Headwaters 10-Q 2014 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 1-32459

HEADWATERS INCORPORATED

(Exact name of registrant as specified in its charter)

Delaware	87-0547337
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
10701 South River Front Parkway, Suite 300
South Jordan, Utah	84095
(Address of principal executive offices)	(Zip Code)

(801) 984-9400

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company 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 x

The number of shares outstanding of the Registrant’s common stock as of July 23, 2014 was 73,495,965.

HEADWATERS INCORPORATED

TABLE OF CONTENTS

			Page No.
PART I — FINANCIAL INFORMATION
	ITEM 1.	FINANCIAL STATEMENTS (Unaudited):
		Condensed Consolidated Balance Sheets — As of September 30, 2013 and June 30, 2014	3
		Condensed Consolidated Statements of Operations — For the three and nine months ended June 30, 2013 and 2014	4
		Condensed Consolidated Statement of Changes in Stockholders’ Equity — For the nine months ended June 30, 2014	5
		Condensed Consolidated Statements of Cash Flows — For the nine months ended June 30, 2013 and 2014	6
		Notes to Condensed Consolidated Financial Statements	7
	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	35
	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	43
	ITEM 4.	CONTROLS AND PROCEDURES	44
PART II — OTHER INFORMATION
	ITEM 1.	LEGAL PROCEEDINGS	45
	ITEM 1A.	RISK FACTORS	45
	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	45
	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	45
	ITEM 4.	MINE SAFETY DISCLOSURES	45
	ITEM 5.	OTHER INFORMATION	46
	ITEM 6.	EXHIBITS	46
SIGNATURES			47

Forward-looking Statements

This Quarterly Report on Form 10-Q contains 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 “may,” “should,” “intends,” “plans,” “expects,” “anticipates,” “targets,” “goals,” “projects,” “believes,” “seeks,” “estimates,” “forecasts,” or variations of such words and similar expressions, or the negative of such terms, may help 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. For a discussion of the factors that could cause actual results to differ from expectations, please see the risk factors described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, as updated from time to time. 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 Securities and Exchange Commission (SEC). Our reports can be accessed through the investor relations section of our web site. The information found on our web site is not part of this or any report we file with or furnish to the SEC.

2

ITEM 1.  FINANCIAL STATEMENTS

HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,			June 30,
(in thousands, except par value)	2013			2014
ASSETS
Current assets:
Cash and cash equivalents	$	75,316		$	114,464
Trade receivables, net	109,868			114,998
Inventories	37,383			56,053
Current and deferred income taxes	14,036			12,427
Other	7,280			12,402
Total current assets	243,883			310,344
Property, plant and equipment, net	159,619			176,281
Other assets:
Goodwill	137,198			186,040
Intangible assets, net	139,797			152,679
Other	43,512			42,896
Total other assets	320,507			381,615
Total assets	$	724,009		$	868,240
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	21,810		$	24,857
Accrued personnel costs	47,746			42,049
Accrued interest	16,077			15,515
Current income taxes	120			0
Other accrued liabilities	55,268			42,067
Current portion of long-term debt	7,553			0
Total current liabilities	148,574			124,488
Long-term liabilities:
Long-term debt	449,420			599,539
Income taxes	24,637			20,980
Other	16,968			24,337
Total long-term liabilities	491,025			644,856
Total liabilities	639,599			769,344
Commitments and contingencies
Non-controlling interest in consolidated subsidiary	0			13,698
Stockholders’ equity:
Common stock, $0.001 par value; authorized 200,000 shares; issued and outstanding: 73,149 shares at September 30, 2013 and 73,492 shares at June 30, 2014	73			73
Capital in excess of par value	720,828			722,872
Retained earnings (accumulated deficit)	(635,972		)	(637,214		)
Treasury stock	(519		)	(533		)
Total stockholders’ equity	84,410			85,198
Total liabilities and stockholders’ equity	$	724,009		$	868,240

See accompanying notes.

3

HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months EndedJune 30,						Nine Months EndedJune 30,
(in thousands, except per-share amounts)	2013			2014			2013			2014
Revenue:
Light building products	$	118,035		$	140,572		$	279,501		$	327,723
Heavy construction materials	75,114			80,636			197,286			211,250
Energy technology	3,881			2,191			10,804			6,553
Total revenue	197,030			223,399			487,591			545,526
Cost of revenue:
Light building products	82,096			97,673			202,723			237,839
Heavy construction materials	54,642			57,070			151,622			157,504
Energy technology	1,787			984			5,085			3,067
Total cost of revenue	138,525			155,727			359,430			398,410
Gross profit	58,505			67,672			128,161			147,116
Operating expenses:
Amortization	5,319			5,477			15,543			16,068
Selling, general and administrative	30,001			36,504			84,517			97,248
Total operating expenses	35,320			41,981			100,060			113,316
Operating income	23,185			25,691			28,101			33,800
Other income (expense):
Net interest expense	(11,111		)	(12,121		)	(32,722		)	(34,411		)
Other, net	24			(36		)	262			(56		)
Total other income (expense), net	(11,087		)	(12,157		)	(32,460		)	(34,467		)
Income (loss) from continuing operations before income taxes	12,098			13,534			(4,359		)	(667		)
Income tax benefit (provision)	(2,850		)	(2,410		)	(550		)	150
Income (loss) from continuing operations	9,248			11,124			(4,909		)	(517		)
Income (loss) from discontinued operations, net of income taxes	1,768			(231		)	1,793			(106		)
Net income (loss)	11,016			10,893			(3,116		)	(623		)
Net income attributable to non-controlling interest	0			(389		)	0			(619		)
Net income (loss) attributable to Headwaters Incorporated	$	11,016		$	10,504		$	(3,116	)	$	(1,242	)
Basic and diluted income (loss) per share attributable to Headwaters Incorporated:
From continuing operations	$	0.13		$	0.14		$	(0.07	)	$	(0.02	)
From discontinued operations	0.02			0.00			0.02			0.00
	$	0.15		$	0.14		$	(0.05	)	$	(0.02	)

See accompanying notes.

4

HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

For the Nine Months Ended June 30, 2014

	Common stock			Capital in excess			Retained earnings (accumulated			Treasury			Total stockholders’
(in thousands)	Shares	Amount		of par value			deficit)			stock			equity
Balances as of September 30, 2013	73,149	$	73	$	720,828		$	(635,972	)	$	(519	)	$	84,410
Issuance of common stock pursuant to employee stock purchase plan	65	0		612									612
Issuance of restricted stock, net of cancellations	150	0											0
Exercise of stock appreciation rights and restricted stock units	128	0											0
Stock-based compensation				1,576									1,576
Net 10 share decrease in treasury stock held for deferred compensation plan obligations, at cost				14						(14		)	0
Fair value adjustment of non-controlling interest in consolidated subsidiary				(158		)							(158		)
Net loss attributable to Headwaters Incorporated for the nine months ended June 30, 2014							(1,242		)				(1,242		)
Balances as of June 30, 2014	73,492	$	73	$	722,872		$	(637,214	)	$	(533	)	$	85,198

See accompanying notes.

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HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months EndedJune 30,
(in thousands)	2013			2014
Cash flows from operating activities:
Net loss	$	(3,116	)	$	(623	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	39,432			40,714
Interest expense related to amortization of debt issue costs and debt discount	4,999			1,699
Stock-based compensation	1,267			1,576
Deferred income taxes	223			429
Net gain on disposition of property, plant and equipment	(726		)	(84		)
Gain on sale of discontinued operations, net of income taxes	(2,158		)	(3,032		)
Asset impairments	0			1,466
Net loss of unconsolidated joint ventures	0			286
Gain on convertible debt repayments	(35		)	0
Decrease in trade receivables	1,066			3,531
Increase in inventories	(2,931		)	(8,639		)
Decrease in accounts payable and accrued liabilities	(25,748		)	(27,216		)
Other changes in operating assets and liabilities, net	(4,403		)	(4,910		)
Net cash provided by operating activities	7,870			5,197
Cash flows from investing activities:
Payments for acquisitions	(43,250		)	(88,579		)
Payments for investments in unconsolidated joint ventures	0			(1,450		)
Purchase of property, plant and equipment	(21,546		)	(25,367		)
Proceeds from disposition of property, plant and equipment	855			864
Proceeds from sale of discontinued operations	4,813			4,666
Net decrease (increase) in long-term receivables and deposits	(694		)	7,673
Net change in other assets	(430		)	(2,876		)
Net cash used in investing activities	(60,252		)	(105,069		)
Cash flows from financing activities:
Net proceeds from issuance of common stock	77,957			0
Net proceeds from issuance of long-term debt	0			146,200
Payments on long-term debt	(39,476		)	(7,792		)
Employee stock purchases	609			612
Net cash provided by financing activities	39,090			139,020
Net increase (decrease) in cash and cash equivalents	(13,292		)	39,148
Cash and cash equivalents, beginning of period	53,782			75,316
Cash and cash equivalents, end of period	$	40,490		$	114,464

See accompanying notes.

6

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

1.Nature of Operations and Basis of Presentation

Description of Business and Organization — Headwaters Incorporated (Headwaters) is a building products company incorporated in Delaware, providing products and services in the light and heavy building materials segments. Headwaters’ vision is to improve lives through innovative advancements in construction materials.

The light building products segment designs, manufactures, and sells a wide variety of building products, including exterior vinyl siding accessories (such as shutters, mounting blocks, and vents), manufactured architectural stone, roofing materials and concrete block. Headwaters believes that many of its branded products have a leading market position. Revenues from Headwaters’ light building products businesses are diversified geographically and also by market, including the new housing and residential repair and remodeling markets, as well as commercial construction markets.

The heavy construction materials segment is the nationwide leader in the management and marketing of coal combustion products (CCPs), including fly ash which is primarily sold directly to concrete manufacturers who use it as a mineral admixture for the partial replacement of portland cement in concrete. Headwaters’ heavy construction materials business is comprised of a nationwide supply, storage and distribution network. Headwaters also provides services to electric utilities related to the management of CCPs.

In addition to the two building materials segments described above, Headwaters also has a non-core energy technology segment which has been focused on reducing waste and increasing the value of energy-related feedstocks, primarily in the areas of low-value oil and coal. In oil, Headwaters believes that its upgrading technology represents a substantial improvement over current heavy oil refining technologies. Headwaters’ heavy oil upgrading process uses a liquid catalyst precursor to generate a highly active molecular catalyst to convert low-value residual oil into higher-value distillates that can be further refined into gasoline, diesel and other products. In coal, Headwaters owned and operated coal cleaning facilities that separate ash from waste coal to provide a refined coal product that is higher in Btu value and lower in impurities than the feedstock coal. As described in Note 4, Headwaters disposed of its remaining coal cleaning facilities in January 2013 and the results of Headwaters’ coal cleaning operations have been presented as discontinued operations for all periods.

Basis of Presentation — Headwaters’ fiscal year ends on September 30 and unless otherwise noted, references to years refer to Headwaters’ fiscal year rather than a calendar year. The unaudited interim condensed consolidated financial statements include the accounts of Headwaters, all of its subsidiaries and other entities in which Headwaters has a controlling interest. All significant intercompany transactions and accounts are eliminated in consolidation. Due to the seasonality of most of Headwaters’ operations and other factors, the consolidated results of operations for any particular period are not indicative of the results to be expected for a full fiscal year. During the nine months ended June 30, 2013, approximately 12% of Headwaters’ total revenue and cost of revenue was for services. During the nine months ended June 30, 2014, approximately 11% of Headwaters’ total revenue and cost of revenue was for services. Substantially all service-related revenue for both periods was in the heavy construction materials segment.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) for quarterly reports on Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included, and consist of normal recurring adjustments. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Headwaters’ Annual Report on Form 10-K for the year ended September 30, 2013 (Form 10-K) and in Headwaters’ Quarterly Reports on Form 10-Q for the quarters ended December 31, 2013 and March 31, 2014.

Recent Accounting Pronouncements — In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASC Topic 606). This new revenue standard creates a single source of revenue guidance for all companies in all industries and is more principles-based than current

7

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

revenue guidance. For Headwaters, the mandatory adoption date of ASC 606 is October 1, 2017 and there are two methods of adoption allowed, either a “full” retrospective adoption or a “modified” retrospective adoption. Headwaters is currently evaluating the impact of ASC 606, but at the current time does not know what impact the new standard will have on revenue recognized and other accounting decisions in future periods, if any, nor what method of adoption will be selected if the impact is material.

Headwaters has reviewed other recently issued accounting standards which have not yet been adopted in order to determine their potential effect, if any, on the results of operations or financial position of Headwaters. Based on the review of these other recently issued standards, Headwaters does not currently believe that any of those accounting pronouncements will have a significant effect on its current or future financial position, results of operations, cash flows or disclosures.

Reclassifications — Certain prior period amounts have been reclassified to conform to the current period’s presentation. The reclassifications had no effect on net income (loss) or total assets.

2.Segment Reporting

Headwaters currently operates three business segments: light building products, heavy construction materials and energy technology. These segments are managed and evaluated separately by management due to differences in their markets, operations, products and services. Revenues for the light building products segment consist of product sales to wholesale and retail distributors, contractors and other users of building products. Revenues for the heavy construction materials segment consist primarily of CCP product sales to ready-mix concrete businesses, with a smaller amount from services provided to coal-fueled electric generating utilities. Currently, continuing revenues for the energy technology segment consist primarily of catalyst sales to oil refineries. Historically, revenues for the energy technology segment consisted primarily of coal sales; however, as described in Note 4, Headwaters sold all of its coal cleaning facilities in fiscal 2012 and 2013. Coal sales revenue and results of operations have been reflected as discontinued operations in the accompanying statements of operations for all periods. Intersegment sales are immaterial.

The following segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. Segment performance is evaluated primarily on revenue and operating income, although other factors are also used, such as Adjusted EBITDA. Headwaters defines Adjusted EBITDA as net income plus net interest expense, income taxes, depreciation and amortization, stock-based compensation, cash-based compensation tied to stock price, goodwill and other impairments, and other non-routine adjustments that arise from time to time.

Segment costs and expenses considered in deriving segment operating income (loss) include cost of revenue, amortization, and segment-specific selling, general and administrative expenses. Amounts included in the Corporate column represent expenses that are not allocated to any segment and include administrative departmental costs and general corporate overhead. Segment assets reflect those specifically attributable to individual segments and primarily include cash, accounts receivable, inventories, property, plant and equipment, goodwill and intangible assets. Certain other assets are included in the Corporate column. The net operating results of the discontinued coal cleaning business are reflected in the single line item for discontinued operations.

8

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

	Three Months Ended June 30, 2013
(in thousands)	Light building products			Heavy construction materials			Energy technology			Corporate			Totals
Segment revenue	$	118,035		$	75,114		$	3,881		$	0		$	197,030
Depreciation and amortization	$	(10,009	)	$	(3,222	)	$	(542	)	$	(77	)	$	(13,850	)
Operating income (loss)	$	15,509		$	12,823		$	(339	)	$	(4,808	)	$	23,185
Net interest expense													(11,111		)
Other income (expense), net													24
Income tax provision													(2,850		)
Income from continuing operations													9,248
Income from discontinued operations, net of income taxes													1,768
Net income													$	11,016
Capital expenditures	$	4,813		$	1,786		$	123		$	417		$	7,139
Segment assets as of September 30, 2013	$	306,686		$	358,684		$	34,509		$	24,130		$	724,009

	Three Months Ended June 30, 2014
(in thousands)	Light building products			Heavy construction materials			Energy technology			Corporate			Totals
Segment revenue	$	140,572		$	80,636		$	2,191		$	0		$	223,399
Depreciation and amortization	$	(10,336	)	$	(3,444	)	$	(408	)	$	(66	)	$	(14,254	)
Operating income (loss)	$	18,691		$	15,019		$	(1,761	)	$	(6,258	)	$	25,691
Net interest expense													(12,121		)
Other income (expense), net													(36		)
Income tax provision													(2,410		)
Income from continuing operations													11,124
Loss from discontinued operations, net of income taxes													(231		)
Net income													$	10,893
Capital expenditures	$	6,604		$	1,968		$	93		$	758		$	9,423
Segment assets	$	420,527		$	382,274		$	30,234		$	35,205		$	868,240

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HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

	Nine Months Ended June 30, 2013
(in thousands)	Light building products			Heavy construction materials			Energy technology			Corporate			Totals
Segment revenue	$	279,501		$	197,286		$	10,804		$	0		$	487,591
Depreciation and amortization	$	(28,102	)	$	(9,493	)	$	(1,627	)	$	(210	)	$	(39,432	)
Operating income (loss)	$	19,971		$	24,096		$	(1,462	)	$	(14,504	)	$	28,101
Net interest expense													(32,722		)
Other income (expense), net													262
Income tax provision													(550		)
Loss from continuing operations													(4,909		)
Income from discontinued operations, net of income taxes													1,793
Net loss													$	(3,116	)
Capital expenditures	$	15,704		$	3,846		$	392		$	1,604		$	21,546

	Nine Months Ended June 30, 2014
(in thousands)	Light building products			Heavy construction materials			Energy technology			Corporate			Totals
Segment revenue	$	327,723		$	211,250		$	6,553		$	0		$	545,526
Depreciation and amortization	$	(29,094	)	$	(10,049	)	$	(1,375	)	$	(196	)	$	(40,714	)
Operating income (loss)	$	25,684		$	30,180		$	(4,868	)	$	(17,196	)	$	33,800
Net interest expense													(34,411		)
Other income (expense), net													(56		)
Income tax benefit													150
Loss from continuing operations													(517		)
Loss from discontinued operations, net of income taxes													(106		)
Net loss													$	(623	)
Capital expenditures	$	17,920		$	4,530		$	398		$	2,519		$	25,367

3.Acquisitions

Kleer Lumber — On December 31, 2012, a subsidiary of Headwaters acquired certain assets and assumed certain liabilities of Kleer Lumber, Inc., a privately-held Massachusetts-based company in the light building products industry. Kleer Lumber’s results of operations have been included with Headwaters’ consolidated results beginning January 1, 2013.

Kleer Lumber is a manufacturer of high quality cellular PVC products, primarily trim boards, but also millwork, sheet stock, railing, paneling, and moulding. Headwaters believes the demand for cellular PVC building products is growing due to the ability to cut, mill, shape, and install in the same manner as wood products, but with the added benefit of cellular PVC requiring significantly less maintenance than wood. Kleer Lumber primarily distributes its products into independent lumber yards located in the Northeast and Mid-Atlantic states.

Total consideration paid for Kleer Lumber was approximately $43.3 million, all of which was cash. Direct acquisition costs, consisting primarily of fees for advisory, legal and other professional services, totaled approximately $0.9 million and were included in selling, general and administrative expense in the statement of operations for the December 2012 quarter.

10

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

The Kleer Lumber acquisition was accounted for as a business combination in accordance with the requirements of ASC 805 Business Combinations. The following table sets forth the estimated fair values of assets acquired and liabilities assumed as of the acquisition date:

	(in thousands)
Current assets	$	5,818
Current liabilities	(3,093		)
Property, plant and equipment	4,098
Intangible assets:
Customer relationships (15 year life)	11,100
Trade name (indefinite life)	4,800
Goodwill	20,527
Net assets acquired	$	43,250

Kleer Lumber’s future growth attributable to new customers, geographic market presence and assembled workforce are additional assets that are not separable and which contributed to recorded goodwill, all of which is tax deductible over 15 years. All of Headwaters’ goodwill plus the indefinite-lived trade name are tested for impairment annually, and all acquired goodwill and intangible assets are subject to review for impairment if indicators of impairment develop in the future.

Entegra — On December 12, 2013, Headwaters acquired 80% of the equity interests of Roof Tile, Inc., a privately-held Florida-based company in the light building products industry, which markets its products primarily under the Entegra brand. Entegra’s results of operations have been included with Headwaters’ consolidated results beginning December 13, 2013.

Entegra is a leading manufacturer of high quality concrete roof tiles and accessories which are sold primarily into the Florida market. The acquisition of Entegra provides additional product offerings to Headwaters’ current roofing products portfolio. Headwaters believes the strategic location of Entegra’s centralized manufacturing plant in Florida, the quality of its contractor/customer relationships, and the scope of its products and services provide a strong competitive advantage. Many of its customers are currently customers of Headwaters, and provide Headwaters the opportunity to expand existing sales and distribution within the Florida market, which is the third fastest growing state in the U.S. in terms of population.

Total consideration paid for Entegra was approximately $57.5 million, all of which was cash. Direct acquisition costs, consisting primarily of fees for legal services, totaled approximately $0.4 million and were included in selling, general and administrative expense in the statement of operations for the nine months ended June 30, 2014. Headwaters has the right, but not the obligation, to acquire the non-controlling 20% equity interest in Entegra for a stipulated multiple of EBITDA adjusted for certain prescribed items. This call right is exercisable at any time after five years following the date of acquisition, unless certain defined events occur prior to that time, in which case the right is exercisable earlier. The non-controlling owners have the right, but not the obligation, to require Headwaters to acquire the non-controlling 20% equity interest, again for a stipulated multiple of EBITDA adjusted for certain prescribed items. This put right is exercisable at any time after 18 months following the date of acquisition, unless certain defined events under Headwaters’ control occur prior to that time, in which case the right is exercisable earlier.

11

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

The Entegra acquisition has been accounted for as a business combination in accordance with the requirements of ASC 805 Business Combinations. The following table sets forth the estimated fair values of assets acquired and liabilities assumed as of the acquisition date, using available information and assumptions Headwaters deems to be reasonable at the current time. Headwaters is in the process of finalizing all of the estimated amounts shown below, particularly the third-party valuations of the fair values of the acquired intangible assets; therefore, the provisional measurements shown in the table are subject to change.

	(in thousands)
Current assets	$	8,260
Current liabilities	(3,422		)
Property, plant and equipment	10,589
Intangible assets:
Customer relationships (15 year life)	18,600
Trade name (indefinite life)	6,600
Goodwill	30,089
Net assets acquired	70,716
Less non-controlling interest	(13,239		)
Net assets attributable to Headwaters	$	57,477

Entegra’s future growth attributable to new customers, geographic market presence and assembled workforce are additional assets that are not separable and which contributed to recorded goodwill, all of which is tax deductible over 15 years. All of Headwaters’ goodwill plus the indefinite-lived trade name are tested for impairment annually, and all acquired goodwill and intangible assets are subject to review for impairment if indicators of impairment develop in the future.

Gerard — On May 16, 2014, Headwaters acquired certain assets and assumed certain liabilities of the roofing products business of Metals USA Building Products, which products are marketed under the Gerard and Allmet brands. Gerard’s results of operations are being reported within the light building products segment and have been included with Headwaters’ consolidated results beginning May 16, 2014.

Gerard is the second largest manufacturer of stone coated metal roofing materials in the U.S. and sells seven primary metal profiles. These niche roofing products combine aesthetically pleasing profiles resembling tile, shake, or slate with a fire proof material and a low lifetime installed cost. The acquisition of Gerard increases the number of specialty niche roofing products that Headwaters provides to its core customers and is an area of focus for Headwaters. With the addition of Gerard, Headwaters now has three product categories in niche roofing, including composite, concrete, and metal, which could increase opportunities for cross selling. Besides broadening the niche roofing product lines, Gerard also expands Headwaters geographic footprint in the roofing category.

Total consideration paid for Gerard was approximately $28.0 million, all of which was cash; however, the purchase price is subject to adjustment for the final calculation of acquisition-date working capital, which calculation is currently expected to be finalized in the September 2014 quarter. Direct acquisition costs, consisting primarily of fees for legal services, totaled approximately $0.2 million and were included in selling, general and administrative expense in the statement of operations for the quarter ended June 30, 2014.

12

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

The Gerard acquisition has been accounted for as a business combination in accordance with the requirements of ASC 805 Business Combinations. The following table sets forth the estimated fair values of assets acquired and liabilities assumed as of the acquisition date, using available information and assumptions Headwaters deems to be reasonable at the current time. Headwaters is in the process of finalizing all of the estimated amounts shown below, including the third-party valuations of the fair values of the acquired intangible assets; therefore, the provisional measurements shown in the table are subject to change.

	(in thousands)
Current assets	$	9,358
Current liabilities	(5,637		)
Property, plant and equipment	6,617
Goodwill and intangible assets	17,664
Net assets acquired	$	28,002

The process of identifying and valuing the intangible assets that were acquired is in the early stages and all intangible assets have been included with goodwill in the June 30, 2014 condensed consolidated balance sheet and in the above table. When the intangible assets have been identified and valued, and estimated useful lives are determined, amortization of those intangible assets will be adjusted effective as of May 16, 2014.

Other — During the March 2014 quarter, Headwaters acquired the assets of a company in the heavy construction materials industry located in the Northeast U.S. for initial cash consideration of approximately $3.1 million. This acquisition increased Headwaters’ supply of fly ash and bottom ash, improving its competitive position in that region. Subsequent to June 30, 2014, Headwaters acquired the assets of another company in the heavy construction materials industry located in the Southeast U.S. for cash consideration of approximately $7.4 million. This acquisition has increased Headwaters’ supply of ash products produced by industrial boilers and has strengthened the ability to meet customers’ needs along the Gulf Coast.

Combined Financial Information — No revenue or earnings from the 2014 acquired businesses are included in Headwaters’ statements of operations for the 2013 periods. The actual revenue from the 2014 acquisitions included in Headwaters’ statements of operations for the three- and nine-month periods ended June 30, 2014 was approximately $15.2 million and $26.0 million, respectively, and the actual earnings including non-controlling interest from the 2014 acquisitions included in Headwaters’ statements of operations for the three- and nine-month periods ended June 30, 2014 was approximately $1.7 million and $2.6 million, respectively. The following represents the pro forma consolidated revenue and net income (loss) for Headwaters for the periods indicated as if the 2014 acquisitions had been included in Headwaters’ consolidated results of operations beginning October 1, 2012.

	Three months ended June 30,				Nine months ended June 30,
(in thousands)	2013		2014		2013			2014
Revenue	$	212,890	$	227,360	$	531,472		$	572,310
Net income (loss)	11,728		11,309		(1,440		)	1,945

The above pro forma results have been calculated by combining the historical results of Headwaters and the 2014 acquisitions as if the acquisitions had occurred on October 1, 2012, and adjusting the income tax provision as if it had been calculated on the resulting, combined results. The pro forma results include an estimate for all periods for intangible asset amortization (which is subject to change when the final asset values have been determined) and also reflect the following 2014 expenses in fiscal 2013 instead of in 2014:  $0.6 million of direct acquisition costs and $1.2 million of nonrecurring expense related to the fair value adjustment to acquisition-date inventory. No other material pro forma adjustments were deemed necessary, either to conform the 2014 acquisitions to Headwaters’ accounting policies or for any other situation. The pro forma information is not necessarily indicative of the results that would have been achieved had the transactions occurred on October 1, 2012 or that may be achieved in the future.

13

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

Non-controlling Interest in Consolidated Subsidiary — As described above, Headwaters acquired 80% of the equity interests of Entegra, and the non-controlling owners have the right to require Headwaters to acquire the non-controlling 20% equity interest. This put right is considered to be redeemable and because the redemption feature is not deemed to be a freestanding financial instrument and is not solely within the control of Headwaters, the non-controlling interest does not qualify as permanent equity and has been reported outside the stockholders’ equity section of the balance sheet as temporary, or mezzanine, equity. The value of the non-controlling interest was affected by the lack of control as well as the estimated fair values of the put and call rights.

Because there is no fixed or probable redemption date for the put right, Headwaters adjusts quarterly the carrying value of the non-controlling interest to reflect its estimated fair value at each quarter end. Fair value is estimated based on the EBITDA formula described previously for determining the price that would be paid if the put right were to have been exercised at quarter end, except that the adjusted carrying amount cannot be decreased below the original acquisition date fair value amount.

The following table summarizes the activity of the non-controlling interest during the nine-month period ended June 30, 2014.

	(in thousands)
Estimated fair value as of acquisition date	$	13,239
Net income attributable to non-controlling interest	619
Dividend	(318		)
Fair value adjustment	158
Balance as of June 30, 2014	$	13,698

4.Discontinued Operations

In September 2011, the Board of Directors committed to a plan to sell the coal cleaning business, which was part of the energy technology segment. At that time the business met all of the criteria for classification as held for sale and presentation as a discontinued operation. Following the sale of all remaining coal cleaning facilities in January 2013, there are no remaining assets held for sale. The results of operations for Headwaters’ coal cleaning business have been presented as discontinued operations for all periods presented and certain summarized information for the discontinued business is presented in the following table.

	Three Months Ended June 30,						Nine Months Ended June 30,
(in thousands)	2013			2014			2013			2014
Revenue	$	0		$	0		$	4,386		$	0
Loss from operations of discontinued operations before income taxes	$	0		$	(146	)	$	(3,085	)	$	(3,138	)
Gain (loss) on disposal	(952		)	(85		)	2,158			3,032
Income tax benefit	2,720			0			2,720			0
Income (loss) from discontinued operations, net of income taxes	$	1,768		$	(231	)	$	1,793		$	(106	)

Headwaters sold all of its coal cleaning facilities in fiscal 2012 and 2013, and recognized estimated gains at the time of sale. Subsequent to the dates of sale, some adjustments of the previously recognized estimated gains on the sales transactions have been recognized, including the reported amounts reflected in the table above. Headwaters currently expects that additional adjustments to the estimated gains and losses may be recognized in fiscal 2014 and beyond as certain contingencies are resolved. The loss from operations reflected in the table includes expenses for certain litigation which commenced prior to disposal of the business.

14

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

For all sales transactions, a majority of the consideration is in the form of potential production royalties and deferred purchase price, which amounts are dependent upon future plant production levels over several years. Potential future production royalties and deferred purchase price on the sales transactions were not considered in the gain calculations and will be accounted for in future periods when any such amounts are received. During the nine months ended June 30, 2014, Headwaters received $2.7 million of deferred purchase price payments, along with the collection of certain receivables which had been reserved.

In accordance with the terms of the asset purchase agreement for one of the sales transactions, the buyer of the coal cleaning facilities agreed to assume the lease and reclamation obligations related to certain of the facilities. Subsequent to the date of sale, Headwaters amended the purchase agreement to provide the buyer with additional time to make payments to Headwaters, as well as fulfill contractual requirements related to the assumed reclamation obligations. As of June 30, 2014, Headwaters remains contingently liable for one of the assumed obligations and has accrued approximately $8.0 million to meet that contingent liability if necessary. Headwaters has also reserved certain receivables due from the buyer until such time as collection is more certain. Headwaters currently expects to continue to reflect as discontinued operations all activity related to the former coal cleaning business, at least until such time as the significant reclamation contingency is resolved.

5.Inventories

Inventories consisted of the following at:

(in thousands)	September 30, 2013		June 30, 2014
Raw materials	$	9,909	$	12,371
Finished goods	27,474		43,682
	$	37,383	$	56,053

6.Intangible Assets

The following table summarizes the gross carrying amounts and related accumulated amortization of intangible assets as of:

		September 30, 2013				June 30, 2014
(in thousands of dollars)	Estimated useful lives	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Trade names	Indefinite	$	4,800	—		$	11,400	—
CCP contracts	15 - 20 years	106,400		$	58,699	110,590		$	62,783
Customer relationships	5 - 15 years	83,564		44,129		101,283		48,362
Trade names	5 - 20 years	67,790		30,502		67,220		32,539
Patents and patented technologies	5 - 19 years	55,099		46,954		54,371		50,698
Other	6 - 17 years	3,960		1,532		3,935		1,738
		$	321,613	$	181,816	$	348,799	$	196,120

The above table does not include any amounts for potential intangible assets acquired in the Gerard acquisition described in Note 3 because the process of identifying and valuing those intangible assets is in the early stages. The increase in gross carrying amount of intangible assets from September 30, 2013 to June 30, 2014 is primarily attributable to assets acquired in the other acquisition transactions described in Note 3. Amortization expense for fiscal 2014 is also subject to finalization of the valuation efforts related to the intangible assets acquired in the 2014 transactions. Total recorded amortization expense related to intangible assets was approximately $5.3 million and $5.5 million for the quarters ended June 30, 2013 and 2014, respectively, and approximately $15.5 million and $16.1 million for the nine months ended June 30, 2013 and 2014, respectively.

15

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

Total currently estimated annual amortization expense for 2014 through 2019 is shown in the following table, which estimates are subject to change when the fair values of the intangible assets acquired in 2014 are finalized.

Year ending September 30:	(in thousands)
2014	$	21,153
2015	17,276
2016	17,019
2017	16,141
2018	16,091
2019	15,063

7.Long-term Debt

The total undiscounted face amount of Headwaters’ outstanding long-term debt was approximately $457.5 million as of September 30, 2013 and $599.8 million as of June 30, 2014. As of those dates, the discounted carrying value of long-term debt consisted of the following:

(in thousands)	September 30, 2013			June 30,2014
7-5/8% Senior secured notes, due April 2019	$	400,000		$	400,000
7¼% Senior notes, due January 2019	0			150,000
Convertible senior subordinated notes:
2.50%, repaid in February 2014 (face amount $7,687), net of discount	7,553			0
8.75%, due February 2016 (face amount $49,791), net of discount	49,420			49,539
Total convertible senior subordinated notes, net of applicable discounts	56,973			49,539
Carrying amount of long-term debt, net of discounts	456,973			599,539
Less current portion	(7,553		)	0
Long-term debt	$	449,420		$	599,539

7-5/8% Senior Secured Notes — In 2011, Headwaters issued $400.0 million of 7-5/8% senior secured notes for net proceeds of approximately $392.8 million. The 7-5/8% notes mature in April 2019 and bear interest at a rate of 7.625%, payable semiannually. The notes are secured by substantially all assets of Headwaters; however, the note holders have a second priority position with respect to the assets that secure the ABL Revolver described below, currently consisting of certain trade receivables and inventories of Headwaters’ light building products and heavy construction materials segments. The notes are senior in priority to the 7¼% senior notes described below to the extent of the value of the assets securing the 7-5/8% notes, and are senior to all other outstanding and future subordinated debt.

Headwaters can redeem the 7-5/8% notes, in whole or in part, at any time after March 2015 at redemption prices ranging from 103.8% to 100.0%, depending on the redemption date. Headwaters can also redeem any portion of the notes at any time through March 2015 at a price equal to 100% plus a make-whole premium. If there is a change in control, Headwaters will be required to offer to purchase the notes from holders at a purchase price equal to 101% of the principal amount.

The senior secured notes limit Headwaters in the incurrence of additional debt and liens on assets, prepayment of future new subordinated debt, merging or consolidating with another company, selling all or substantially all assets, making investments and the payment of dividends or distributions, among other things. Headwaters was in compliance with all debt covenants as of June 30, 2014.

7¼% Senior Notes — In December 2013, Headwaters issued $150.0 million of 7¼% senior notes for net proceeds of approximately $146.2 million. The 7¼% notes are unsecured, mature in January 2019 and bear interest at a rate of 7.25%, payable semiannually. The notes are effectively subordinate in priority to the 7-5/8% senior secured notes and the ABL

16

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

Revolver described below, to the extent of the value of the assets securing such debt, and are senior to all other outstanding and future subordinated debt.

Headwaters can redeem the 7¼% notes, in whole or in part, at any time after January 15, 2016 at redemption prices ranging from 103.625% to 100.0%, depending on the redemption date. In addition, until January 15, 2016, Headwaters can redeem at a price of 107.25% up to 35% of the outstanding notes with the net proceeds from one or more equity offerings. Headwaters can also redeem any of the notes at any time prior to January 15, 2016 at a price equal to 100% of the principal amount plus a make-whole premium. If there is a change in control, Headwaters will be required to offer to purchase the notes from holders at a purchase price equal to 101% of the principal amount.

The 7¼% notes limit Headwaters in the incurrence of additional debt and liens on assets, prepayment of subordinated debt, merging or consolidating with another company, selling all or substantially all assets, making investments and the payment of dividends or distributions, among other things. Headwaters was in compliance with all debt covenants as of June 30, 2014.

ABL Revolver — Since entering into the ABL Revolver, Headwaters has not borrowed any funds under the arrangement and has no borrowings outstanding as of June 30, 2014. Availability under the ABL Revolver cannot exceed $70.0 million, which includes a $35.0 million sub-line for letters of credit and a $10.5 million swingline facility. Availability under the ABL Revolver is further limited by the borrowing base valuations of the assets of Headwaters’ light building products and heavy construction materials segments which secure the borrowings, currently consisting of certain trade receivables and inventories. In addition to the first lien position on these assets, the ABL Revolver lenders have a second priority position on substantially all other assets of Headwaters. As of June 30, 2014, Headwaters had secured letters of credit under the ABL Revolver of approximately $7.4 million for various purposes and had availability under the ABL Revolver of approximately $60.6 million.

The ABL Revolver terminates in October 2018. There is a contingent provision for early termination at any time within three months prior to the earliest maturity date of the senior secured notes, the senior notes or the convertible senior subordinated notes, at which time any amounts borrowed must be repaid. The contingent provision for early termination is precluded if borrowing base capacity under the ABL Revolver and/or cash collateral is at least equivalent to the amount of notes maturing on such date.

Outstanding borrowings under the ABL Revolver accrue interest at Headwaters’ option, at either i) the London Interbank Offered Rate (LIBOR) plus 1.75%, 2.0% or 2.25%, depending on Headwaters’ average net excess availability under the ABL; or ii) the “Base Rate” plus 0.5%, 0.75% or 1.0%, again depending on average net excess availability. The base rate is subject to a floor equal to the highest of i) the prime rate, ii) the federal funds rate plus 0.5%, and iii) the 30-day LIBOR rate plus 1.0%. Fees on the unused portion of the ABL Revolver range from 0.25% to 0.375%, depending on the amount of the credit facility which is utilized. If there would have been borrowings outstanding under the ABL Revolver as of June 30, 2014, the interest rate on those borrowings would have been approximately 2.2%.

The ABL Revolver contains restrictions and covenants common to such agreements, including limitations on the incurrence of additional debt and liens on assets, prepayment of subordinated debt, merging or consolidating with another company, selling assets, making acquisitions and investments and the payment of dividends or distributions, among other things. In addition, if availability under the ABL Revolver is less than 15%, Headwaters is required to maintain a monthly fixed charge coverage ratio of at least 1.0x for the preceding twelve-month period. Headwaters was in compliance with all covenants as of June 30, 2014.

Convertible Senior Subordinated Notes — During the March 2014 quarter, Headwaters repaid all of the remaining outstanding 2.50% convertible senior subordinated notes. The Form 10-K includes a detailed description of the 8.75% notes, which are the only convertible senior subordinated notes outstanding as of June 30, 2014. Except for the amortization of debt discount, there were no changes in this debt during the nine months ended June 30, 2014.

17

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

Interest and Debt Maturities — During the June 2013 and 2014 quarters, Headwaters incurred total interest costs of approximately $11.2 million and $12.2 million, respectively, including approximately $1.8 million and $0.5 million, respectively, of non-cash interest expense. During the nine months ended June 30, 2013 and 2014, Headwaters incurred total interest costs of approximately $33.0 million and $34.6 million, respectively, including approximately $5.0 million and $1.7 million, respectively, of non-cash interest expense. Neither capitalized interest nor interest income was material for any period presented. The weighted-average interest rate on the face amount of outstanding long-term debt, excluding amortization of debt discount and debt issue costs, was approximately 7.7% at September 30, 2013 and 7.6% at June 30, 2014. Headwaters has no debt maturities until February 2016.

8.Fair Value of Financial Instruments

Headwaters’ material financial instruments consist primarily of cash and cash equivalents, trade receivables, accounts payable and long-term debt. All of these financial instruments except long-term debt are either carried at fair value in the consolidated balance sheets or are short-term in nature. Accordingly, the carrying values for those financial instruments as reflected in the consolidated balance sheets closely approximate their fair values.

All of Headwaters’ outstanding long-term debt as of September 30, 2013 and June 30, 2014 was fixed-rate. Using fair values for the debt, the aggregate fair value of Headwaters’ long-term debt as of September 30, 2013 would have been approximately $484.0 million, compared to a carrying value of $457.5 million, and the aggregate fair value as of June 30, 2014 would have been approximately $643.0 million, compared to a carrying value of $599.5 million.

Fair value “Level 2” estimates for long-term debt were based primarily on price estimates from broker-dealers. The fair values for long-term debt differ from the carrying values primarily due to interest rates that differ from current market interest rates and differences between Headwaters’ common stock price at the balance sheet measurement dates and the conversion prices for the convertible senior subordinated notes.

9.Income Taxes

Headwaters’ estimated effective income tax rate for continuing operations for the fiscal year ending September 30, 2014 is currently expected to be approximately 22%, and this estimated rate was used to record income taxes for the June 2014 quarter and the nine months ended June 30, 2014. For the nine months ended June 30, 2013, Headwaters used an estimated effective income tax rate for continuing operations of 18%. Headwaters did not recognize any tax expense for discrete items in the 2014 periods, but recognized approximately $1.3 million of tax expense for discrete items in continuing operations in the fiscal 2013 periods that did not affect the calculation of the estimated effective income tax rate for the 2013 fiscal year. A majority of the expense recognized for discrete items was for adjustments related to unrecognized income tax benefits, most of which were for additional state income taxes. In addition, in 2013 Headwaters recognized a tax benefit of approximately $2.7 million in discontinued operations, due primarily to the reversal of unrecognized income tax benefits related to audit periods that closed.

Beginning in 2011, Headwaters has recorded a full valuation allowance on its net amortizable deferred tax assets and accordingly, did not recognize benefit for tax credit carryforwards, net operating loss (NOL) carryforwards or other deferred tax assets in any of the 2013 or 2014 periods, except to the extent of projected fiscal year earnings. The estimated income tax rates of 18% for fiscal 2013 and 22% for fiscal 2014 resulted primarily from the combination of recognizing benefit for deferred tax assets only to the extent of projected fiscal year earnings, plus state income taxes in certain state jurisdictions.

A valuation allowance is required when there is significant uncertainty as to the realizability of deferred tax assets. The ability to realize deferred tax assets is dependent upon Headwaters’ ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. Headwaters has considered the following possible sources of taxable income when assessing the realization of its deferred tax assets:

·future reversals of existing taxable temporary differences;

·future taxable income or loss, exclusive of reversing temporary differences and carryforwards;

18

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

·tax-planning strategies; and

·taxable income in prior carryback years.

Because Headwaters’ operations in domestic and foreign jurisdictions have generated losses in recent years, management has determined that Headwaters does not meet the “more likely than not” threshold that NOLs, tax credits and other deferred tax assets will be realized. Accordingly, a valuation allowance is required.

During fiscal 2015, Headwaters may realize a three-year cumulative accounting profit on a consolidated basis. If this occurs, Headwaters will also consider other factors in evaluating the continued need for a full, or partial, valuation allowance. These factors include:

·current financial performance;

·our ability to meet short-term and long-term financial and taxable income projections;

·the overall market environment; and

·the volatility and trend of the industries in which Headwaters operates.

All of the factors Headwaters is considering in evaluating whether and when to release all or a portion of the deferred tax asset valuation allowance involve significant judgment. For example, there are many different interpretations of “cumulative losses in recent years” which can be used. Also, significant judgment is involved in making projections of future financial and taxable income, especially because Headwaters’ financial results are significantly dependent upon industry trends, including the new residential, repair and remodel, and infrastructure construction markets. Most of the markets in which Headwaters participates are currently in varying states of recovery from the historic downturn experienced in recent years; however, it is not possible to accurately predict whether recovery will continue, and if it does, at what rate and for how long. Any reversal of the valuation allowance will favorably impact Headwaters’ results of operations in the period of reversal.

During fiscal 2014, Headwaters may realize a three-year cumulative accounting profit in certain state jurisdictions. If this occurs, Headwaters will consider the factors above in determining the continued need for a valuation allowance on the deferred tax assets related to those state jurisdictions.

As of June 30, 2014, Headwaters’ NOL and capital loss carryforwards totaled approximately $77.3 million (tax effected). The U.S. and state NOLs expire from 2014 to 2033. Substantially all of the non-U.S. NOLs, which are not material, do not expire. In addition, there are approximately $25.7 million of tax credit carryforwards as of June 30, 2014, which also expire from 2014 to 2033.

The calculation of tax liabilities involves uncertainties in the application of complex tax regulations in multiple tax jurisdictions. Headwaters currently has open tax years subject to examination by the IRS and state tax authorities for the years 2011 through 2013. Headwaters recognizes potential liabilities for anticipated tax audit issues in the U.S. and state tax jurisdictions based on estimates of whether, and the extent to which, additional taxes and interest will be due. If events occur (or do not occur) as expected and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when it is determined the liabilities are no longer required to be recorded in the consolidated financial statements. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. It is reasonably possible that approximately $1.0 million of Headwaters’ unrecognized income tax benefits, primarily related to state taxes, will be released within the next 12 months, due to the expiration of statute of limitation time periods.

10.Equity Securities and Stock-Based Compensation

Issuance of Common Stock — In December 2012, Headwaters issued 11.5 million shares of common stock for gross cash proceeds of approximately $83.4 million. Offering costs totaled approximately $5.4 million, resulting in net proceeds of approximately $78.0 million.

19

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

Shelf Registration — In February 2012, Headwaters filed a universal shelf registration statement with the SEC under which $210.0 million was available for offerings of securities. Following the issuance of common stock described above, there is currently approximately $126.6 million available for future securities offerings. A prospectus supplement describing the terms of any additional securities to be issued is required to be filed before any future offering can commence under the registration statement.

Treasury Shares Held for Deferred Compensation Obligation — In accordance with the terms of the Directors’ Deferred Compensation Plan (DDCP), non-employee directors can elect to defer certain compensation and choose from various options how the deferred compensation will be invested. One of the investment options is Headwaters common stock. When a director chooses Headwaters stock as an investment option, Headwaters purchases the common stock in accordance with the director’s request and holds the shares until such time as the deferred compensation obligation becomes payable, normally when the director retires from the Board. At such time, the shares held by Headwaters are distributed to the director in satisfaction of the obligation. Headwaters accounts for the purchase of common stock as treasury stock, at cost. The corresponding deferred compensation obligation is reflected in capital in excess of par value. Changes in the fair value of the treasury stock are not recognized. As of June 30, 2014, the treasury stock and related deferred compensation obligation had fair values of approximately $0.8 million, which was $0.3 million higher than the carrying values at cost.

Stock-Based Compensation — During the December 2013 quarter, the Compensation Committee of Headwaters’ Board of Directors (the Committee) approved the grant of approximately 0.5 million stock-based awards to officers and employees. The awards were granted under terms of the 2010 Incentive Compensation Plan (2010 ICP) and vest over an approximate three-year period. Vesting is also subject to a 60-day average stock price hurdle that precludes vesting unless Headwaters’ stock price exceeds by a predetermined amount the stock price on the date of grant, which threshold was reached during the March 2014 quarter.

Stock-based compensation expense was approximately $0.4 million and $0.6 million for the June 2013 and 2014 quarters, respectively, and $1.3 million and $1.6 million for the nine months ended June 30, 2013 and 2014, respectively. As of June 30, 2014, there was approximately $2.6 million of total compensation cost related to unvested awards not yet recognized, which will be recognized in future periods in accordance with applicable vesting terms.

20

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

11.Earnings per Share

The following table sets forth the computations of basic and diluted EPS for the periods indicated, reflecting the amounts attributable to Headwaters and excluding the amounts attributable to the non-controlling interest in Entegra. In accordance with ASC 260, income (loss) from continuing operations for each period is used as the control number in determining whether potentially dilutive common shares should be included in the diluted earnings per share computations for those periods, even when the effect of doing so is anti-dilutive to the other per-share amounts.

	Three Months EndedJune 30,					Nine Months EndedJune 30,
(in thousands, except per-share amounts)	2013		2014			2013			2014
Numerator:
Income (loss) from continuing operations	$	9,248	$	11,124		$	(4,909	)	$	(517	)
Income from continuing operations attributable to non-controlling interest	0		(389		)	0			(619		)
Fair value adjustment of non-controlling interest	0		(158		)	0			(158		)
Numerator for basic and diluted earnings per share from continuing operations — income (loss) from continuing operations attributable to Headwaters Incorporated	9,248		10,577			(4,909		)	(1,294		)
Numerator for basic and diluted earnings per share from discontinued operations — income (loss) from discontinued operations, net of income taxes	1,768		(231		)	1,793			(106		)
Numerator for basic and diluted earnings per share — net income (loss) attributable to Headwaters Incorporated	$	11,016	$	10,346		$	(3,116	)	$	(1,400	)
Denominator:
Denominator for basic earnings per share — weighted-average shares outstanding	72,892		73,206			69,195			73,131
Effect of dilutive securities — shares issuable upon exercise of options and SARs and vesting of restricted stock	1,247		1,380			0			0
Denominator for diluted earnings per share — weighted-average shares outstanding after assumed exercises and vesting	74,139		74,586			69,195			73,131
Basic and diluted income (loss) per share from continuing operations	$	0.13	$	0.14		$	(0.07	)	$	(0.02	)
Basic and diluted income per share from discontinued operations	0.02		0.00			0.02			0.00
Basic and diluted income (loss) per share	$	0.15	$	0.14		$	(0.05	)	$	(0.02	)
Anti-dilutive securities not considered in diluted EPS calculation:
SARs	775		691			2,877			3,836
Stock options	893		377			1,002			530
Restricted stock	0		0			140			253

12.Commitments and Contingencies

Significant new commitments, material changes in commitments and ongoing contingencies as of June 30, 2014, not disclosed elsewhere, are as follows:

Compensation Arrangements — Cash Performance Unit Awards. The Compensation Committee has approved various grants of performance unit awards to certain officers and employees, to be settled in cash, based on the achievement of certain stipulated goals, all of which are described in detail in the Form 10-K (including fiscal 2014 grants made during the December 2013 quarter). Since September 30, 2013, there have been no significant changes in Headwaters’ commitments or in the amounts accrued under these awards, except for the payment during the December 2013 quarter

21

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

of amounts contractually due under the terms of certain prior year awards, and the accrual of approximately $2.0 million in the June 2014 quarter under terms of the fiscal 2014 grants. Headwaters currently expects that additional amounts will be earned during the September 2014 quarter under the terms of the fiscal 2014 awards.

Cash-Settled SAR Grants.  In fiscal 2011, the Committee approved grants to certain employees of approximately 0.4 million cash-settled SARs, approximately 0.1 million of which remain outstanding as of June 30, 2014. These SARs vested in annual installments through September 30, 2013, provided the participant was still employed by Headwaters at the respective vest dates, and are settled in cash upon exercise by the employee. The SARs terminate on September 30, 2015 and must be exercised on or before that date. As of June 30, 2014, approximately $1.2 million has been accrued for outstanding awards because the stock price at June 30, 2014 was above the grant-date stock price of $3.81. Future changes in Headwaters’ stock price in any amount above $3.81 through September 30, 2015 will result in adjustment to the expected remaining liability, which adjustment (whether positive or negative) will be reflected in Headwaters’ consolidated statement of operations each quarter.

In fiscal 2012, the Committee approved grants to certain officers and employees of approximately 1.0 million cash-settled SARs, approximately 0.4 million of which remain outstanding as of June 30, 2014. These SARs have terms similar to those described above, except they could not vest until and unless the 60-day average stock price exceeded approximately 135% of the stock price on the date of grant (or $2.50), which occurred during 2012. Approximately $5.0 million has been accrued for outstanding awards as of June 30, 2014. Changes in Headwaters’ stock price in any amount above the grant-date stock price of $1.85 through September 30, 2016, the date these SARs expire, will result in adjustment to the expected remaining liability, which adjustment (whether positive or negative) will be reflected in Headwaters’ statement of operations each quarter. Compensation expense for all cash-settled SARs was approximately $3.9 million and $5.1 million for the nine months ended June 30, 2013 and 2014, respectively.

Property, Plant and Equipment — As of June 30, 2014, Headwaters was committed to spend approximately $5.7 million on capital projects that were in various stages of completion.

Legal Matters — Headwaters has ongoing litigation and asserted claims which have been incurred during the normal course of business, including the specific matters discussed below. Headwaters intends to vigorously defend or resolve these matters by settlement, as appropriate. Management does not currently believe that the outcome of these matters will have a material adverse effect on Headwaters’ operations, cash flow or financial position.

Headwaters incurred approximately $1.8 million and $4.5 million of expense for legal matters during the nine months ended June 30, 2013 and 2014, respectively. Historically, except for fiscal 2011 and fiscal 2014, when $15.0 million and $2.5 million, respectively, of charges were accrued for potential losses, costs for outside legal counsel have comprised a majority of Headwaters’ litigation-related costs. Headwaters currently believes the range of potential loss for all unresolved legal matters, excluding costs for outside counsel, is from $2.5 million up to the amounts sought by claimants and has recorded a liability as of June 30, 2014 of $2.5 million. The substantial claims and damages sought by claimants in excess of this amount are not currently deemed to be probable. Headwaters’ outside counsel and management currently believe that unfavorable outcomes of outstanding litigation beyond the amount accrued are neither probable nor remote. Accordingly, management cannot express an opinion as to the ultimate amount, if any, of Headwaters’ liability, nor is it possible to estimate what litigation-related costs will be in future periods.

The specific matters discussed below raise difficult and complex legal and factual issues, and the resolution of these issues is subject to many uncertainties, including the facts and circumstances of each case, the jurisdiction in which each case is brought, and the future decisions of juries, judges, and arbitrators. Therefore, although management believes that the claims asserted against Headwaters in the named cases lack merit, there is a possibility of material losses in excess of the amounts accrued if one or more of the cases were to be determined adversely against Headwaters for a substantial amount of the damages asserted. It is possible that a change in the estimates of probable liability could occur, and the changes could be material. Additionally, as with any litigation, these proceedings require that Headwaters incur substantial costs, including attorneys’ fees, managerial time and other personnel resources, in pursuing resolution.

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HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

AES Thames Bankruptcy.  Headwaters Resources, Inc. (HRI) had a contract to perform fly ash disposal services for AES Thames, L.L.C. (AES Thames) related to its coal-fired power plant located in Montville, Connecticut. AES Thames filed a petition for relief under the United States Bankruptcy Code in February 2011. In January 2013, the trustee filed an adversary proceeding complaint in the United States Bankruptcy Court for the District of Delaware alleging that certain payments made before the bankruptcy by AES Thames to HRI were avoidable preferential transfers under the Bankruptcy Code. The complaint seeks to recover $1.6 million plus interest, attorney fees, and costs. HRI answered denying the allegations of the complaint. In May 2014, HRI and the trustee entered a stipulation of settlement dismissing the trustee’s claims against HRI in exchange for a payment by HRI of $25,000 and a release of HRI’s claims in the bankruptcy, bringing the case to conclusion.

Edwards.  In May 2013, James W. Edwards, purportedly a stockholder of Headwaters Incorporated, filed a complaint in the United States District Court for the District of Utah against current and former members of the Board of Directors of the Company and against Headwaters Incorporated. The complaint alleges that the Board breached its fiduciary duties and wasted corporate assets in connection with the Compensation Committee’s grant of certain stock appreciation rights to the Company’s Chief Executive Officer in November 2011 under the 2010 Incentive Plan (Plan). The complaint alleges that the 2011 grant exceeded Plan limits and that the 2013 Proxy Statement in connection with the Company’s 2013 Annual Meeting of Stockholders contained false and misleading information concerning the 2011 grant. The complaint seeks an order rescinding the 2011 grant, unspecified damages and other remedies, plus interest, attorney fees, and costs. The complaint was brought derivatively on behalf of Headwaters Incorporated and as a purported class action on behalf of all shareholders of record as of December 31, 2012. Defendants filed their initial response to the complaint in January 2014. The parties entered into a stipulation of settlement in February 2014 and in May 2014 the District Court entered an order granting preliminary approval of settlement. Headwaters has published notice of the proposed settlement. It is expected that the District Court will hold a hearing on motion for final approval of the settlement in August 2014. Because resolution of the litigation is uncertain, legal counsel and management cannot express an opinion as to the ultimate amount, if any, of Headwaters’ liability.

Boynton.  In 1998, Headwaters entered into a technology purchase agreement with James G. Davidson and Adtech, Inc. The transaction transferred certain patent and royalty rights to Headwaters related to a synthetic fuel technology invented by Davidson. In 2002, Headwaters received a summons and complaint from the United States District Court for the Western District of Tennessee filed by former stockholders of Adtech alleging, among other things, fraud, conspiracy, constructive trust, conversion, patent infringement and interference with contract arising out of the 1998 technology purchase agreement entered into between Davidson and Adtech on the one hand, and Headwaters on the other. All claims against Headwaters were dismissed in pretrial proceedings except claims of conspiracy and constructive trust. The District Court certified a class comprised of substantially all purported stockholders of Adtech, Inc. The plaintiffs sought compensatory damages from Headwaters in the approximate amount of $43.0 million plus prejudgment interest and punitive damages. In June 2009, a jury reached a verdict in a trial in the amount of $8.7 million for the eight named plaintiffs representing a portion of the class members. In September 2010, a jury reached a verdict after a trial for the remaining 46 members of the class in the amount of $7.3 million. In April 2011, the trial court entered an order for a constructive trust in the amount of approximately $16.0 million (the same amount as the sum of the previous jury verdicts), and entered judgment against Headwaters in the total approximate amount of $16.0 million, in accordance with the verdicts and order on constructive trust. Headwaters and plaintiffs cross-appealed from the judgment to the United States Court of Appeals for the Federal Circuit. The Federal Circuit transferred the case to the United States Court of Appeals for the Sixth Circuit on the basis of jurisdiction. In April 2014, a panel of the Sixth Circuit affirmed the judgment of the District Court in a divided decision. In May 2014, Headwaters paid the plaintiffs approximately $16.2 million in exchange for a satisfaction of judgment, bringing the case to conclusion.

EPA.  In April 2012, Headwaters Resources, Inc. (HRI) filed a complaint in the United States District Court for the District of Columbia against the United States Environmental Protection Agency (EPA). The complaint alleges that the EPA has failed to review, and where necessary, revise RCRA subtitle D regulations applicable to the disposal of coal ash within the timeframe required by statute. Other parties also initiated litigation against the EPA alleging the same (and other) failures of the EPA to perform its duties regarding coal ash disposal regulations. HRI’s complaint seeks certain declaratory relief with respect to EPA rulemaking at issue in the case. The District Court consolidated HRI’s case with

23

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

related actions brought by other parties. In October 2013, the District Court granted summary judgment that the EPA has failed to fulfill its statutory duty to review coal ash disposal regulations, among other things, ordering the EPA to propose a schedule to complete its review of coal ash disposal regulations, and, as necessary, revise the regulations. The parties filed a proposed schedule for the EPA to review its coal ash disposal regulations by December 2014, which schedule is expected to be approved by the District Court. How the EPA will revise its coal ash regulations will not be known until the EPA issues its final regulations. Because the final resolution of the litigation is uncertain, legal counsel and management cannot express an opinion as to the ultimate outcome.

Fentress Families Trust.  VFL Technology Corporation (VFL), acquired by HRI in 2004, provides services related to fly ash management to Virginia Electric and Power Company. In February 2012, 383 plaintiffs, most of whom are residents living in the City of Chesapeake, Virginia, filed a complaint in the State of Virginia Chesapeake Circuit Court against 15 defendants, including Virginia Electric and Power Company (VEPCO), and certain other persons associated with the Battlefield Golf Course, including owners, developers, contractors, and others, including VFL and Headwaters, alleging causes of action for nuisance and negligence. The complaint alleges that fly ash used to construct the golf course was carried in the air and contaminated water exposing plaintiffs to dangerous chemicals and causing property damage. Plaintiffs’ complaint seeks injunctive relief and damages of approximately $850.0 million for removal and remediation of the fly ash and the water supply, $1.9 billion for vexation, $8.0 million and other unspecified amounts for personal injuries, and $55.0 million as damages to properties, plus prejudgment interest, attorney fees, and costs. In a related case, other plaintiffs have filed a separate lawsuit asserting the same claims against the same defendants claiming additional damages totaling approximately $307.2 million. In August 2013 the court ruled on VEPCO’s demurrer ordering that claims for personal injury or property damage based upon allegations of groundwater contamination were dismissed but that claims of nuisance and negligence based upon allegations of air-borne ash and contaminated surface water would not be dismissed. These cases are based on substantially the same alleged circumstances asserted in complaints filed by the plaintiffs in 2009 and voluntarily dismissed in 2010. Discovery is underway. HRI has filed claims for defense and indemnity with several of its insurers. In 2010, HRI filed suit in the United States District Court for the District of Utah against two insurers that denied coverage based on allegations in the 2009 Fentress complaints. The District Court ruled in the insurers’ favor, which ruling HRI appealed to the United States Court of Appeals for the Tenth Circuit. The parties have completed appellate briefing and oral argument was held in January 2014 but no decision has been announced. Another insurer continues to pay for the defense of the underlying cases under a reservation of rights. The relatively novel fly ash claims of the plaintiffs together with multiple insurance policies and policy periods make insurance coverage issues complex and uncertain. Moreover, plaintiffs’ total claims exceed the potential limits of insurance available to HRI. Because resolution of the litigation is uncertain, legal counsel and management cannot express an opinion as to the ultimate amount, if any, of HRI’s liability, or the insurers’ obligation to indemnify HRI against loss, if any.

CPM.  In December 2012, CPM filed a complaint in the State of Virginia Chesapeake Circuit Court against HRI related to construction of the golf course described in the Fentress Families Trust case, alleging breach of contract and seeking declaratory judgment and compensatory damages in the amount of $0.5 million plus attorney fees and costs. CPM alleges that HRI should indemnify CPM for past and future expenses incurred in defending against the Fentress complaints. Because resolution of this litigation is uncertain, legal counsel and management cannot express an opinion as to the ultimate amount, if any, of HRI’s liability, or the insurers’ obligation to indemnify HRI against loss, if any.

Archstone.  Archstone owns an apartment complex in Westbury, New York. Archstone alleges that moisture penetrated the building envelope and damaged moisture sensitive parts of the buildings which began to rot and grow mold. In 2008, Archstone evicted its tenants and began repairing the 21 apartment buildings. Also in 2008, Archstone filed a complaint in the Nassau County Supreme Court of the State of New York against the prime contractor and its performance bond surety, the designer, and Eldorado Stone, LLC which supplied architectural stone that was installed by others during construction. The prime contractor then sued over a dozen subcontractors who in turn sued others. Most parties filed cross-claims for contribution and indemnity against Eldorado Stone and others. Archstone claims as damages approximately $36.0 million in repair costs, $19.0 million in lost lease payments and rent abatement, $7.0 million paid to tenants who sued Archstone, and $7.0 million for class action defense fees, plus prejudgment interest and attorney’s fees. Eldorado Stone answered denying liability and tendered the matter to its insurers who are paying for the defense of the

24

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

case. Eldorado Stone obtained an order of summary judgment dismissing three of Archstone’s four claims. Eldorado Stone has moved for summary judgment on Archstone’s remaining claim of common law indemnification for damages paid to the tenants and associated attorney’s fees. Meanwhile, discovery is underway. Because the resolution of the action is uncertain, legal counsel and management cannot express an opinion concerning the likely outcome of this matter, the liability of Eldorado Stone, if any, or the insurers’ obligation to indemnify Eldorado Stone against loss, if any.

Headwaters Building Products Matters.  There are litigation and pending and threatened claims made against certain subsidiaries of Headwaters Building Products (HBP), a division within Headwaters’ light building products segment, with respect to several types of exterior finish systems manufactured and sold by its subsidiaries for application by contractors on residential and commercial buildings. The plaintiffs or claimants in these matters typically allege that the structures have suffered damage from water penetration due to some alleged failure of the building product or wall system. The claims involve alleged liabilities associated with certain stucco and architectural stone products which are produced and sold by certain subsidiaries of HBP. The Archstone case summarized above is an example of these types of claims.

The foregoing litigation and claims typically cite damages for alleged personal injuries, property damage, economic loss, unfair business practices and punitive damages. Claims made against Headwaters and its subsidiaries generally have been paid by their insurers, subject to Headwaters’ payment of deductibles or self-insured retentions, although such insurance carriers typically have issued “reservation of rights” letters. There is no guarantee of insurance coverage or continuing coverage. These and future proceedings may result in substantial costs to Headwaters and HBP, including attorneys’ fees, managerial time and other personnel resources and costs. Adverse resolution of these proceedings could have a materially negative effect on Headwaters’ businesses, financial condition, and results of operation, and its ability to meet its financial obligations. Although Headwaters carries general and product liability insurance, subject to exclusions and self-insured retentions, Headwaters cannot assure that such insurance coverage will remain available, that Headwaters’ insurance carriers will accept claims or will remain viable, or that the insured amounts will cover all claims in excess of self-insured retentions. Future rate increases may also make such insurance uneconomical for Headwaters to maintain. Because resolution of the litigation and claims is uncertain, legal counsel and management cannot express an opinion as to the ultimate amount, if any, of HBP’s liability.

Heavy Construction Materials Matters.  In addition, there are litigation and pending and threatened claims made against HRI, Headwaters’ Heavy Construction Materials segment, with respect to coal combustion products. The plaintiffs or claimants in these matters have alleged that inhalation or other exposure to fly ash is unsafe and that HRI has failed to warn about the alleged dangers of fly ash exposure and the use of adequate protection. The Fentress Family Trust case summarized above is an example of these types of claims. The application of relatively novel fly ash claims to insurance policies is complex and uncertain. Adverse resolution of these proceedings could have a materially negative effect on Headwaters’ businesses, financial condition, and results of operation, and its ability to meet its financial obligations. Because resolution of the litigation, claims, and insurance coverage disputes is uncertain, legal counsel and management cannot express an opinion as to the ultimate amount, if any, of HRI’s liability.

Other.  Headwaters and its subsidiaries are also involved in other legal proceedings that have arisen in the normal course of business. Because resolution of these proceedings is uncertain, legal counsel and management cannot express an opinion as to the ultimate amount, if any, of Headwaters’ liability.

13.  Condensed Consolidating Financial Information

Headwaters’ 7-5/8% senior secured notes and 7¼% senior notes are jointly and severally, fully and unconditionally guaranteed by Headwaters Incorporated and by all of Headwaters’ 100%-owned domestic subsidiaries. Separate stand-alone financial statements and disclosures for Headwaters Incorporated and each of the guarantor subsidiaries are not presented because the guarantees are full and unconditional and the guarantor subsidiaries have joint and several liability. There are no significant restrictions on the ability of Headwaters Incorporated to obtain funds from the

25

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

guarantor subsidiaries nor on the ability of the guarantor subsidiaries to obtain funds from Headwaters Incorporated or other guarantor subsidiaries.

Non-guaranteeing entities include subsidiaries that are not 100% owned, foreign subsidiaries and joint ventures in which Headwaters has a non-controlling ownership interest. For certain periods, the non-guaranteeing entities represent less than 3% of consolidated assets, stockholders’ equity, revenues, income from continuing operations before taxes and cash flows from operating activities. Accordingly, for those periods the condensed consolidating financial information which follows does not present separately the non-guarantor entities’ information. Due to various events in 2014, the non-guaranteeing entities have become more material and therefore have been presented separately.

26

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET — September 30, 2013

	Guarantor			Parent			Eliminationsand			Headwaters
(in thousands)	Subsidiaries			Company			Reclassifications			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	70,747		$	4,569		$	—		$	75,316
Trade receivables, net	109,868									109,868
Inventories	37,383									37,383
Deferred income taxes	25,828			17,895			(29,687		)	14,036
Other	6,548			732						7,280
Total current assets	250,374			23,196			(29,687		)	243,883
Property, plant and equipment, net	155,499			4,120			—			159,619
Other assets:
Goodwill	137,198									137,198
Intangible assets, net	139,797									139,797
Investments in subsidiaries				282,979			(282,979		)	—
Intercompany accounts and notes	360,482			637,046			(997,528		)	—
Deferred income taxes	53,228			22,179			(75,407		)	—
Other	22,300			21,212						43,512
Total other assets	713,005			963,416			(1,355,914		)	320,507
Total assets	$	1,118,878		$	990,732		$	(1,385,601	)	$	724,009
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	21,051		$	759		$	—		$	21,810
Accrued personnel costs	14,622			33,124						47,746
Accrued interest				16,077						16,077
Current and deferred income taxes	20,073			9,734			(29,687		)	120
Other accrued liabilities	52,898			2,370						55,268
Current portion of long-term debt				7,553						7,553
Total current liabilities	108,644			69,617			(29,687		)	148,574
Long-term liabilities:
Long-term debt				449,420						449,420
Income taxes	80,877			19,167			(75,407		)	24,637
Intercompany accounts and notes	637,046			360,482			(997,528		)	—
Other	9,332			7,636						16,968
Total long-term liabilities	727,255			836,705			(1,072,935		)	491,025
Total liabilities	835,899			906,322			(1,102,622		)	639,599
Stockholders’ equity:
Common stock				73						73
Capital in excess of par value	458,498			720,828			(458,498		)	720,828
Retained earnings (accumulated deficit)	(175,519		)	(635,972		)	175,519			(635,972		)
Treasury stock				(519		)				(519		)
Total stockholders’ equity	282,979			84,410			(282,979		)	84,410
Total liabilities and stockholders’ equity	$	1,118,878		$	990,732		$	(1,385,601	)	$	724,009

27

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET — June 30, 2014

	Guarantor			Non-guarantor		Parent			Eliminationsand			Headwaters
(in thousands)	Subsidiaries			Subsidiaries		Company			Reclassifications			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	102,997		$	5,177	$	6,290		$	—		$	114,464
Trade receivables, net	109,896			5,102								114,998
Inventories	53,204			2,849								56,053
Current and deferred income taxes	24,601					17,981			(30,155		)	12,427
Other	10,070			237		2,095						12,402
Total current assets	300,768			13,365		26,366			(30,155		)	310,344
Property, plant and equipment, net	158,514			11,457		6,310			—			176,281
Other assets:
Goodwill	150,547			35,493								186,040
Intangible assets, net	128,152			24,527								152,679
Investments in subsidiaries						386,127			(386,127		)	—
Intercompany accounts and notes	276,022					637,046			(913,068		)	—
Deferred income taxes	54,404					19,981			(74,385		)	—
Other	15,235			1,200		26,461						42,896
Total other assets	624,360			61,220		1,069,615			(1,373,580		)	381,615
Total assets	$	1,083,642		$	86,042	$	1,102,291		$	(1,403,735	)	$	868,240
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	23,818		$	795	$	244		$	—		$	24,857
Accrued personnel costs	9,391			326		32,332						42,049
Accrued interest						15,515						15,515
Current and deferred income taxes	29,505			650					(30,155		)	—
Other accrued liabilities	35,895			3,665		2,507						42,067
Total current liabilities	98,609			5,436		50,598			(30,155		)	124,488
Long-term liabilities:
Long-term debt						599,539						599,539
Income taxes	80,276					15,089			(74,385		)	20,980
Intercompany accounts and notes	571,136			1,433		340,499			(913,068		)	—
Other	13,033			94		11,210						24,337
Total long-term liabilities	664,445			1,527		966,337			(987,453		)	644,856
Total liabilities	763,054			6,963		1,016,935			(1,017,608		)	769,344
Non-controlling interest in consolidated subsidiary				13,698								13,698
Stockholders’ equity:
Common stock						73						73
Capital in excess of par value	458,499			64,318		723,030			(522,975		)	722,872
Retained earnings (accumulated deficit)	(137,911		)	1,063		(637,214		)	136,848			(637,214		)
Treasury stock						(533		)				(533		)
Total stockholders’ equity	320,588			65,381		85,356			(386,127		)	85,198
Total liabilities and stockholders’ equity	$	1,083,642		$	86,042	$	1,102,291		$	(1,403,735	)	$	868,240

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HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2013

	Guarantor			Parent						Headwaters
(in thousands)	Subsidiaries			Company			Eliminations			Consolidated
Revenue:
Light building products	$	118,035		$	—		$	—		$	118,035
Heavy construction materials	75,114									75,114
Energy technology	3,881									3,881
Total revenue	197,030			—			—			197,030
Cost of revenue:
Light building products	82,096									82,096
Heavy construction materials	54,642									54,642
Energy technology	1,787									1,787
Total cost of revenue	138,525			—			—			138,525
Gross profit	58,505			—			—			58,505
Operating expenses:
Amortization	5,319									5,319
Selling, general and administrative	25,193			4,808						30,001
Total operating expenses	30,512			4,808			—			35,320
Operating income (loss)	27,993			(4,808		)	—			23,185
Other income (expense):
Net interest income (expense)	9			(11,120		)				(11,111		)
Equity in earnings of subsidiaries				22,624			(22,624		)	—
Other, net	24									24
Total other income (expense), net	33			11,504			(22,624		)	(11,087		)
Income from continuing operations before income taxes	28,026			6,696			(22,624		)	12,098
Income tax benefit (provision)	(7,170		)	4,320						(2,850		)
Income from continuing operations	20,856			11,016			(22,624		)	9,248
Income from discontinued operations, net of income taxes	1,768									1,768
Net income	$	22,624		$	11,016		$	(22,624	)	$	11,016

29

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2014

	Guarantor			Non-guarantor			Parent						Headwaters
(in thousands)	Subsidiaries			Subsidiaries			Company			Eliminations			Consolidated
Revenue:
Light building products	$	129,085		$	11,487		$	—		$	—		$	140,572
Heavy construction materials	80,636												80,636
Energy technology	2,191												2,191
Total revenue	211,912			11,487			—			—			223,399
Cost of revenue:
Light building products	89,948			7,725									97,673
Heavy construction materials	57,070												57,070
Energy technology	984												984
Total cost of revenue	148,002			7,725			—			—			155,727
Gross profit	63,910			3,762			—			—			67,672
Operating expenses:
Amortization	5,165			312									5,477
Selling, general and administrative	28,837			1,409			6,258						36,504
Total operating expenses	34,002			1,721			6,258			—			41,981
Operating income (loss)	29,908			2,041			(6,258		)	—			25,691
Other income (expense):
Net interest expense	(125		)	(2		)	(11,994		)				(12,121		)
Equity in earnings of subsidiaries							23,446			(23,446		)	—
Other, net	25			(61		)							(36		)
Total other income (expense), net	(100		)	(63		)	11,452			(23,446		)	(12,157		)
Income from continuing operations before income taxes	29,808			1,978			5,194			(23,446		)	13,534
Income tax benefit (provision)	(7,250		)	(470		)	5,310						(2,410		)
Income from continuing operations	22,558			1,508			10,504			(23,446		)	11,124
Loss from discontinued operations, net of income taxes	(231		)										(231		)
Net income	22,327			1,508			10,504			(23,446		)	10,893
Net income attributable to non-controlling interest				(389		)							(389		)
Net income attributable to Headwaters Incorporated	$	22,327		$	1,119		$	10,504		$	(23,446	)	$	10,504

30

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended June 30, 2013

	Guarantor			Parent						Headwaters
(in thousands)	Subsidiaries			Company			Eliminations			Consolidated
Revenue:
Light building products	$	279,501		$	—		$	—		$	279,501
Heavy construction materials	197,286									197,286
Energy technology	10,804									10,804
Total revenue	487,591			—			—			487,591
Cost of revenue:
Light building products	202,723									202,723
Heavy construction materials	151,622									151,622
Energy technology	5,085									5,085
Total cost of revenue	359,430			—			—			359,430
Gross profit	128,161			—			—			128,161
Operating expenses:
Amortization	15,543									15,543
Selling, general and administrative	70,013			14,504						84,517
Total operating expenses	85,556			14,504			—			100,060
Operating income (loss)	42,605			(14,504		)	—			28,101
Other income (expense):
Net interest expense	(49		)	(32,673		)				(32,722		)
Equity in earnings of subsidiaries				35,336			(35,336		)	—
Other, net	227			35						262
Total other income (expense), net	178			2,698			(35,336		)	(32,460		)
Income (loss) from continuing operations before income taxes	42,783			(11,806		)	(35,336		)	(4,359		)
Income tax benefit (provision)	(9,240		)	8,690						(550		)
Income (loss) from continuing operations	33,543			(3,116		)	(35,336		)	(4,909		)
Income from discontinued operations, net of income taxes	1,793									1,793
Net income (loss)	$	35,336		$	(3,116	)	$	(35,336	)	$	(3,116	)

31

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended June 30, 2014

	Guarantor			Non-guarantor			Parent						Headwaters
(in thousands)	Subsidiaries			Subsidiaries			Company			Eliminations			Consolidated
Revenue:
Light building products	$	305,530		$	22,193		$	—		$	—		$	327,723
Heavy construction materials	211,250												211,250
Energy technology	6,553												6,553
Total revenue	523,333			22,193			—			—			545,526
Cost of revenue:
Light building products	222,275			15,564									237,839
Heavy construction materials	157,504												157,504
Energy technology	3,067												3,067
Total cost of revenue	382,846			15,564			—			—			398,410
Gross profit	140,487			6,629			—			—			147,116
Operating expenses:
Amortization	15,394			674									16,068
Selling, general and administrative	77,248			2,804			17,196						97,248
Total operating expenses	92,642			3,478			17,196			—			113,316
Operating income (loss)	47,845			3,151			(17,196		)	—			33,800
Other income (expense):
Net interest expense	(292		)	(2		)	(34,117		)				(34,411		)
Equity in earnings of subsidiaries							38,671			(38,671		)	—
Other, net	99			(155		)							(56		)
Total other income (expense), net	(193		)	(157		)	4,554			(38,671		)	(34,467		)
Income (loss) from continuing operations before income taxes	47,652			2,994			(12,642		)	(38,671		)	(667		)
Income tax benefit (provision)	(10,600		)	(650		)	11,400						150
Income (loss) from continuing operations	37,052			2,344			(1,242		)	(38,671		)	(517		)
Loss from discontinued operations, net of income taxes	(106		)										(106		)
Net income (loss)	36,946			2,344			(1,242		)	(38,671		)	(623		)
Net income attributable to non-controlling interest				(619		)							(619		)
Net income (loss) attributable to Headwaters Incorporated	$	36,946		$	1,725		$	(1,242	)	$	(38,671	)	$	(1,242	)

32

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended June 30, 2013

	Guarantor			Parent						Headwaters
(in thousands)	Subsidiaries			Company			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	35,336		$	(3,116	)	$	(35,336	)	$	(3,116	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	39,222			210						39,432
Interest expense related to amortization of debt issue costs and debt discount				4,999						4,999
Stock-based compensation	588			679						1,267
Deferred income taxes	223									223
Net gain on disposition of property, plant and equipment	(726		)							(726		)
Gain on sale of discontinued operations, net of income taxes	(2,158		)							(2,158		)
Gain on convertible debt repayment				(35		)				(35		)
Equity in earnings of subsidiaries				(35,336		)	35,336			0
Decrease in trade receivables	1,066									1,066
Increase in inventories	(2,931		)							(2,931		)
Decrease in accounts payable and accrued liabilities	(14,642		)	(11,106		)				(25,748		)
Other changes in operating assets and liabilities, net	(9,694		)	5,291						(4,403		)
Net cash provided by (used in) operating activities	46,284			(38,414		)	—			7,870
Cash flows from investing activities:
Payment for acquisition	(43,250		)							(43,250		)
Purchase of property, plant and equipment	(19,942		)	(1,604		)				(21,546		)
Proceeds from disposition of property, plant and equipment	855									855
Proceeds from sale of discontinued operations	4,813									4,813
Net decrease (increase) in long-term receivables and deposits	(1,413		)	719						(694		)
Net change in other assets	(385		)	(45		)				(430		)
Net cash used in investing activities	(59,322		)	(930		)	—			(60,252		)
Cash flows from financing activities:
Net proceeds from issuance of common stock				77,957						77,957
Payments on long-term debt				(39,476		)				(39,476		)
Employee stock purchases	438			171						609
Net cash provided by financing activities	438			38,652			—			39,090
Net decrease in cash and cash equivalents	(12,600		)	(692		)	—			(13,292		)
Cash and cash equivalents, beginning of period	44,111			9,671						53,782
Cash and cash equivalents, end of period	$	31,511		$	8,979		$	—		$	40,490

33

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended June 30, 2014

				Non-
	Guarantor			guarantor			Parent						Headwaters
(in thousands)	Subsidiaries			Subsidiaries			Company			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	36,946		$	2,344		$	(1,242	)	$	(38,671	)	$	(623	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	39,130			1,388			196						40,714
Interest expense related to amortization of debt issue costs and debt discount							1,699						1,699
Stock-based compensation	618						958						1,576
Deferred income taxes	429												429
Net loss (gain) on disposition of property, plant and equipment	(135		)	5			46						(84		)
Gain on sale of discontinued operations, net of income taxes	(3,032		)										(3,032		)
Asset impairments	1,466												1,466
Net loss of unconsolidated joint ventures				286									286
Equity in earnings of subsidiaries							(38,671		)	38,671			0
Decrease in trade receivables	2,609			922									3,531
Decrease (increase) in inventories	(9,521		)	882									(8,639		)
Increase (decrease) in accounts payable and accrued liabilities	(26,725		)	1,240			(1,731		)				(27,216		)
Other changes in operating assets and liabilities, net	5,258			529			(10,697		)				(4,910		)
Net cash provided by (used in) operating activities	47,043			7,596			(49,442		)	—			5,197
Cash flows from investing activities:
Payments for acquisitions	(3,100		)				(85,479		)				(88,579		)
Payments for investments in unconsolidated joint ventures				(1,450		)							(1,450		)
Purchase of property, plant and equipment	(22,163		)	(685		)	(2,519		)				(25,367		)
Proceeds from disposition of property, plant and equipment	864												864
Proceeds from sale of discontinued operations	4,666												4,666
Net decrease in long-term receivables and deposits	7,373						300						7,673
Net change in other assets	(2,864		)	(318		)	306						(2,876		)
Net cash used in investing activities	(15,224		)	(2,453		)	(87,392		)	—			(105,069		)
Cash flows from financing activities:
Net proceeds from issuance of long-term debt							146,200						146,200
Payments on long-term debt							(7,792		)				(7,792		)
Employee stock purchases	465						147						612
Net cash provided by financing activities	465			—			138,555			—			139,020
Net increase in cash and cash equivalents	32,284			5,143			1,721			—			39,148
Cash and cash equivalents, beginning of period	70,713			34			4,569						75,316
Cash and cash equivalents, end of period	$	102,997		$	5,177		$	6,290		$	—		$	114,464

34

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the interim condensed consolidated financial statements and related notes included in this Form 10-Q. Our fiscal year ends on September 30 and unless otherwise noted, references to years refer to our fiscal year rather than a calendar year.

Overview

Consolidation and Segments.  The consolidated financial statements include the accounts of Headwaters, all of our subsidiaries, and other entities in which we have a controlling interest. All significant intercompany transactions and accounts are eliminated in consolidation. We currently operate primarily in two construction-oriented business segments: light building products and heavy construction materials, and have several product lines within those segments. Our construction-oriented end markets include new residential, residential repair and remodeling, commercial, institutional and infrastructure. Our third non-core operating segment is in energy technology.

Operations and Strategy.  In the light building products segment, we design, manufacture, and sell manufactured architectural stone, exterior siding accessories (such as shutters, mounting blocks, and vents), roofing materials, concrete block and other building products. We manufacture our light building products in approximately 20 locations. Revenues consist of product sales to wholesale and retail distributors, contractors and other users of building products. A restructuring effort in the light building products segment was initiated in 2011 and completed in March 2012. In December 2012, we acquired the assets of Kleer Lumber, Inc., a manufacturer of PVC trim board and moulding products; in December 2013, we acquired 80% of the equity interests of Roof Tile, Inc., a manufacturer of high quality concrete roof tiles and accessories marketed primarily under the Entegra brand; and in May 2014, we acquired the stone coated metal roofing materials business of Metals USA Building Products, which products are marketed under the Gerard and Allmet brands.

Our heavy construction materials business acquires fly ash from coal-fueled electric generating utilities. Using a nationwide storage and distribution network, we primarily sell fly ash directly to concrete manufacturers who use it as an admixture for the partial replacement of portland cement in concrete. In addition to fly ash and other coal combustion products (CCP) sales, revenues also include CCP disposal services provided to utilities.

The energy technology segment has been focused on reducing waste and increasing the value of energy-related feedstocks, primarily in the areas of low-value oil and coal. Currently, revenues for the energy technology segment consist primarily of catalyst sales to oil refineries. In the past, revenues consisted primarily of coal sales; however, in September 2011 we committed to a plan to sell our coal cleaning business and since then the coal cleaning business has been presented as a discontinued operation. In January 2013, we sold all of our remaining coal cleaning facilities.

Light Building Products Segment.  For several years, our light building products segment has been significantly affected by the depressed new housing and residential remodeling markets. Accordingly, we significantly reduced operating costs to be positively positioned to take advantage of an anticipated industry turnaround. Although new housing construction continues to be substantially below the median for the last 50 years, there was improvement in end markets in 2013. Performance in 2014 has been somewhat uneven, with mixed results as the year has unfolded. Demand for new homes appears to be rising, although there is still an environment characterized by tight credit conditions which constrain new building and purchases. New residential construction starts as of June 2014 are about the same as last year at a seasonally-adjusted annualized level of approximately 0.9 million units.

Existing home sales have been relatively steady. The National Association of Realtors reported that for all of calendar 2013, there were 5.1 million sales, which was 9% higher than for calendar 2012. June 2014 total existing home sales were at a seasonally-adjusted annual rate of 5.0 million units, a slight decrease from 5.1 million units in June 2013. Total housing inventory as of June 30, 2014 was 2.3 million existing homes for sale, representing a 5.5-month supply. This compares to a 5.2-month supply as of June 30, 2013 and a 4.3-month supply in May 2005, near the peak of the housing boom. The median sales price for existing homes of all types in June 2014 was 4% higher than in June 2013. We believe population growth, pent-up household formation, somewhat increased builder confidence and growing rental demand are some of the factors that have resulted in positive momentum. Repair and remodel markets, however, continue to be weak.

We, like many others in the light building products industry, experienced a large drop in sales and a reduction in our margins beginning in 2008 and continuing through 2012. While mortgage and home equity loan interest rates have been low in recent years, volatility continues to exist in credit and equity markets, increased borrowing requirements prevent many potential buyers from qualifying for home mortgages and equity loans and there exists a continued lack of consumer confidence. It is not possible to know when improved market conditions and a housing recovery will become sustainable for the long-term and there are no assurances that improvements in our light building products markets will continue.

35

Heavy Construction Materials Segment.  Our business strategy in the heavy construction materials industry is to negotiate long-term contracts with suppliers, supported by investment in transportation and storage infrastructure for the marketing and sale of CCPs. Demand for CCPs is somewhat dependent on federal and state funding of infrastructure projects, which has decreased in recent years as compared to earlier periods. We are continuing our efforts to expand the demand for high-quality CCPs, develop more uses for lower-quality CCPs, and expand our CCP disposal services and site service revenue generated from CCP management. While all of our businesses were affected by the recent recession, the impact on our heavy construction materials segment was somewhat less severe than on our light building products segment. However, to the extent that coal combustion power plant units are shut down or idled in the future, our business may be adversely affected.

Energy Technology Segment.  Currently, continuing revenues for the energy technology segment consist primarily of catalyst sales. In 2011, we announced the decision by one refinery to commercially implement our HCAT® heavy oil upgrading technology following a lengthy evaluation and there are currently two refineries utilizing the HCAT technology. We have signed license agreements with three additional potential customers and expect those refineries to complete evaluation of the technology over the next six months, potentially leading to additional HCAT sales.

Until January 2013, we owned and operated coal cleaning facilities that remove impurities from waste coal, resulting in higher-value, marketable coal. In 2011, we assessed the strategic fit of our various operations and decided to divest our coal cleaning business, which did not align with our long-term strategy. In September 2011, the Board of Directors committed to a plan to sell the coal cleaning business, which has been classified as a discontinued operation since that time. We sold one coal cleaning facility during 2012 and the remaining ten facilities in 2013.

During 2010, 2011 and 2012, many of our coal cleaning assets were idled or produced coal at low levels of capacity and were cash flow negative for these or other reasons. As a result, we recorded significant asset impairments in those years to reduce the carrying value of the assets to fair value less estimated selling costs. We recognized small estimated gains on the 2012 and 2013 sales transactions, and subsequent to the dates of sale, adjustments of the previously recognized estimated gains have been recognized. We currently expect that additional adjustments to the estimated gains and losses may be recognized in fiscal 2014 and beyond as certain contingencies are resolved.

Seasonality and Weather.  Both our light building products and our heavy construction materials segments are greatly impacted by seasonality. Revenues, profitability and EBITDA are generally highest in the June and September quarters and both segments are affected by weather to the extent it impacts construction activities.

Capitalization and Liquidity.  We became highly leveraged as a result of acquisitions consummated in the 2004 timeframe, but reduced our outstanding debt significantly through 2008 by using cash generated from operations, from underwritten public offerings of common stock and from proceeds from settlement of litigation. In 2011, we recommenced making early debt repayments as our business improved and free cash flow increased.

In 2010 and 2011, we restructured our long-term debt twice which culminated in the issuance of $400.0 million of 7-5/8% senior secured notes for net proceeds of approximately $392.8 million. We used most of those proceeds to repay in full the formerly outstanding 11-3/8% senior secured notes. The 7-5/8% senior secured notes mature in April 2019 while the 11-3/8% notes were scheduled to mature in 2014.

During 2012 and 2013, we repaid a total of $85.6 million of our convertible senior subordinated notes and during 2014 we repaid $7.7 million of these notes. Currently, we have outstanding approximately $49.8 million face value of convertible debt, all of which is due in February 2016.

In December 2012, we issued 11.5 million shares of common stock for net proceeds of approximately $78.0 million. Approximately $43.3 million of the net proceeds were used to acquire the assets of Kleer Lumber. In December 2013, we issued $150.0 million of 7¼% senior notes for net proceeds of approximately $146.2 million. Approximately $57.5 million of the net proceeds were used to acquire 80% of the equity interests of Entegra. Capital expenditures beginning in fiscal 2010 have been significantly lower than in prior years, which allowed us to focus on liquidity and the early repayment of debt and enabled us to continue implementing our overall operational strategy. As of June 30, 2014, we have approximately $114.5 million of cash on hand and total liquidity of approximately $175.0 million. Additional cash flow is expected to be generated from operations over the next 12 months.

In summary, our strategy for fiscal 2014 and subsequent years is to continue activities to improve operational efficiencies and reduce operating costs. We also plan to pursue growth opportunities through targeted capital expenditures as well as potential additional strategic acquisitions of niche products or entities that expand our current operating platform, when opportunities arise.

36

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

The information set forth below compares our operating results for the three months ended June 30, 2014, the third quarter of our 2014 fiscal year (2014), with operating results for the three months ended June 30, 2013, the third quarter of our 2013 fiscal year (2013). Except as noted, the references to captions in the statements of operations refer to continuing operations only.

Summary.  Our third quarter 2014 consolidated revenue increased by 13% to $223.4 million from $197.0 million for the third quarter of 2013. Gross profit increased by 16%, to $67.7 million, compared to $58.5 million in the third quarter of 2013 and operating income improved from $23.2 million in 2013 to $25.7 million in 2014. Income from continuing operations was $11.1 million, or $0.14 per diluted share, for the third quarter of 2014, compared to $9.3 million, or $0.13 per diluted share, for the third quarter of 2013. Net income including discontinued operations was $10.9 million, or $0.14 per diluted share, for the third quarter of 2014, compared to $11.0 million, or $0.15 per diluted share, for the third quarter of 2013.

Revenue and Gross Margins.  The major components of revenue, along with gross margins, are discussed in the sections below, by segment.

Light Building Products Segment.  Sales of light building products in 2014 were $140.6 million with a corresponding gross profit of $42.9 million. Sales of light building products in 2013 were $118.0 million with a corresponding gross profit of $35.9 million. The 19% revenue increase in 2014 was due to both organic growth of approximately 9% and the acquisitions of Entegra and Gerard in December 2013 and May 2014, respectively. Weather conditions improved slowly from the difficult winter, primarily impacting sales of our siding-related products. Our manufactured stone, block, and roofing products experienced positive revenue growth in the quarter as we benefited from market share gains and good economic conditions in Texas and Florida.

Operating income increased by 21% to $18.7 million from $15.5 million. The operating income margin was affected by revenue mix, as sales of our higher-margin siding accessories in the Northeast and Midwest were slow to materialize following the difficult winter. In addition, increases in transportation, marketing and raw material costs negatively impacted our siding group’s margins. Our block group more than offset increases in cement costs with price increases and manufacturing efficiencies, a combination which led to margin expansion. In the June quarter, our stone group achieved strong top line growth, coupled with margin expansion.

According to the National Association of Home Builders (NAHB), the most current 10- and 50-year averages for new housing starts were 1.2 million and 1.5 million units, respectively. New housing starts were only 0.8 million units and 0.9 million units in calendar 2012 and 2013, respectively, and during the last 50 years, the six years with the lowest number of housing starts were the six calendar years 2008 through 2013. According to the NAHB, in June 2014 the seasonally-adjusted annual number of new housing starts was 0.9 million units. Also impacting some of our product offerings is a continuing weakness in the repair and remodel end markets.

The significant weakness in the new housing and residential remodeling markets which began several years ago appeared to ease somewhat during fiscal 2013, but the recovery has been more uneven during fiscal 2014. In addition, there has been and continues to be significant regional differences in the strength of the improvement that has occurred. For example, the recovery has been more robust in some areas of the U.S., such as parts of the South and West, as compared to other regions such as the Northeast and Midwest, where growth has been minimal. These regional differences in the health of the housing market impact the sales of our various product groups differently. We believe our niche strategy and our focus on productivity improvements, cost reductions and price increases have tempered somewhat the impact of the weak housing market; however, it is not possible to know when improved market conditions and a housing recovery will become sustainable over the long-term.

Given our market leadership positions and reduced cost structure, we believe that we are positioned to benefit from a sustained recovery in the housing market when it occurs. We believe the long-term growth prospects in the industry are strong because the current seasonally-adjusted annualized housing starts are still below the 10- and 50-year averages. Also, according to a 2014 report by The Joint Center for Housing Studies of Harvard University, household growth is projected to average between approximately 1.2 million and 1.3 million units a year from 2015 to 2025.

Heavy Construction Materials Segment.  Heavy construction materials revenues for 2014 were $80.6 million with a corresponding gross profit of $23.6 million. Heavy construction materials revenues for 2013 were $75.1 million with a corresponding gross profit of $20.5 million. This revenue growth was due to increases in product volume and price, slightly offset by a decrease in lower-margin service revenue. Service revenue represented approximately 22% of total segment revenue for the third quarter of 2014, compared to 25% for the third quarter of 2013 and 29% for all of fiscal 2013. Site service revenue as a percent of total segment revenue is normally higher in the December and March quarters and lower in the June and September quarters, primarily due to seasonality.

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Gross profit increased by 15% to $23.6 million in the third quarter of 2014, compared to $20.5 million in 2013, and gross margin increased by approximately 200 basis points to 29%. Operating income increased $2.2 million, or 17%, from $12.8 million in 2013 to $15.0 million in 2014. The increases in gross profit and operating income in 2014 were primarily due to increases in fly ash revenue resulting from positive changes in both volume and price, as well as to cost management initiatives.

According to the Portland Cement Association (PCA), calendar 2012 cement consumption increased 9.0% over calendar 2011 and cement consumption was projected to increase 4.5% in calendar 2013. It is not possible to accurately predict the future trends of either cement consumption or cement prices, nor the correlation between cement usage and prices and fly ash sales and prices. Nevertheless, because fly ash is sold as an admixture for the partial replacement of portland cement in a wide variety of concrete uses—including infrastructure, commercial, and residential construction—statistics and trends for portland and blended cement sales can be an indicator for fly ash sales. In November 2013, the PCA estimated the growth rate for calendar 2014 will be 8.1% and the PCA’s Chief Economist believes the trough point for road construction, which accounts for the largest area of public cement consumption, was reached in 2013.

Low natural gas prices, EPA regulations, and reduced power demand, have combined to force the long-term shutdown or temporary idling of multiple coal combustion power plant units (primarily older, smaller units), negatively impacting the supply of CCPs for beneficial use in certain areas. This trend, which is currently expected to continue until the industry adjusts to requirements to update coal burning plants, has impacted somewhat our CCP supplies in certain regions of the country; however, we have multiple sources of supply and a broad distribution system, which allow us to move CCPs to locations where power plant units have closed, creating an opportunity for potential growth. Reallocating CCP supplies can increase our transportation costs, some but not all of which we have historically been able to pass on to customers.

The question of whether disposal of fly ash should be regulated under Subtitle C of RCRA (Resource Conservation and Recovery Act) or Subtitle D, as solid waste, is near resolution. In a consent decree proposed by the parties in 2014 to the U.S. District Court for the District of Columbia, the EPA agreed by December 19, 2014 to “sign for publication in the Federal Register a notice taking final action regarding EPA’s proposed revision of RCRA Subtitle D regulations pertaining to coal combustion residuals.” The Court is expected to accept the proposed consent decree and there has been no material change to the positive direction taken by the EPA. We believe that the EPA’s statement makes it highly likely that fly ash disposal will be regulated under Subtitle D as a solid waste.

We have worked with the EPA for almost five years, and feel comfortable with the EPA’s settlement with us and the other plaintiffs. We previously reported that the EPA had said that its plan to align new fly ash impoundment water standards with proposed CCP disposal rules “could provide strong support for a conclusion that regulation of [coal combustion residuals] under RCRA Subtitle D would be adequate.” That alignment is consistent with finalizing Subtitle D regulations for fly ash disposal.

There is still a possibility that Congress could move forward with statutory language that requires states to follow national disposal standards backed up by EPA enforcement powers. The legislation would be protective of the environment, create a rational enforcement mechanism, and improve overall management of fly ash disposal. We support the legislation, but Subtitle D regulations would resolve the uncertainty surrounding beneficial use.

Energy Technology Segment.  Following the decision to sell the coal cleaning business in fiscal 2011, our energy technology segment currently consists primarily of operations related to HCAT, our heavy oil upgrading catalyst. Energy technology segment revenues for 2014 were $2.2 million, compared to revenues for 2013 of $3.9 million. The change in revenue related primarily to the timing of HCAT shipments, which vary quarter to quarter, depending upon the timing of orders and onsite inventory levels of our current customers. We have entered into license agreements with three new potential customers and expect those customers to complete evaluations of the technology over the next six months, potentially leading to additional HCAT sales.

Operating Expenses.  Amortization of intangible assets was not materially different between 2014 and 2013 because the decrease in amortization expense for assets that have been fully amortized offset most of the increased amortization for the assets acquired in the 2014 acquisitions. Future amortization expense will depend in part on the values and useful lives of the acquired intangible assets, once those are finalized. Selling, general and administrative expenses increased 22% from 2013 to 2014 due primarily to recurring expenses of the businesses acquired in 2014, direct acquisition costs for those businesses, increased selling and marketing costs (including some non-routine customer acquisition-related costs and costs designed to spur incremental organic revenue growth), an increase in expense for cash-based compensation tied to stock price, plus small increases in several other cost categories related to revenue growth. During the remainder of fiscal 2014, we expect to incur additional non-routine customer acquisition-related costs, primarily in the energy technology segment.

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Net Interest Expense.  For 2014, we reported net interest expense of $12.1 million, compared to net interest expense of $11.1 million for 2013. Net interest expense increased $1.0 million due primarily to the new senior debt which was issued in December 2013, partially offset by a decrease in interest expense for convertible senior subordinated notes, the average balance of which decreased in 2014 as compared to 2013. In 2013, there was approximately $1.0 million of accelerated debt discount and debt issue cost amortization as a result of early repayments of convertible debt. In 2014, we had no early repayments of long-term debt. Interest expense for fiscal 2014 is currently expected to total approximately $47.0 million.

Income Tax Provision.  See Note 9 to the condensed consolidated financial statements for the reasons for the 22% reported effective income tax rate in 2014 and the 18% rate for 2013, including why we recorded a valuation allowance on our net operating losses, tax credits and other deferred tax assets in both periods. A valuation allowance is required when there is significant uncertainty as to the realizability of deferred tax assets. The ability to realize deferred tax assets is dependent upon our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. We have considered the following possible sources of taxable income when assessing the realization of our deferred tax assets:

·future reversals of existing taxable temporary differences;

·future taxable income or loss, exclusive of reversing temporary differences and carryforwards;

·tax-planning strategies; and

·taxable income in prior carryback years.

Because our operations in domestic and foreign jurisdictions have generated losses in recent years, management determined that we do not meet the “more likely than not” threshold that NOLs, tax credits and other deferred tax assets will be realized. Accordingly, a valuation allowance is required.

During fiscal 2015, we may realize a three-year cumulative accounting profit. If this occurs, we will also consider other factors in evaluating the continued need for a full, or partial, valuation allowance. These factors include:

·current financial performance;

·our ability to meet short-term and long-term financial and taxable income projections;

·the overall market environment; and

·the volatility and trend of the industries in which we operate.

All of the factors we are considering in evaluating whether and when to release all or a portion of the deferred tax asset valuation allowance involve significant judgment. For example, there are many different interpretations of “cumulative losses in recent years” which can be used. Also, significant judgment is involved in making projections of future financial and taxable income, especially because our financial results are significantly dependent upon industry trends, including the new residential, repair and remodel, and infrastructure construction markets. Most of the markets in which we participate are currently in varying states of recovery from the historic downturn experienced in recent years; however, it is not possible to accurately predict whether recovery will continue, and if it does, at what rate and for how long. Any reversal of the valuation allowance will favorably impact our results of operations in the period of reversal.

During fiscal 2014, we may realize a three-year cumulative accounting profit in certain state jurisdictions. If this occurs, we will consider the factors above in determining the continued need for a valuation allowance on the deferred tax assets related to those state jurisdictions.

Discontinued Operations.  We recorded $0.2 million of loss from discontinued operations in the third quarter of 2014, representing $0.1 million of operating losses (primarily expenses for certain litigation which commenced prior to disposal of the business) and $0.1 million of loss related to the coal cleaning facilities sold in the January 2013 sales transaction. We recorded $1.8 million of income from discontinued operations in the third quarter of 2013, representing $0.9 million of loss related to the sale of coal cleaning facilities and $2.7 million of income tax benefit, due primarily to the reversal of unrecognized income tax benefits related to audit periods that closed. We currently expect that additional adjustments to the estimated gains and losses from sale of the facilities may be recognized in fiscal 2014 and beyond as certain contingencies are resolved.

For all facility sales transactions, a majority of the consideration is in the form of potential production royalties and deferred purchase price, which amounts are dependent upon future plant production levels over several years. Potential future production royalties and deferred purchase price on the sales transactions were not considered in the gain calculations and will be accounted for in future periods when any such amounts are received.

In accordance with the terms of the asset purchase agreement for one of the sales transactions, the buyer of the coal cleaning facilities agreed to assume the lease and reclamation obligations related to certain of the facilities. Subsequent to the

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date of sale, the purchase agreement was amended to provide the buyer with additional time to make payments, as well as fulfill contractual requirements related to the assumed reclamation obligations. As of June 30, 2014, we remain contingently liable for one of the assumed obligations and have accrued approximately $8.0 million to meet that contingent liability if necessary. We have also reserved certain receivables due from the buyer until such time as collection is more certain. We currently expect to continue to reflect as discontinued operations all activity related to the former coal cleaning business, at least until such time as the significant reclamation contingency is resolved.

Nine Months Ended June 30, 2014 Compared to Nine Months Ended June 30, 2013

The information set forth below compares our operating results for the nine months ended June 30, 2014 (2014) with operating results for the nine months ended June 30, 2013 (2013). Except as noted, the references to captions in the statements of operations refer to continuing operations only.

Summary.  Our total revenue for the nine months ended June 30, 2014 was $545.5 million, up 12% from $487.6 million for 2013. Gross profit increased 15%, from $128.2 million in 2013 to $147.1 million in 2014. Operating income of $28.1 million in 2013 improved by 20%, to $33.8 million in 2014, and the loss from continuing operations decreased from $(4.9) million, or a diluted loss per share of $(0.07) in 2013, to a loss of $(0.5) million, or $(0.02) per diluted share, in 2014. The net loss including discontinued operations decreased from $(3.1) million, or a diluted loss per share of $(0.05) in 2013, to a net loss of $(0.6) million, or $(0.02) per diluted share, in 2014.

Revenue and Gross Margins.  The major components of revenue, along with gross margins, are discussed in the sections below, by segment.

Light Building Products Segment.  Sales of light building products in 2014 were $327.7 million with a corresponding gross profit of $89.9 million. Sales of light building products in 2013 were $279.5 million with a corresponding gross profit of $76.8 million. The revenue increase in 2014 was due to both organic growth and the acquisition of Kleer Lumber in December 2012 and the acquisitions of Entegra and Gerard in December 2013 and May 2014, respectively. The adverse weather conditions experienced in the March 2014 quarter continued into the June quarter and reduced 2014 sales, particularly in the Northeast and Midwest. Organic revenue in our siding product group lagged because of its geographic exposure to weather impacted regions, but both our manufactured stone and block product categories experienced growth in 2014 compared to 2013.

Heavy Construction Materials Segment.  Heavy construction materials revenues for 2014 were $211.3 million with a corresponding gross profit of $53.7 million. Heavy construction materials revenues for 2013 were $197.3 million with a corresponding gross profit of $45.7 million. Revenue increased during 2014 primarily due to product volume and price increases, with a small decrease in service revenue resulting from completed service projects. Sales of fly ash increased in volume compared to last year, notwithstanding the impacts of extreme winter weather in the Northeast and Midwest, limiting the use of fly ash in both regions. Gross margin increased from 23% in 2013 to 25% in 2014. The increases in gross profit and gross margin percentage were primarily due to increases in fly ash revenue resulting from positive changes in volume and price, as well as to cost management initiatives.

Energy Technology Segment.  Energy technology segment revenues for 2014 were $6.6 million, compared to revenues for 2013 of $10.8 million. The change in revenue related primarily to the timing of HCAT shipments, which vary period to period, depending upon the timing of orders and onsite inventory levels of our current customers.

Operating Expenses.  Amortization of intangible assets was higher in 2014 than in 2013 due to amortization of the assets acquired in the 2014 acquisitions. Selling, general and administrative expenses increased 15% from 2013 to 2014 due primarily to recurring expenses of the businesses acquired in 2014, direct acquisition costs for those businesses, increased selling and marketing costs (including some non-routine customer acquisition-related costs and costs designed to spur incremental organic revenue growth), an increase in expense for cash-based compensation tied to stock price, plus small increases in several other cost categories related to revenue growth.

Net Interest Expense.  For 2014, we reported net interest expense of $34.4 million, compared to net interest expense of $32.7 million for 2013. Net interest expense increased $1.7 million due primarily to the new senior debt which was issued in December 2013, partially offset by the decrease in interest expense for convertible senior subordinated notes, the average balance of which decreased in 2014 as compared to 2013. In 2013, there was approximately $2.1 million of accelerated debt discount and debt issue cost amortization as a result of early repayments of convertible debt. In 2014, we had no early repayments of long-term debt.

Income Tax Provision.  See Note 9 to the condensed consolidated financial statements for the reasons for the 22% reported effective income tax rate in 2014 and the 18% rate for 2013, including why we recorded a valuation allowance on our net operating losses, tax credits and other deferred tax assets in both periods.

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Discontinued Operations.  We recorded $0.1 million of loss from discontinued operations in 2014, representing $3.1 million of operating losses (primarily expenses for certain litigation which commenced prior to disposal of the business) and $3.0 million of gain related to the coal cleaning facilities sold in the January 2013 sales transaction. We recorded $1.8 million of income from discontinued operations in 2013, representing $3.1 million of operating losses (primarily the results of operations of the facilities prior to disposal), $2.2 million of gain related to the sale of coal cleaning facilities and $2.7 million of income tax benefit, due primarily to the reversal of unrecognized income tax benefits related to audit periods that closed. In 2013, the initial gain recorded on disposal was estimated, based on information available at the time, and in 2014, we received $2.7 million of deferred purchase price payments, along with the collection of certain receivables which had been reserved.

Impact of Inflation and Related Matters

In recent periods, some of our operations in the light building products segment have been negatively impacted by increased raw materials costs for commodities such as polypropylene, poly-vinyl chloride, cement and aggregates. In addition, we have experienced increases in our transportation costs in many parts of our business. We currently believe it is likely that raw materials and commodities such as fuels, along with the prices of other goods and services, could increase in future periods. We have passed certain increased costs to customers through higher prices, but it is not possible to accurately predict the future trends of these costs, nor our ability to pass on future cost increases.

Liquidity and Capital Resources

Summary of Cash Flow Activities.  Net cash provided by operating activities during the nine months ended June 30, 2014 (2014) was approximately $5.2 million, compared to net cash provided by operating activities during the nine months ended June 30, 2013 (2013) of approximately $7.9 million. There were no significant differences in the major components of operating cash flows between the two periods.

In 2014, our primary investing activity consisted of three acquisitions and in 2013, our primary investing activity consisted of one acquisition. Purchases of property, plant and equipment were at the same general level in both periods. In 2014, our primary financing activity consisted of the issuance of senior debt, and in 2013, our primary financing activity consisted of the issuance of common stock. More details about these and other investing and financing activities are provided in the following paragraphs.

Investing Activities.  On December 31, 2012, we acquired certain assets and assumed certain liabilities of Kleer Lumber, Inc., a company in the light building products industry. Total consideration paid for Kleer Lumber, all of which was cash, was approximately $43.3 million. Direct acquisition costs, consisting primarily of fees for advisory, legal and other professional services, totaled approximately $0.9 million. On December 12, 2013, we acquired 80% of the equity interests of Roof Tile, Inc., which markets its products primarily under the Entegra brand. Entegra is also in the light building products industry. Total consideration paid for Entegra, all of which was cash, was approximately $57.5 million. Direct acquisition costs, consisting primarily of fees for legal services, totaled approximately $0.4 million. During the March 2014 quarter, we acquired the assets of a company in the heavy construction materials industry for initial cash consideration of approximately $3.1 million. On May 16, 2014, we acquired certain assets and assumed certain liabilities of the roofing products business of Metals USA Building Products, which products are marketed under the Gerard and Allmet brands. Total consideration paid for Gerard, all of which was cash, was approximately $28.0 million; however, the purchase price is subject to adjustment for the final calculation of acquisition-date working capital, which calculation is currently expected to be finalized in the September 2014 quarter. Direct acquisition costs, consisting primarily of fees for legal services, totaled approximately $0.2 million. Subsequent to June 30, 2014, we acquired the assets of another company in the heavy construction materials industry for cash consideration of approximately $7.4 million.

In both 2013 and 2014, a majority of capital expenditures for property, plant and equipment was for maintenance of operating capacity in our light building products segment, with a smaller amount related to other segments and more discretionary expenditures for new product lines or projects. Capital expenditures in fiscal 2014 for both maintenance and growth are currently expected to be somewhat less than $40 million, as compared to approximately $30 million during each of the past three fiscal years. Funding for 2014 capital expenditures is expected to come from working capital. As of June 30, 2014, we were committed to spend approximately $5.7 million on capital projects that were in various stages of completion.

As noted earlier, in 2011 we assessed the strategic fit of our various operations and decided to divest our coal cleaning business, which did not align with our long-term strategy. In September 2011, the Board of Directors committed to a plan to sell the coal cleaning business, which has been classified as a discontinued operation since that time. We sold one coal cleaning facility during fiscal 2012 and sold the remaining ten facilities in fiscal 2013. For all sales transactions, a majority of the consideration is in the form of potential production royalties and deferred purchase price, which amounts are

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dependent upon future plant production levels over several years. In 2014, we received $2.7 million of deferred purchase price payments and collected approximately $4.0 million of long-term deposits related to the coal cleaning business.

In accordance with the terms of the asset purchase agreement for one of the sales transactions, the buyer of the coal cleaning facilities agreed to assume the lease and reclamation obligations related to certain of the facilities. Subsequent to the date of sale, we amended the purchase agreement to provide the buyer with additional time to make payments, as well as fulfill contractual requirements related to the assumed reclamation obligations. As of June 30, 2014, we remain contingently liable for one of the assumed obligations and have accrued approximately $8.0 million to meet that contingent liability if necessary (representing a net increase of $1.3 million during 2014). We have also reserved certain receivables due from the buyer until such time as collection is more certain. It is not possible to accurately predict the timing or amounts of any future cash receipts or payments related to our discontinued coal cleaning business.

We intend to continue to expand our business through growth of existing operations in our core light and heavy building materials businesses. We also continue to look for bolt-on niche acquisitions that meet our criteria and enhance product offerings to our core customer base. Acquisitions have historically been an important part of our long-term business strategy as well; however, primarily because of debt covenant restrictions, cash flow considerations and events affecting the debt and equity markets, we did not make any large acquisitions from 2008 until the December 2012 acquisition of Kleer Lumber described above. In past years, we have also invested in joint ventures accounted for using the equity method of accounting, and in 2014 we invested $1.5 million in unconsolidated joint ventures. We do not currently have plans to significantly increase our investments in any of the joint venture entities, none of which is material. Current debt agreements limit potential acquisitions and investments in joint ventures. The ABL Revolver limits potential acquisitions and investments in joint ventures if pro forma net excess availability is 25% or less of total potential availability under the facility.

Financing Activities.  In the December 2012 quarter, we issued 11.5 million shares of common stock for gross cash proceeds of approximately $83.4 million. Offering costs totaled approximately $5.4 million, resulting in net proceeds of approximately $78.0 million, of which approximately $43.3 million was used to acquire Kleer Lumber. In the December 2013 quarter, we issued $150.0 million of 7¼% senior notes for net proceeds of approximately $146.2 million, of which approximately $57.5 million was used to acquire Entegra.

The approximately $7.7 million aggregate principal amount of 2.50% convertible notes that remained outstanding at September 30, 2013 was repaid in February 2014, and our remaining outstanding debt matures from 2016 through 2019. We believe our cash flow will be sufficient to repay all outstanding long-term debt on or before the due dates. Following certain asset sales, as defined, we could be required to prepay a portion of the senior secured notes.

Headwaters is a holding company and repayment of our senior secured notes and senior unsecured notes will be dependent upon cash flow generated by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. In the event of a default, the ABL Revolver limits the ability of the ABL borrowers, all of which are our subsidiaries, to make distributions to enable us to make payments in respect of our senior secured notes and senior unsecured notes. There are no other significant contractual or governmental restrictions on our ability to obtain funds from our guarantor subsidiaries.

We were in compliance with all debt covenants as of June 30, 2014. The senior secured notes, senior notes and ABL Revolver limit the incurrence of additional debt and liens on assets, prepayment of future new subordinated debt, merging or consolidating with another company, selling all or substantially all assets, making acquisitions and investments and the payment of dividends or distributions, among other things. In addition, if availability under the ABL Revolver is less than 15% of the total $70.0 million commitment, or $10.5 million currently, we are required to maintain a monthly fixed charge coverage ratio of at least 1.0x for the preceding twelve-month period.

There have been no borrowings under the ABL Revolver since it was entered into in 2009. The ABL Revolver has a termination date of October 2018, with a contingent provision for early termination at any time within three months prior to the earliest maturity date of the senior secured notes or the convertible senior subordinated notes, at which time any amounts borrowed must be repaid. The contingent provision for early termination is precluded if borrowing base capacity under the ABL Revolver and/or cash collateral is at least equivalent to the amount of notes maturing on such date. Availability under the ABL Revolver cannot exceed $70.0 million, which includes a $35.0 million sub-line for letters of credit and a $10.5 million swingline facility. Availability under the ABL Revolver is further limited by the borrowing base valuations of the assets of our light building products and heavy construction materials segments which secure the borrowings, currently consisting of certain trade receivables and inventories. In addition to the first lien position on these assets, the ABL Revolver lenders have a second priority position on substantially all other assets.

As of June 30, 2014, availability under the ABL Revolver was approximately $60.6 million. However, due primarily to the seasonality of our operations, the amount of availability varies from period to period and, while not currently expected, it is

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possible that the availability under the ABL Revolver could fall below the 15% threshold, or $10.5 million, in a future period. As of June 30, 2014, our fixed charge coverage ratio, as defined in the ABL Revolver agreement, is approximately 1.3. The fixed charge coverage ratio is calculated by dividing EBITDAR minus capital expenditures and cash payments for income taxes by fixed charges. EBITDAR consists of net income (loss) i) plus net interest expense, income taxes (as defined), depreciation and amortization, non-cash charges such as goodwill and other impairments, and rent expense; ii) plus or minus other specified adjustments such as equity earnings or loss in joint ventures. Fixed charges consist of cash payments for debt service plus rent expense. Voluntary prepayments of debt principal may be excluded from fixed charges if, at the time of the prepayment, the pro-forma net excess availability (after giving effect of the prepaid debt) for the prior and future 60 days is greater than 25% of the facility, or $17.5 million.

If availability under the ABL Revolver were to decline below $10.5 million at some future date and the fixed charge coverage ratio were to also be below 1.0, the ABL Revolver lender could issue a notice of default. If a notice of default were to become imminent, we would seek an amendment to the ABL Revolver, or alternatively, a waiver of the availability requirement and/or fixed charge coverage ratio for a period of time. We do not currently believe it is likely we will reach the lower limits of both our ABL Revolver and the fixed charge coverage ratio. See Note 7 to the consolidated financial statements for more detailed descriptions of the terms of our long-term debt and our ABL Revolver.

In February 2012, we filed a universal shelf registration statement with the SEC under which $210.0 million was available for offerings of securities. Following the issuance of common stock in December 2012, there is approximately $126.6 million available for future securities offerings. A prospectus supplement describing the terms of any additional securities to be issued is required to be filed before any future offering can commence under the registration statement.

Working Capital.  As of June 30, 2014, our working capital was $185.9 million (including $114.5 million of cash and cash equivalents) compared to $95.3 million as of September 30, 2013. We currently expect operations to produce positive cash flow during fiscal 2014 and in future years. We also currently believe working capital will be sufficient for our operating needs for the next 12 months, and that it will not be necessary to utilize borrowing capacity under the ABL Revolver for our seasonal operational cash needs in the foreseeable future.

Income Taxes.  Cash outlays for income taxes were less than $2.0 million for both 2013 and 2014. As of June 30, 2014, our NOL and capital loss carryforwards totaled approximately $77.3 million (tax effected). The U.S. and state NOLs and capital losses expire from 2014 to 2033. Substantially all of the non-U.S. NOLs, which are not material, do not expire. In addition, there are approximately $25.7 million of tax credit carryforwards as of June 30, 2014, which also expire from 2014 to 2033. We do not currently expect cash outlays for income taxes during the next 12 months to be significant.

Summary of Future Cash Requirements.  Significant cash requirements for the next 12 months, beyond seasonal operational working capital requirements, consist primarily of capital expenditures and interest payments on long-term debt. In subsequent periods, significant cash requirements will include the repayment of debt, but not prior to February 2016. See Note 12 to the condensed consolidated financial statements where the potential risks of litigation are described in detail. Adverse conclusions to those legal matters could involve material amounts of cash outlays in future periods.

Legal Matters

We have ongoing litigation and asserted claims which have been incurred during the normal course of business. Reference is made to Note 12 to the condensed consolidated financial statements for a description of our accounting for legal costs and for other information about legal matters.

Recent Accounting Pronouncements

See Note 1 to the condensed consolidated financial statements for a discussion of accounting pronouncements that have been issued which we have not yet adopted.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, primarily related to our stock price. In addition, future borrowings, if any, under our ABL Revolver will bear interest at a variable rate, as described in Note 7 to the condensed consolidated financial statements. We do not use derivative financial instruments for speculative or trading purposes.

Cash Performance Unit Awards. As discussed in Note 12 to the condensed consolidated financial statements and more fully described in the 10-K, the Compensation Committee approved grants of performance unit awards to participants in certain business units related to consolidated cash flow generated during fiscal 2014. The terms of these awards are similar to those for the fiscal 2012 and 2013 awards, with one added feature that provides for potential further adjustment based on cash flows generated in fiscal 2015 and 2016. Changes in our cash flow generation as well as changes in the stock price through September

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30, 2014 will result in adjustment of the expected liability as of September 30, 2014, which adjustment (whether positive or negative) will be reflected in our statement of operations each quarter through September 30, 2014. Changes in the stock price can result in an increase or decrease in the estimated September 30, 2014 payout liability; however, any adjustments are also dependent upon the amount of cash flow generated during 2014. Potential adjustments to the 2014 estimated liability may also occur in 2015 and 2016, depending on cash flows generated in those years.

Cash-Settled SAR Grants.  In fiscal 2011, the Committee approved grants to certain employees of approximately 0.4 million cash-settled SARs, approximately 0.1 million of which remain outstanding as of June 30, 2014. These SARs vested in annual installments through September 30, 2013, provided the participant was still employed at the respective vest dates, and are settled in cash upon exercise by the employee. The SARs terminate on September 30, 2015 and must be exercised on or before that date. As of June 30, 2014, approximately $1.2 million has been accrued for outstanding awards because the stock price at June 30, 2014 was above the grant-date stock price of $3.81. Future changes in our stock price in any amount above $3.81 through September 30, 2015 will result in adjustment to the expected remaining liability, which adjustment (whether positive or negative) will be reflected in our statement of operations each quarter.

In fiscal 2012, the Committee approved grants to certain officers and employees of approximately 1.0 million cash-settled SARs, approximately 0.4 million of which remain outstanding as of June 30, 2014. These SARs have terms similar to those described above. Approximately $5.0 million has been accrued for outstanding awards as of June 30, 2014. Changes in our stock price in any amount above the grant-date stock price of $1.85 through September 30, 2016, the date these SARs expire, will result in adjustment to the expected remaining liability, which adjustment (whether positive or negative) will be reflected in our statement of operations each quarter. Compensation expense for all cash-settled SARs was approximately $3.9 million and $5.1 million for the nine months ended June 30, 2013 and 2014, respectively.

If all of the above-described SARs ultimately vest and the stock price is above the grant-date stock prices, a change in our stock price of $1.00 would result in an increase or decrease of approximately $0.5 million in the ultimate payout liability.

The portion of total cash-based compensation expense resulting from changes in our stock price for all performance unit awards and cash settled SARs described above, was $4.5 million and $5.7 million for the nine months ended June 30, 2013 and 2014, respectively.

ITEM 4.CONTROLS AND PROCEDURES

Disclosure Controls and Procedures — We maintain disclosure controls and procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 (the Exchange Act), such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified by SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), to allow timely decisions regarding required disclosure.

Our management evaluated, with the participation of our CEO and CFO, the effectiveness of our disclosure controls and procedures as of June 30, 2014, pursuant to paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act. This evaluation included a review of the controls’ objectives and design, the operation of the controls, and the effect of the controls on the information presented in this Quarterly Report. Our management, including the CEO and CFO, do not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our disclosure controls and procedures are designed to provide such reasonable assurance of achieving their objectives. Also, the projection of any evaluation of the disclosure controls and procedures to future periods is subject to the risk that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on their review and evaluation, and subject to the inherent limitations described above, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of June 30, 2014 at the above-described reasonable assurance level.

Internal Control over Financial Reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

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Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even internal controls determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The effectiveness of our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the possibility of human error, and the risk of fraud. The projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies may deteriorate. Because of these limitations, there can be no assurance that any system of internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.

There has been no change in our internal control over financial reporting during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

See “Legal Matters” in Note 12 to the consolidated financial statements for a description of current legal proceedings.

ITEM 1A.RISK FACTORS

Risks relating to our business, our common stock and indebtedness are described in Item 1A of our Form 10-K.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We did not have any sales of unregistered equity securities during the quarter ended June 30, 2014, but did purchase treasury stock. As described in Note 10 to the consolidated financial statements, we have a Directors’ Deferred Compensation Plan (DDCP) under which non-employee directors can elect to defer certain compensation and choose from various options how the deferred compensation will be invested. One of the investment options is Headwaters common stock. When an eligible director chooses our common stock as an investment option, we purchase the common stock in open-market transactions in accordance with the director’s request and hold the shares until such time as the deferred compensation obligation becomes payable. At such time, the treasury shares will be distributed to the director in satisfaction of the obligation.

The following table provides details about the treasury stock purchased in connection with the DDCP during the quarter ended June 30, 2014.

Period	Total Number of Shares Purchased	Average Price Paid per Share (1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
April 1, 2014 – April 30, 2014	0	n/a		n/a	n/a
May 1, 2014 – May 31, 2014	4,594	$	12.65	n/a	n/a
June 1, 2014 – June 30, 2014	0	n/a		n/a	n/a
Total	4,594	$	12.65	n/a	n/a

(1)Includes broker commissions.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.MINE SAFETY DISCLOSURES

None.

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ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS

The following exhibits are included herein:

12	Computation of ratio of earnings to combined fixed charges and preferred stock dividends	*
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer	*
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer	*
32	Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer	*
101.INS	XBRL Instance document	*
101.SCH	XBRL Taxonomy extension schema	*
101.CAL	XBRL Taxonomy extension calculation linkbase	*
101.DEF	XBRL Taxonomy extension definition linkbase	*
101.LAB	XBRL Taxonomy extension label linkbase	*
101.PRE	XBRL Taxonomy extension presentation linkbase	*

*Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HEADWATERS INCORPORATED
Date: July 31, 2014	By:	/s/ Kirk A. Benson
		Kirk A. Benson, Chief Executive Officer
		(Principal Executive Officer)
Date: July 31, 2014	By:	/s/ Donald P. Newman
		Donald P. Newman, Chief Financial Officer
		(Principal Financial Officer)

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