,599				94,733				83,174
Weighted-Average Common and Common Equivalent Shares Outstanding			44,199,121				44,092,803				44,200,558				44,033,928
Shares Excluded Due to Anti-dilution Effects			2,741,721				2,015,545				2,555,217				2,359,386

 

(I)	PENSION AND EMPLOYEE BENEFIT PLANS

We sponsor several defined benefit and defined contribution pension plans which together cover substantially all 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 Ended December 31,								For the Nine Months Ended December 31,
		2010				2009				2010				2009
		(dollars in thousands)								(dollars in thousands)
Service Cost – Benefits Earned During the Period		$	148			$	126			$	418			$	404
Interest Cost of Benefit Obligations			283				266				795				768
Expected Return on Plan Assets			(461	)			(62	)			(873	)			(620	)
Recognized Net Actuarial Loss			122				509				266				581
Amortization of Prior-Service Cost			4				(57	)			60				97
Net Periodic Pension Cost		$	96			$	782			$	666			$	1,230

 

(K)	FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of our long-term debt has been estimated based upon our current incremental borrowing rates for similar types of borrowing arrangements. The fair value of our Senior Notes at December 31, 2010 is as follows:

 

		Fair Value
		(dollars in thousands)
Series 2005A Tranche A		$	39,372
Series 2005A Tranche B			80,095
Series 2005A Tranche C			62,480
Series 2007A Tranche A			10,129
Series 2007A Tranche B			11,674
Series 2007A Tranche C			52,500
Series 2007A Tranche D			37,540

All assets and liabilities which are not considered financial instruments have been valued using historical cost accounting. The carrying values of cash and cash equivalents, accounts and notes receivable, accounts payable and accrued liabilities approximate their fair values due to the short-term maturities of these assets and liabilities. The fair value of our New Credit Facility also approximates its carrying value at December 31, 2010.

(L)	LONG TERM DEBT

Long-term debt consists of the following:

 

		As of
		December 31, 2010				March 31, 2010
		(dollars in thousands)
Bank Credit Facility		$	5,000			$	3,000
Senior Notes			285,000				300,000
Total Debt		$	290,000			$	303,000

Bank Credit Facility –

On December 16, 2010, we amended our existing credit facility, modifying certain financial and other covenants and extending the maturity date to 2015. The principal balance of the existing facility was repaid, and replaced with a new $300.0 million credit agreement ("the "New Credit Facility"). The New Credit Facility expires on December 16, 2015. Borrowings under the New Credit Facility are guaranteed by all major operating subsidiaries of the Company. At the option of the Company, outstanding principal amounts on the New Credit Facility bear interest at a variable rate equal to (i) LIBOR, plus an agreed margin (ranging from 100 to 225 basis points), which is to be established quarterly based upon the Company's ratio of consolidated EBITDA, which is defined as earnings before interest, taxes, depreciation and amortizati on, to its consolidated indebtedness, or (ii) an alternative base rate which is the higher of (a) the prime rate or (b) the federal funds rate plus  ¹/2%, per annum plus an agreed margin (ranging from 0 to 125 basis points). 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. The New Credit Facility contains customary covenants that restrict our ability to incur additional debt, encumber our assets, sell assets, make or enter into certain investments, loans or guaranties and enter into sale and leaseback arrangements. The New Credit Facility also requires us to maintain a conso lidated funded indebtedness ratio (consolidated indebtedness to consolidated earnings before interest, taxes, depreciation, amortization and other non-cash deductions) of 3.5 or less and an interest coverage ratio (consolidated earnings before interest, taxes, depreciation, amortization and other non-cash deductions to interest expense) of at least 2.5. The New Credit Facility also limits our ability to make certain restricted payments, such as paying cash dividends; however, there are several exceptions to this restriction, including: (i) the Company may pay cash dividends in an aggregate amount of up to $50.0 million each fiscal year; and (ii) the Company may make restricted payments not otherwise permitted so long as no default would result therefrom and our consolidated funded indebtedness ratio does not exceed 3.0.

The New Credit Facility has a $50.0 million letter of credit facility. Under the letter of credit facility, the Company pays a fee at a per annum rate equal to the applicable margin for Eurodollar loans in effect from time to time plus a one-time letter of credit fee in an amount equal to 0.125% of the initial stated amount. At December 31, 2010, we had $9.2 million of letters of credit outstanding.

We have $5.0 million of borrowings outstanding under the New Credit Facility at December 31, 2010, and currently have $285.8 million of borrowings available under the New Credit Facility at December 31, 2010.

Senior Notes –

We entered into a Note Purchase Agreement on November 15, 2005 (the "2005 Note Purchase Agreement") related to our sale of $200 million of senior, unsecured notes, designated as Series 2005A Senior Notes (the "Series 2005A Senior Notes") in a private placement transaction. The Series 2005A Senior Notes, which are guaranteed by substantially all of our subsidiaries, were sold at par and issued in three tranches on November 15, 2005. Since entering into the 2005 Note Purchase Agreement, we have repurchased $22 million in principal of the Series 2005A Senior Notes. Following these repurchases, the amounts outstanding for each of the three tranches are as follows:

 

		Principal				Maturity Date				Interest Rate
Tranche A		$	38.6 million				November 15, 2012				5.25	%
Tranche B		$	77.2 million				November 15, 2015				5.38	%
Tranche C		$	62.2 million				November 15, 2017				5.48	%

 

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

We entered into an additional Note Purchase Agreement on October 2, 2007 (the "2007 Note Purchase Agreement") related to our sale of $200 million of senior, unsecured notes, designated as Series 2007A Senior Notes (the "Series 2007A Senior Notes") in a private placement transaction. The Series 2007A Senior Notes, which are guaranteed by substantially all of our subsidiaries, were sold at par and issued in four tranches on October 2, 2007. Since entering into the 2007 Note Purchase Agreement, we have repurchased $93 million in principal of the Series 2007A Senior Notes. Following the repurchase, the amounts outstanding for each of the four tranches are as follows:

 

		Principal				Maturity Date				Interest Rate
Tranche A		$	9.5 million				October 2, 2014				6.08	%
Tranche B		$	11.0 million				October 2, 2016				6.27	%
Tranche C		$	50.0 million				October 2, 2017				6.36	%
Tranche D		$	36.5 million				October 2, 2019				6.48	%

Interest for each tranche of Notes is payable semi-annually on April 2 and October 2 of each year until all principal is paid for the respective tranche.

Our obligations under the 2005 Note Purchase Agreement and the 2007 Note Purchase Agreement (collectively referred to as the "Note Purchase Agreements") and the Series 2005A Senior Notes and the Series 2007A Senior Notes (collectively referred to as "the Senior Notes") are equal in right of payment with all other senior, unsecured debt of the Company, including our debt under the New Credit Facility. The Note Purchase Agreements contain 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 New Credit Facility. We were in compliance with all financial ratios and covenants at December 31, 2010.

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 Agreements) on the Senior Notes and the other payment and performance obligations of the Company contained in the Senior Notes and in the Note Purchase Agreements. 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 a nd the yield to maturity of U.S. treasury securities having a maturity equal to the remaining average life of the Senior Notes being prepaid.