UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
April 24, 2003
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Date of Report (Date of earliest event reported)
HEADWATERS INCORPORATED
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(Exact name of Registrant as specified in its charter)
Delaware 0-27808 87-0547337
- -------------------------------- -------------------------- --------------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
10653 South River Front Parkway, Suite 300
South Jordan, UT 84095
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(Address of principal executive offices) (Zip Code)
(801) 984-9400
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name or former address, if changed since last report)
Certain statements in this Report constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. As such,
actual results may vary materially from such expectations. For a discussion of
certain factors that could cause actual results to differ from expectations,
please see the information set forth under the caption entitled "Forward-looking
Statements" in Part I, Item 2 of Headwaters' Quarterly Report on Form 10-Q for
the quarter ended December 31, 2002. There can be no assurance that Headwaters'
results of operations will not be adversely affected by such factors. Headwaters
undertakes no obligation to revise or publicly release the results of any
revision to these forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
opinion only as of the date hereof.
Item 9. Information Being Furnished Under Item 12
In accordance with Securities and Exchange Commission Release No. 33-8216, the
following information, which is intended to be furnished under Item 12, "Results
of Operations and Financial Condition," is instead being furnished under Item 9,
"Regulation FD Disclosure." This information shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or incorporated by reference in any filing under the Securities
Act of 1933, as amended, or the Exchange Act, except as shall be expressly set
forth by specific reference in such a filing.
On April 24, 2003, Headwaters announced its results for the quarter ended March
31, 2003. The full text of this announcement follows.
HEADWATERS INCORPORATED ANNOUNCES RESULTS
FOR SECOND QUARTER - FISCAL 2003
o Second Quarter Earnings Per Share of $0.24
o Six Month Earnings Per Share Up 32% to $0.53
o Long Term Debt Reduced by $5 Million
SOUTH JORDAN, UTAH, APRIL 24, 2003 - HEADWATERS INCORPORATED (NASDAQ: HDWR),
today announced results for the quarter and six months ended March 31, 2003.
Highlights for the second quarter of fiscal 2003 included:
o Quarterly revenue increase of 240% to $86.1 million.
o Continued strong demand for fly ash and other coal combustion
products.
o Record sales of chemical reagents - 96% quarterly increase.
o Record tons of solid alternative fuel sold - 88% quarterly increase.
o Continued accelerated repayment of acquisition debt.
Total revenue for the March 2003 quarter was $86.1 million, an increase
of 240% over total revenue of $25.3 million for the March 2002 quarter. Net
income for the March 2003 quarter was $6.8 million, or $0.24 per diluted share,
compared to $5.5 million, or $0.21 per diluted share for the March 2002 quarter.
Total revenue for the six months ended March 31, 2003 was $174.8 million, an
increase of 300% over total revenue of $43.7 million for the six months ended
March 31, 2002. Net income for the six months ended March 31, 2003 was $14.8
million, or $0.53 per diluted share, compared to $10.2 million, or $0.40 per
diluted share for the six months ended March 31, 2002, an increase of 32%.
Effective September 19, 2002 Headwaters acquired Industrial Services
Group, Inc. ("ISG"), the nation's largest marketer and manager of coal
combustion products. Accordingly, ISG's results of operations are included in
the March 2003 three- and six-month results, but not in the March 2002 results.
ISG's revenues were $42.9 million for the March 2003 quarter and $92.2 million
for the six months ended March 31, 2003.
Chemical reagent sales increased 96% to $33.1 million in the second
quarter of fiscal 2003, compared to $16.9 million for the same period in 2002.
License fees for the quarter increased 35% to $8.9 million, up from $6.6 million
in 2002. For the respective six-month periods, chemical reagent sales increased
128% to $62.2 million in 2003, compared to $27.3 million in 2002. License fees
for the six-month period increased 43% to $17.7 million, up from $12.4 million
in 2002.
Summary income statement data for the three- and six-month periods
ended March 31, 2002 and 2003 is shown below:
(in 000's of dollars,
except per-share data) Quarter Ended March 31 Six Months Ended March 31
-------------------------------- ------------------------------------ ------------------------------------
2002 2003 2002 2003
-------------------------------- ----------------- ------------------ ----------------- ------------------
Total revenue $25,256 $86,053 $43,678 $174,762
Operating income $7,435 $16,768 $14,617 $34,746
Net income $5,459 $6,789 $10,186 $14,841
Diluted income per share $0.21 $0.24 $0.40 $0.53
-------------------------------- ----------------- ------------------ ----------------- ------------------
Covol Fuels' Performance
During the March 2003 quarter, Covol Fuels' licensees sold 9.8 million
tons of solid alternative fuel. This compares to 5.2 million tons sold in the
March 2002 quarter, an 88% increase, and 8.4 million tons in the December 2002
quarter, a 17% increase. Covol Fuels sold 25.7 million pounds of chemical
reagent in the March 2003 quarter, compared to 13.7 million pounds in the March
2002 quarter, an 88% increase, and 22.6 million pounds in the December 2002
quarter, a 14% increase.
Of the 9.8 million tons of solid alternative fuel sold during the
quarter, Headwaters reported royalty income on 7.6 million tons, resulting in
average revenues per ton of $1.18. The 9.8 million tons of fuel sold was
produced at 24 of 28 licensed facilities, resulting in average quarterly
production of 0.41 million tons per facility. The highest number of tons
produced from any one facility in the quarter was 0.80 million, and the lowest
was 0.14 million. All of Headwaters' licensee facilities are now producing solid
alternative fuel.
Covol Fuels sold 25.7 million pounds of chemical reagent to a total of
34 facilities. Of the 34 facilities, 19 were licensee facilities and 15 were
solely chemical reagent customers.
ISG's Performance
During the March 2003 quarter of integrated operations, ISG performed
at expected levels even though operations were negatively impacted during the
first two quarters of fiscal 2003 by above normal rain in Texas and northern
California and severe winter weather conditions in certain other locations.
ISG's business is seasonal with its strongest operations from May through
October. Typically, ISG's strongest quarter ends September 30th and its slowest
quarter ends March 31st.
The following table highlights the seasonality of the ISG business:
Operating Operating
Quarter Ended Revenue Income Margin
------------------- ------------- --------------- ---------------
Dec. 2001 $51,221 $3,098 6%
Mar. 2002 $44,556 $1,172 3%
Jun. 2002 $62,147 $6,843 11%
Sep. 2002 $66,838 $7,105 11%
The combination of the December 2001 and the March 2002 quarters'
operations represents less than 43% of the total revenue and less than 24% of
the total operating income for fiscal 2002. Operating margins are better in the
June and September quarters because of fixed cost operating leverage, wherein
fixed costs remain relatively constant as revenue increases.
During the March 2003 quarter, revenue from ISG's coal combustion
products ("CCP") segment was $31.2 million with a gross margin of 24.9% compared
to $33.1 million with a gross margin of 25.2% for the March 2002 quarter. The
total tons of high value CCPs sold in the March 2003 quarter were 961,000
compared to 976,000 for the March 2002 quarter. The change in quarterly
shipments of high value CCPs was primarily due to unusually rainy weather in
Texas.
Revenues from the manufactured products segment were $11.7 million
during the March 2003 quarter, with a gross margin of 24.2%, compared to revenue
of $11.2 million and a gross margin of 22.1% for the March 2002 quarter. This
represents a 10% improvement in the gross margin which resulted from
restructuring activities at the manufacturing products facilities.
Combined Pro Forma and Integration
Summary income statement data for the three- and six-month periods
ended March 31, 2003 and pro forma data that combines Headwaters with ISG for
the three- and six-month periods ended March 31, 2002 are shown below:
(in 000's of dollars,
except per-share data) Quarter Ended March 31 Six Months Ended March 31
-------------------------------- ------------------------------------ ------------------------------------
2002 (pro forma) 2003 2002 (pro forma) 2003
-------------------------------- -------------------- --------------- --------------------- --------------
Total revenue $69,812 $86,053 $139,455 $174,762
Operating income $8,540 $16,768 $19,753 $34,746
Net income $3,958 $6,789 $8,486 $14,841
Diluted income per share $0.14 $0.24 $0.31 $0.53
Pro forma quarterly combined revenues grew 23% from $69.8 million to
$86.1 million, operating income grew 98% from $8.5 million to $16.8 million, and
net income increased by 70% from $4.0 million to $6.8 million. For the six-month
periods ended March 31, 2002 and 2003, pro forma combined revenues grew 25% from
$139.5 million to $174.8 million, operating profits grew 76% from $19.8 million
to $34.7 million, and net income increased by 74% from $8.5 million to $14.8
million.
The integration with ISG is proceeding on schedule and Headwaters
continues to believe that the integration will be completed by the June 2003
quarter. During the March 2003 quarter, Headwaters' and ISG's corporate offices
were consolidated into one location. The information technology and accounting
systems for Covol Fuels and ISG's CCP operations have been fully consolidated
under the same application software. Employee benefits, compensation, and human
resources policies have been standardized and fully integrated.
Debt
In connection with the acquisition of ISG, Headwaters incurred $175
million of long-term debt, consisting of $155 million of senior debt and $20
million of subordinated debt. During the March 2003 quarter, Headwaters repaid a
total of $5.2 million of senior debt, which, when combined with the $9.9 million
of senior debt repaid in the December 2002 quarter, represents a 9% reduction in
long-term debt incurred to acquire ISG. Because of the early repayment of this
debt, Headwaters accelerated the amortization of $90,000 of debt discount and
capitalized debt issuance costs during the March 2003 quarter and $455,000 for
the six months ended March 31, 2003. The following table highlights certain debt
coverage and balance sheet ratios using the pro forma trailing twelve months
("TTM") earnings before interest, taxes, depreciation and amortization
("EBITDA"), results:
September 2002 December 2002 March 2003
----------------------------------------------- --------------------- -------------------- ----------------
Total Indebtedness to EBITDA 2.43 2.10 1.97
EBITDA to Required Interest Payments 5.65 6.16 6.22
Current Ratio 1.24 1.28 1.25
Total Debt to Total Assets 0.47 0.46 0.44
Headwaters' goal in fiscal 2003 is to reduce the ratio of total
indebtedness to TTM pro forma EBITDA to 1.8 or less. Because of the strong cash
flow generated by Headwaters in the March 2003 quarter, it continues to believe
that this goal can be achieved. Headwaters intends to repay $10 to $15 million
of the senior debt in the June quarter, reducing the total acquisition debt to
$145 to $150 million.
Commentary and Outlook
"We are pleased with the quarter, particularly with the cash flow
strength of the Company. We have completed the seasonally slowest two quarters
of our fiscal year. We look forward to the June and September quarters where we
expect to report record quarterly results," said Kirk A. Benson, Chairman and
Chief Executive Officer.
Based on its financial performance for the six months ended March 31,
2003, Headwaters believes that it will be able to achieve its earnings forecast
of $1.28 to $1.32 per diluted share for fiscal 2003, reflecting a growth rate of
between 36% and 40% over fiscal 2002 results.
Management will host a conference call with a simultaneous webcast
today at 11:00 a.m. Eastern/9:00 a.m. Mountain to discuss the Company's
financial results and business outlook. The call will be available live via the
Internet by accessing Headwaters' web site at www.hdwtrs.com and clicking on the
Investor Relations section. To listen to the live broadcast, please go to the
web site at least fifteen minutes early to register, download, and install any
necessary audio software. For those who cannot listen to the live broadcast, an
online replay will be available for 90 days on www.hdwtrs.com, or a phone replay
will be available through May 1, 2003, by dialing (800) 642-1687 or (706)
645-9291 and entering the passcode 9806082.
About Headwaters Incorporated
Headwaters Incorporated is a world leader in providing technology and
services that maximize the value of fossil fuels. The Company is focused on
providing services to energy companies, conversion of fossil fuels into
alternative energy products, and generally adding value to energy. Headwaters
generates revenue from managing coal combustion products (CCPs) and from
licensing its innovative chemical technology to produce an alternative fuel.
Through its CCP business and its solid alternative fuels business, the Company
earns a growing revenue stream that provides the capital needed to expand and
acquire synergistic new business opportunities.
Forward Looking Statements
Certain statements contained in this document may be deemed to be
forward-looking statements under federal securities laws, and Headwaters intends
that such forward-looking statements be subject to the safe-harbor created
thereby.
Such forward-looking statements relate to: (i) the growth of Headwaters'
revenues, earnings, or earnings per share; (ii) the expectation that operating
results will be higher for the June and September quarters; (iii) the ability of
Headwaters to sustain the earnings stream from its alternative fuels, coal
combustion products, and other businesses; (iv) the expectation that Headwaters'
stock is undervalued or will increase in value in the future; (v) the
identification and completion of any future acquisitions and the expectation
that the value of such acquisitions will increase; (vi) the commercialization of
any technology acquired or developed.
Headwaters cautions that these statements are qualified by important factors
that could cause actual results to differ materially from those reflected by the
forward-looking statements contained herein.
Such factors include, but are not limited to: (a) the availability of tax
credits to us and our licensees under the tax code; (b) our dependence on
licensees to use our technology; (c) collection of payments outstanding; (d) the
company's ability to repay its debt and comply with covenants in financing
agreements; limitations in the capital available to Headwaters to execute on its
business plan, and the cost of that capital; (e) the ability of Headwaters to
locate and close on attractive acquisition opportunities; (f)Headwaters' limited
operating history with its new business strategy and its ability to sustain and
manage its growth under that strategy; and (g) the success Headwaters in
replacing and growing its financial performance before its legacy alternative
fuels business decline.
More information about potential factors which could affect either company's
business and financial results is included in Headwaters' Annual Report on Form
10-K for the fiscal year ended Sept. 30, 2002, Quarterly Reports on Form 10-Q,
and other periodic filings and prospectuses. All forward-looking statements are
based on information available to Headwaters on the date hereof, and Headwaters
assumes no obligation to update such statements. Investors and security holders
may obtain a free copy of the Annual and Quarterly Reports and other documents
filed by Headwaters with the Securities and Exchange Commission at the
Commission's Web site at http://www.sec.gov. Free copies of Headwaters' Annual
Report and other filings with the Commission may also be obtained by directing a
request to smadden@hdwtrs.com.
HEADWATERS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(thousands of dollars and shares, except per-share amounts)
Quarter Ended March 31,
-------------------------------------------
2002 2002 2003
---------- ---------- ----------
Revenue: (PRO FORMA) (ACTUAL) (ACTUAL)
Chemical reagent sales $ 16,944 $ 16,944 $ 33,123
License fees 6,626 6,626 8,948
CCP revenues 33,111 -- 31,168
Manufactured products sales 11,445 -- 11,700
Other 1,686 1,686 1,114
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Total revenue 69,812 25,256 86,053
---------- ---------- ----------
Operating costs and expenses:
Cost of chemical reagents 11,640 11,640 21,782
Cost of CCP revenues 24,766 -- 23,422
Cost of manufactured products 8,918 -- 8,872
Cost of other revenues 2,026 2,026 1,135
Depreciation and amortization 3,371 333 3,167
Research and development 1,245 595 1,106
Selling, general and administrative 9,306 3,227 9,801
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Total operating costs and expenses 61,272 17,821 69,285
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Operating income 8,540 7,435 16,768
Interest expense, net (3,789) 13 (3,460)
Other income (expense), net 1,634 1,351 (2,119)
---------- ---------- ----------
Income before income taxes 6,385 8,799 11,189
Income tax provision (2,427) (3,340) (4,400)
---------- ---------- ----------
Net income $ 3,958 $ 5,459 $ 6,789
========== ========== ==========
Basic net income per share $ 0.15 $ 0.23 $ 0.25
========== ========== ==========
Diluted net income per share $ 0.14 $ 0.21 $ 0.24
========== ========== ==========
Weighted average shares outstanding -- basic 26,024 23,924 26,983
========== ========== ==========
Weighted average shares outstanding -- diluted 27,556 25,456 28,101
========== ========== ==========
Reconciliation of actual results to pro forma results for the quarter ended
March 31, 2002:
Headwaters' historical net income as originally reported $ 5,459
ISG's historical net income as originally reported 20,478
Elimination of ISG extraordinary item (22,558) A
Additional amortization expense on ISG's intangible assets (67) B
Elimination of ISG's originally reported interest expense 4,896 C
Interest expense on new debt incurred by Headwaters (3,860) D
Income tax effect of above adjustments (390) E
----------
Pro forma net income shown above $ 3,958
==========
A Elimination of ISG's historical extraordinary gain on extinguishment of debt.
B Amortization of increase in recorded value of ISG's identifiable intangible
assets.
C Elimination of ISG's interest on long-term debt retired by Headwaters
at acquisition date.
D Adjustment to record interest on new long-term debt issuance by Headwaters.
E Income tax effect, calculated using a combined effective federal and state
income tax rate of approximately 40%.
HEADWATERS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(thousands of dollars and shares, except per-share amounts)
Six Months Ended March 31,
-----------------------------------------------
2002 2002 2003
----------- ----------- -----------
Revenue: (PRO FORMA) (ACTUAL) (ACTUAL)
Chemical reagent sales $ 27,287 $ 27,287 $ 62,191
License fees 12,442 12,441 17,726
CCP revenues 72,701 -- 69,454
Manufactured products sales 23,076 -- 22,784
Other 3,949 3,950 2,607
----------- ----------- -----------
Total revenue 139,455 43,678 174,762
----------- ----------- -----------
Operating costs and expenses:
Cost of chemical reagents 18,869 18,869 40,793
Cost of CCP revenues 51,950 -- 51,418
Cost of manufactured products 18,328 -- 17,477
Cost of other revenues 2,922 2,922 2,132
Depreciation and amortization 6,688 664 6,251
Research and development 2,432 1,129 2,120
Selling, general and administrative 18,513 5,477 19,825
----------- ----------- -----------
Total operating costs and expenses 119,702 29,061 140,016
----------- ----------- -----------
Operating income 19,753 14,617 34,746
Interest expense, net (7,804) (54) (7,897)
Other income (expense), net 2,248 2,093 (2,058)
----------- ----------- -----------
Income before income taxes 14,197 16,656 24,791
Income tax provision (5,711) (6,470) (9,950)
----------- ----------- -----------
Net income $ 8,486 $ 10,186 $ 14,841
=========== =========== ===========
Basic net income per share $ 0.33 $ 0.43 $ 0.55
=========== =========== ===========
Diluted net income per share $ 0.31 $ 0.40 $ 0.53
=========== =========== ===========
Weighted average shares outstanding -- basic 25,858 23,758 26,909
=========== =========== ===========
Weighted average shares outstanding -- diluted 27,434 25,334 28,133
=========== =========== ===========
Reconciliation of actual results to pro forma results for the six months ended
March 31, 2002:
Headwaters' historical net income as originally reported $ 10,186
ISG's historical net income as originally reported 18,271
Elimination of ISG extraordinary item (22,558) A
Elimination of ISG's amortization of goodwill through December 31, 2001 1,002 B
Additional amortization expense on ISG's intangible assets (136) C
Elimination of ISG's originally reported interest expense 10,691 D
Interest expense on new debt incurred by Headwaters (7,910) E
Income tax effect of above adjustments (1,060) F
---------------
Pro forma net income shown above $ 8,486
===============
A Elimination of ISG's historical extraordinary gain on extinguishment of debt.
B Elimination of ISG's historical non-deductible goodwill amortization, due to
the implementation requirements of SFAS 142.
C Amortization of increase in recorded value of ISG's identifiable intangible
assets.
D Elimination of ISG's interest on long-term debt retired by Headwaters at
acquisition date.
E Adjustment to record interest on new long-term debt issuance by Headwaters.
F Income tax effect, calculated using a combined effective federal and state
income tax rate of approximately 40%.
HEADWATERS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(thousands of dollars)
September 30, March 31,
Assets: 2002 2003
------------ ------------
Current assets:
Cash and short-term investments $ 13,191 $ 10,668
Trade receivables, net 50,331 49,838
Inventories 8,442 10,131
Other 5,969 6,524
------------ ------------
Total current assets 77,933 77,161
Property, plant and equipment, net 50,549 50,460
Notes and accrued interest receivable 4,593 2,458
Intangible assets, net 118,918 115,666
Goodwill 113,367 113,367
Debt issue costs and other assets 7,497 7,028
------------ ------------
Total assets $ 372,857 $ 366,140
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $20,773 $19,455
Accrued liabilities 26,559 19,813
Current portion of long-term debt 15,578 22,387
------------ ------------
Total current liabilities 62,910 61,655
Long-term debt 154,552 133,309
Deferred income taxes 51,357 51,136
Other long-term liabilities 5,442 4,819
------------ ------------
Total liabilities 274,261 250,919
------------ ------------
Stockholders' equity:
Common stock - par value 27 28
Capital in excess of par value 126,265 127,966
Accumulated deficit (24,418) (9,577)
Other, primarily treasury stock (3,278) (3,196)
------------ ------------
Total stockholders' equity 98,596 115,221
------------ ------------
Total liabilities and stockholders' equity $ 372,857 $ 366,140
============ ============
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 hereunto duly authorized.
HEADWATERS INCORPORATED
Registrant
Date: April 24, 2003 /s/ Kirk A. Benson
----------------------------
Kirk A. Benson
Chief Executive Officer and
Principal Executive Officer