NEWS BULLETIN RE: Headwaters Incorporated FROM: 10653 South River Front Parkway, Suite 300 FINANCIAL South Jordan, UT 84095 RELATIONS BOARD (801) 984-9400 NYSE: HW FOR FURTHER INFORMATION AT THE COMPANY: AT FINANCIAL RELATIONS BOARD: Sharon Madden Tricia Ross Director of Investor Relations Analyst Contact (801) 984-9400 (617) 520-7064 FOR IMMEDIATE RELEASE: July 27, 2006HEADWATERS INCORPORATED ANNOUNCES RESULTS FOR FISCAL 2006 THIRD QUARTER
o Net income of $27.4 million or $0.58 per diluted earnings per share o Second heavy oil commercial test scheduled – more discussions underway o Ethanol project financing completed – project on schedule o Acquired 150 million tons of waste coal resources – ongoing operations SOUTH JORDAN, UTAH, JULY 27, 2006 (NYSE: HW) – HEADWATERS INCORPORATED today announced results for its third fiscal quarter ended June 30, 2006. Highlights for the quarter include: o Announced the agreement to acquire a South Korean hydrogen peroxide facility o Construction on direct synthesis hydrogen peroxide demo plant on schedule o Completed direct coal liquefaction studies in India and the Philippines o Expanded fly ash storage by 35,000 tons o Largest single month of sales in history for architectural stone achieved o Acquired Wellcraft, Inc. building materials product line Total revenue for the June 2006 quarter was $295.9 million, down 4% from $308.7 million reported for the June 2005 quarter. Operating income decreased 48%, to $49.2 million in the June 2006 quarter compared to $95.5 million in the prior year quarter. Net income for the June 2006 quarter was $27.4 million or $0.58 of earnings per diluted share, using 48.5 million weighted-average shares outstanding. Net income for the June 2005 quarter was $55.3 million or $1.17 of earnings per diluted share, using 48.0 million weighted-average shares outstanding. Financial results for the June 2005 quarter were favorably impacted – on a net basis – from non-recurring items totaling $18.8 million in net income, or $0.39 of earnings per diluted share, as shown in the following table:
Three Months Ended June 30, 2005 (in thousand except EPS) $ EPS - ---------------------------------------------------------- ----------- ----------- Net income, as reported $55,290 $1.17 Significant items: Contract litigation settlement and related items (44,228) SFAS No. 123R implementation 25,511 Net license fee revenue related to prior periods (8,185) Income tax effect of significant items 8,070 ----------- ----------- Net income, after consideration of the above items $36,458 $0.78 =========== =========== The items labeled "contract litigation settlement and related items" and "net license fee revenue related to prior periods" materially affected only the Energy Services segment. The item labeled "SFAS No. 123R implementation" materially affected all of Headwaters’ segments. Consistent with the Company's accounting treatment in its second fiscal quarter ended March 31, 2006, due to the ongoing uncertainty surrounding the phase-out of Section 29 tax credits in calendar 2006, no revenues were recognized in the June 2006 quarter for several licensees whose payments to Headwaters are based on a portion of the tax credits earned by the licensee. Approximately $20 million of potential license fees were not recognized in the June 2006 quarter and these fees are in addition to the $10.5 million in potential license fees not recognized in the March 2006 quarter. Total revenue for the nine months ended June 30, 2006 was $846.2 million, up 13% from $749.5 million reported for the nine months ended June 30, 2005. Operating income decreased 18%, to $137.3 million for the nine months ended June 30, 2006 compared to $166.6 million in the prior year period. Net income for the nine months ended June 30, 2006 was $74.1 million or $1.58 of earnings per diluted share, using 48.7 million weighted-average shares outstanding. Net income for the nine months ended June 30, 2005 was $76.4 million or $1.81 of earnings per diluted share, using 43.9 million weighted-average shares outstanding. Segment Performance In the following discussion about segment performance for the June 2006 quarter versus the June 2005 quarter, the numbers used for June 2005 quarter exclude the effects of the non-recurring items referred to in the table above. Revenues from Headwaters' Construction Materials segment during the June 2006 quarter increased $14.5 million or 10%, to $162.1 million versus $147.6 million for the June 2005 quarter. Gross margin percentage decreased approximately 100 basis points to 34% for the June 2006 quarter compared to the prior year, and improved 300 basis points, from 31% versus the March 2006 quarter. Revenue increases occurred across all major product lines due to strong market demand and the introduction of new products. The primary reasons for the decline in gross margin percentage, year-over-year, were higher raw material and energy costs, and to a lesser degree, continued costs and manufacturing inefficiencies related to expansion of capacity and new product lines. In July, Headwaters acquired the assets of Wellcraft, Inc. Wellcraft offers a complete line of egress window wells and well covers, which will be assimilated into Headwaters’ existing construction materials business and distribution system. The acquisition was consistent with the Company’s strategy to add
product lines to its distribution system and was not a material transaction from a financial perspective. Headwaters believes the market size for Wellcraft products is approximately $30 million and is growing at a 15% to 20% annual rate. Revenues from Headwaters’ coal combustion products ("CCPs") segment during the June 2006 quarter increased $4.6 million or 7%, from $69.5 million to $74.1 million versus the June 2005 quarter. Gross margin percentage of 27% increased approximately 100 basis points from the June 2005 quarter. The increase in revenue and gross margin percentage resulted primarily from upward pricing trends in most cement markets. Demands for CCPs remains strong as the Company continues to expand its distribution and storage system. Chemical reagent sales decreased $10.0 million, or 22%, in the June 2006 quarter to $35.0 million, compared to $45.0 million in the June 2005 quarter. The decrease in chemical reagent sales was a result of lower production of synfuel by most of Headwaters' licensees and other customers, due to concerns about the potential phase-out of Section 45K of the Internal Revenue Code (formerly Section 29). Due to raw material cost increases (which are related generally to petroleum prices), gross margins on chemical reagent sales in the June 2006 quarter were 24% compared to 29% in the June 2005 quarter. Future margins will be dependent upon oil prices and pricing with Headwaters’ customers. Headwaters Energy Services' license fees for the June 2006 quarter decreased $15.8 million or 56%, from $28.2 million in the June 2005 quarter, to $12.4 million in the June 2006 quarter. The decrease in license fee revenues in the June 2006 quarter resulted primarily from no revenues being recognized for several licensees whose payments to Headwaters are based on a portion of the tax credits earned by the licensee. Certain accounting rules governing revenue recognition require that the seller's price to the buyer be "fixed or determinable," and the uncertainty surrounding the impact of high oil prices on the potential phase-out of Section 45K precludes revenue recognition. Accordingly, revenues for these licensees will not be recognized until such time as the revenues become more determinable. Headwaters' effective tax rate for the June 2006 quarter was 34% compared to 28% for the June 2005 quarter. Using available information as of June 30, 2006, and consistent with the methodology employed at the end of the March 2006 quarter, Headwaters calculated an estimated phase-out percentage for Section 45K tax credits for calendar year 2006 of 69%. Headwaters used this estimated phase-out percentage in calculating its estimated effective tax rate for fiscal 2006. Section 29 tax credits are subject to phase-out after the average annual domestic wellhead oil price ("reference price") reaches a beginning phase-out threshold price, and are eliminated entirely if the reference price reaches the full phase-out price. Historically, the reference price has trended somewhat lower than published NYMEX market prices for oil. For calendar 2005, the reference price was $50.26 per barrel and the phase-out range began at $53.20 and would have fully phased out tax credits at $66.78 per barrel. Therefore, there was no phase-out of tax credits for calendar 2005. For calendar 2006, Headwaters estimates that the phase-out range (computed by increasing the 2005 inflation adjustment factor by 2%) begins at $54.27 and completes phase-out at $68.12 per barrel. Congress is considering legislation to change Section 29 phase-out calculations to a prospective rather than retrospective application of the reference price. Headwaters estimates that if
average oil prices for the calendar 2006 period to date are maintained for all of calendar 2006, and absent a change to a prospective application of the reference price, significant phase-out would occur. New Product Development The construction of a Headwaters/Degussa direct synthesis hydrogen peroxide (H2O2) demonstration plant located in Germany continues on schedule and on budget. The operating results from the demonstration plant will provide engineering data to enable the joint venture to construct a world scale direct synthesis hydrogen peroxide manufacturing facility. In addition, Headwaters, along with its joint venture partner Degussa AG, intends to acquire and expand a hydrogen peroxide plant in Korea to be a platform for the advancement of the joint venture's hydrogen peroxide for propylene oxide business and the commercialization of Headwater's NxCat nanocatalysts. We expect this acquisition to be completed in our fourth fiscal quarter. Headwaters is continuing the commercialization of its heavy oil upgrading technology. In addition to the successful completion of its initial commercial scale test at a European refinery, Headwaters is preparing for commercial tests at three additional ebullated bed facilities. Pilot plant work is continuing on multiple heavy oil feedstocks, including Canadian bitumen. Headwaters is now operating two coal cleaning installations, having acquired rights to mine approximately 150 million tons of waste coal. Headwaters is in the testing and engineering phase to commence construction of additional facilities. Capital Structure / Indebtedness The components of Headwaters' debt structure as of June 30, 2006 are as follows: - ----------------------------------------- -------------- ------------------------ ----------------- Amount (in millions) Outstanding Interest Rate Maturity - ----------------------------------------- -------------- ------------------------ ----------------- Senior secured first lien term loan $415.3 LIBOR + 2.0% April 2011 - ----------------------------------------- -------------- ------------------------ ----------------- Industrial Revenue Bond and other $7.5 5.6% to 7.8% Currently Callable - ----------------------------------------- -------------- ------------------------ ----------------- Senior revolving credit facility ($60.0 $0 Prime + 0.75% September 2009 million available less outstanding letters of credit of approximately $6.9 million) - ----------------------------------------- -------------- ------------------------ ----------------- Senior subordinated convertible debt $172.5 2.875% June 2011 - ----------------------------------------- -------------- ------------------------ ----------------- Total $595.3 - ----------------------------------------- -------------- ------------------------ ----------------- To supplement our condensed consolidated financial statements presented in accordance with generally accepted accounting principles ("GAAP"), we use a non-GAAP measure called EBITDA. EBITDA is net income adjusted by adding net interest expense, income taxes, depreciation and amortization ("EBITDA"). Management uses EBITDA internally to measure the amount of cash generated by Headwaters and to make decisions about the amount of capital expenditures Headwaters will make and where to allocate capital. EBITDA is also provided to enhance the user's overall understanding of our current financial performance, our ability to service our debt, our compliance with current debt covenants and our ability to fund future growth. Therefore, we believe that EBITDA provides
useful information to our investors regarding our performance and overall results of operations. Our EBITDA measure presented here may not be comparable to similarly titled measures presented by other companies. The following table highlights certain debt coverage and balance sheet ratios using period end balances and the trailing twelve months ("TTM") EBITDA: ---------------------------------- --------------- ------------ ------------ Pro forma Actual Actual 9/30/04 9/30/05 6/30/06 ---------------------------------- --------------- ------------ ------------ TTM EBITDA (in millions) $233.8 $277.6 $260.4 Total Indebtedness to TTM EBITDA 4.16 2.36 2.29 Current Ratio 1.24 1.49 1.83 Total Debt to Equity 3.16 0.95 0.77 ---------------------------------- --------------- ------------ ------------ The pro forma September 2004 calculations assume all of the 2004 acquisitions occurred on October 1, 2003. Pro forma EBITDA for the trailing twelve months ended September 30, 2004 of $233.8 million is derived as follows (in millions): Net income of $72.9 plus net interest expense of $63.1, income taxes of $45.6, and depreciation and amortization of $52.2. Actual EBITDA for the trailing twelve months ended September 30, 2005 of $277.6 million is derived as follows (in millions): Net income of $121.3 plus net interest expense of $57.4, income taxes of $42.5, and depreciation and amortization of $56.4. Actual EBITDA for the trailing twelve months ended June 30, 2006 of $260.4 million is derived as follows (in millions): Net income of $119.0 plus net interest expense of $37.3, income taxes of $42.1, and depreciation and amortization of $62.0. See "Current Ratio" calculations in financial tables that follow. During the quarter, Headwaters announced an offering of $150 million of senior subordinated notes, but did not complete the offering as conditions within the high yield market deteriorated dramatically. Headwaters viewed this potential offering of notes as an opportunity to put in place a longer-term capital structure and has no immediate need to complete any financing. Accordingly, we do not believe that the current coupon rates associated with senior subordinated notes are attractive to Headwaters at this time. Commentary and Outlook Scott K. Sorensen, Headwaters' Chief Financial Officer, stated, "Given our performance of $0.58 earnings per share for the third quarter and $1.58 for the nine months, we are on track to achieve our earnings guidance of $2.00 to $2.70 per share for fiscal year 2006. If legislation is not passed correcting the retrospective phase out calculation of the tax credits under Section 45K, then the upper end of the earnings per share guidance range should be approximately $2.15 with the bottom end of the range remaining at $2.00." "We continue to push forward with our new product offerings," said Kirk A. Benson, Chairman and Chief Executive Officer. "In addition to the solid progress we are making on our diversified growth strategies, our building products businesses continue to perform well, providing strong cash flow and organic growth opportunities." Management will host a conference call with a simultaneous web cast today at 11:00 a.m. Eastern/9:00 a.m. Mountain to discuss the Company’s financial results and business outlook. The call will be available live via the Internet by accessing Headwaters' web site at www.headwaters.com and clicking on the Investor Relations section. To listen to the live broadcast, please go to
the web site at least fifteen minutes early to register, download, and install any necessary audio software. For those who cannot listen to the live broadcast, an online replay will be available for 90 days on www.headwaters.com, or a phone replay will be available through August 3, 2006 by dialing 800-642-1687 or 706-645-9291 and entering the passcode 2805774. About Headwaters Incorporated Headwaters Incorporated is a world leader in creating value through innovative advancements in the utilization of natural resources. Headwaters is a diversified growth company providing products, technologies and services to the energy, construction and home improvement industries. Through its alternative energy, coal combustion products, and building materials businesses, the Company earns a growing revenue stream that provides the capital needed to expand and acquire synergistic new business opportunities. Forward Looking Statements Certain statements contained in this report are forward-looking statements within the meaning of federal securities laws and Headwaters intends that such forward-looking statements be subject to the safe-harbor created thereby. Forward-looking statements include Headwaters' expectations as to the managing and marketing of coal combustion products, the production and marketing of building materials and products, the licensing of technology and chemical sales to alternative fuel facilities, the receipt of product sales, license fees and royalty revenues, which are subject to tax credit phase out risks, the development, commercialization, and financing of new technologies and other strategic business opportunities and acquisitions, and other information about Headwaters. Such statements that are not purely historical by nature, including those statements regarding Headwaters' future business plans, the operation of facilities, the availability of tax credits in an environment of high oil prices and potential tax credit phase out, the availability of feedstocks, and the marketability of the coal combustion products, building products, and synthetic fuel, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Actual results may vary materially from such expectations. Words such as "expects," "anticipates," "targets," "goals," "projects," "believes," "seeks," "estimates," variations of such words, and similar expressions are intended to identify such forward-looking statements. Any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances, are forward-looking. In addition to matters affecting the coal combustion product, alternative fuel, and building products industries or the economy generally, factors which could cause actual results to differ from expectations stated in forward-looking statements include, among others, the factors described in the captions entitled "Forward-looking Statements" and "Risk Factors" in Item 7 in Headwaters' Annual Report on Form 10-K for the fiscal year ended September 30, 2005, Quarterly Reports on Form 10-Q, and other periodic filings and prospectuses. Although Headwaters believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that our results of operations will not be adversely affected by such factors. Unless legally required, we undertake no obligation to revise or update any forward-looking statements for any reason. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Our internet address is www.headwaters.com. There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our reports can be accessed through the investor relations section of our web site.
HEADWATERS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per-share amounts) Quarter Ended June 30, Nine Months Ended June 30, 2005 2006 2005 2006 ---------------------------- ---------------------------- Revenue: Construction materials $ 147,582 $ 162,067 $ 370,467 $ 423,744 Coal combustion products 69,453 74,068 170,973 197,724 Alternative energy 91,694 59,794 208,097 224,692 ---------------------------- ---------------------------- Total revenue 308,729 295,929 749,537 846,160 Cost of revenue: Construction materials 97,720 107,264 248,140 288,200 Coal combustion products 51,436 53,714 130,882 149,022 Alternative energy 37,874 40,147 91,119 140,395 ---------------------------- ---------------------------- Total cost of revenue 187,030 201,125 470,141 577,617 ---------------------------- ---------------------------- Gross profit 121,699 94,804 279,396 268,543 Operating expenses: Amortization 6,126 6,278 18,322 18,419 Research and development 4,758 3,363 10,109 9,682 Contract litigation settlement (38,252) -- (38,252) -- Selling, general and administrative 53,598 35,921 122,585 103,192 ---------------------------- ---------------------------- Total operating expenses 26,230 45,562 112,764 131,293 ---------------------------- ---------------------------- Operating income 95,469 49,242 166,632 137,250 Net interest expense (11,364) (8,156) (45,967) (25,816) Other income (expense), net (6,375) 541 (11,514) (4,960) ---------------------------- ---------------------------- Income before income taxes 77,730 41,627 109,151 106,474 Income tax provision (22,440) (14,220) (32,750) (32,370) ---------------------------- ---------------------------- Net income $ 55,290 $ 27,407 $ 76,401 $ 74,104 ============================ ============================ Basic earnings per share $ 1.35 $ 0.65 $ 2.07 $ 1.77 ============================ ============================ Diluted earnings per share $ 1.17 $ 0.58 $ 1.81 $ 1.58 ============================ ============================ Weighted average shares outstanding -- basic 41,019 41,984 36,877 41,813 ============================ ============================ Weighted average shares outstanding -- diluted 47,996 48,543 43,872 48,708 ============================ ============================ Note: Total depreciation and amortization was $13,635 and $16,175 for the quarters ended June 30, 2005 and 2006, respectively, and $41,318 and $46,955 for the nine months ended June 30, 2005 and 2006, respectively.
HEADWATERS INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands) September 30, June 30, Assets: 2005 2006 ---------------------------- Current assets: Cash and cash equivalents $ 13,666 $ 59,663 Trade receivables, net 174,127 144,086 Other receivable 70,000 -- Inventories 60,519 72,879 Other 36,762 33,520 ---------------------------- Total current assets 355,074 310,148 Property, plant and equipment, net 190,450 204,883 Intangible assets, net 276,248 262,881 Goodwill 811,545 826,679 Other assets 38,339 47,818 ---------------------------- Total assets $ 1,671,656 $ 1,652,409 ============================ Liabilities and Stockholders' Equity: Current liabilities: Accounts payable $ 43,957 $ 32,964 Accrued liabilities 141,574 128,727 Current portion of long-term debt 52,207 7,475 ---------------------------- Total current liabilities 237,738 169,166 Long-term debt 601,811 587,826 Deferred income taxes 108,449 105,952 Other long-term liabilities 37,345 17,171 ---------------------------- Total liabilities 985,343 880,115 ---------------------------- Stockholders' equity: Common stock - par value 42 42 Capital in excess of par value 489,602 500,679 Retained earnings 197,808 271,912 Other (1,139) (339) ---------------------------- Total stockholders' equity 686,313 772,294 ---------------------------- Total liabilities and stockholders' equity $ 1,671,656 $ 1,652,409 ============================ The current ratio as of September 30, 2005 of 1.49 is derived by dividing total current assets of $355,074 by total current liabilities of $237,738. The current ratio as of June 30, 2006 of 1.83 is derived by dividing total current assets of $310,148 by total current liabilities of $169,166.
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8-K Filing
Headwaters Inactive 8-KResults of Operations and Financial Condition
Filed: 27 Jul 06, 12:00am