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
July 23, 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 March 31, 2003. 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 July 23, 2003, Headwaters announced its results for the quarter ended June
30, 2003. The full text of this announcement follows.
HEADWATERS INCORPORATED ANNOUNCES RESULTS
FOR THIRD QUARTER - FISCAL 2003
o Third Quarter Earnings Per Share of $0.37
o Nine Month Earnings Per Share Up 36% to $0.90
o Confirms Earnings guidance for Fiscal 2003 of $1.28-$1.32
SOUTH JORDAN, UTAH, JULY 23, 2003 - HEADWATERS INCORPORATED (NASDAQ: HDWR),
today announced results for the quarter and nine months ended June 30, 2003.
Highlights for the third quarter of fiscal 2003 included:
o Record quarterly net income.
o First license of ammonia slip technology.
o Dynegy coal combustion products contract extended through
2012.
o ISG acquisition accretive in the third quarter.
o Long term debt reduced by $15 million.
Total revenue for the June 2003 quarter was $106.4 million with $10.5
million of net income, or $0.37 per diluted share. Total revenue for the nine
months ended June 30, 2003 was $281.2 million with $25.4 million of net income,
or $0.90 per diluted share. Chemical reagent sales increased 62% to $35.9
million in the third quarter of fiscal 2003, compared to $22.2 million for the
same period in 2002. License fees for the quarter increased 15% to $10.1
million, up from $8.8 million in 2002. For the respective nine-month periods,
2
chemical reagent sales increased 98% to $98.1 million in 2003, compared to $49.5
million in 2002. License fees for the nine-month period increased 31% to $27.8
million, up from $21.3 million in 2002. Coal combustion product ("CCP") revenues
decreased 7% to $46.0 million for the June 2003 quarter compared to $49.3
million for 2002. Manufactured products sales increased 4% to $13.3 million for
the June 2003 quarter compared to $12.8 million for 2002. CCP revenues decreased
5% to $115.5 million for the nine months ended June 30, 2003 compared to $122.0
million for 2002. Manufactured products sales of $36.0 million for the nine
months ended June 30, 2003 were comparable to the 2002 sales of $35.9 million.
Effective September 19, 2002, Headwaters acquired Industrial Services
Group, Inc. ("ISG"), the nation's largest marketer and manager of coal
combustion products. Summary income statement data for the three- and nine-month
periods ended June 30, 2003 and 2002, and pro forma data that combines
Headwaters with ISG for the three- and nine-month periods ended June 30, 2002
are shown below:
(in 000's of dollars,
except per-share data) Quarter Ended June 30 Nine Months Ended June 30
- ------------------------------ ------------------------------------ --------------------------------------
2002 2002 2003 2002 2002 2003
(actual) (pro forma) (actual) (pro forma)
------- ------- -------- ------- -------- --------
Total revenue $31,968 $94,115 $106,396 $75,646 $233,570 $281,158
Operating income $10,915 $17,691 $ 21,769 $25,531 $ 37,444 $ 56,514
Net income $ 6,736 $ 8,597 $ 10,544 $16,922 $ 17,083 $ 25,385
Diluted income per share $ 0.26 $ 0.31 $ 0.37 $ 0.66 $ 0.62 $ 0.90
Pro forma quarterly combined revenues grew 13% from $94.1 million to
$106.4 million, pro forma operating income grew 23% from $17.7 million to $21.8
million, and pro forma net income increased by 22% from $8.6 million to $10.5
million or $0.37 per diluted share. For the nine-month period ended June 30,
2003, pro forma combined revenues grew 20% from $233.6 million to $281.2
million, pro forma operating income grew 51% from $37.4 million to $56.5
million, and pro forma net income increased by 49% from $17.1 million to $25.4
million, or $0.90 per diluted share, when compared to the same period in 2002.
Covol Fuels' Performance
During the June 2003 quarter, Covol Fuels' licensees sold 10.4 million
tons of solid alternative fuel. This compares to 7.5 million tons sold in the
June 2002 quarter and 9.9 million tons in the March 2003 quarter, a 39% and 5%
increase, respectively. Covol Fuels sold 27.9 million pounds of chemical reagent
in the June 2003 quarter, compared to 17.6 million pounds in the June 2002
quarter and 25.7 million pounds in the March 2003 quarter, a 59% and 9%
increase, respectively. Of the 10.4 million tons of solid alternative fuel sold
during the quarter, Headwaters reported royalty income on 8.0 million tons,
resulting in average revenues per ton of $1.27. The 10.4 million tons of fuel
sold was produced at 24 of 28 licensed facilities, resulting in average
quarterly production of 433,000 tons per facility. The highest number of tons
produced from any one facility in the quarter was 847,000, and the lowest was
186,000.
Covol Fuels sold 27.9 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 facilities. Covol Fuels currently has 14 facilities that
only purchase chemical reagents.
3
During the quarter, the Internal Revenue Service ("IRS") issued
Announcement 2003-46 in which it indicated that it "had reason to question the
scientific validity of test procedures and results that have been presented as
evidence that fuel underwent a significant chemical change" and that it was
suspending issuing private letter rulings ("PLRs") on the question of chemical
change. Obtaining a PLR has become a standard procedure in connection with sales
of solid alternative fuel facilities. One of Covol Fuels' licensees is in the
process of selling certain solid alternative fuel facilities because it is not
currently able to utilize all of the tax credits it is generating. As a result
of the inability to obtain private letter rulings, the sales of this licensee's
solid alternative fuel facilities have been delayed and this licensee reduced
production. Due to this reduced production, Headwaters' license fees and
chemical reagent sales for the September quarter could decrease by as much as
$2.0 million and $3.5 million, respectively.
"We are disappointed by the action of the IRS. This is the fourth time
that the chemical change issue has been discussed at the IRS National Office,
and nothing has changed since 1995 when it was first reviewed by the Service,"
said Ken Frailey, President of Covol Fuels. "We have years of test data and
conclusions from a variety of experts that appropriate coal processing with
Covol's process and reagents results in significant chemical change."
ISG's Performance
The seasonality of ISG's performance was evident in the third quarter
as revenues increased by 38% over the second quarter. As expected, ISG was
accretive to Headwaters earnings during the third quarter, after accounting for
all depreciation, amortization, and interest expense related to the ISG
acquisition. A precise calculation of accretion is not possible because ISG has
been fully integrated into Headwaters' operations. Typically, the September
quarter is the strongest quarter for ISG's operations, when approximately 40% of
its annual operating profit occurs. Accordingly, Headwaters anticipates a strong
fourth quarter due to increased construction activity in the summer months.
During the June 2003 quarter, revenue from ISG's CCP segment was $46.0
million with a gross margin of 27.8% compared to $49.3 million with a gross
margin of 28.1% for the June 2002 quarter. In addition to normal recurring
operational changes, the June 2002 quarter included $2.6 million of revenue from
a non-recurring project, the Olivenheim dam, in Southern California which was
completed in 2002. Also, ISG has been shifting more responsibility for
transportation costs to its customers rather than incurring the costs and
charging the customers a price that includes transportation. The June 2002
quarter included approximately $8 million of transportation revenue and costs
whereas the June 2003 quarter included approximately $4 million. The total tons
of high quality CCPs sold in the June 2003 quarter were 1,441,000 compared to
1,556,000 for the June 2002 quarter, including the tons sold to the Olivenheim
project. The 2003 quarterly shipments of high quality CCPs were negatively
impacted by unusually rainy weather in the Texas, Atlanta and Northeast US
markets. However, sales of CCP have been positively impacted by the increased
acceptance of CCPs as a "green" product.
Revenues from the manufactured products segment were $13.3 million
during the June 2003 quarter, with a gross margin of 24.1%, compared to revenue
of $12.8 million and a gross margin of 21.8% for the June 2002 quarter. This
represents a 10% improvement in the gross margin which resulted from cost saving
measures at the manufacturing products facilities as well as expanded sales of
our "green" products, despite a poor economic climate.
4
Debt Reduction
In connection with the September 2002 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 June 2003 quarter,
Headwaters repaid a total of $15.2 million of senior debt, which, when combined
with the $15.1 million of senior debt repaid in the December 2002 and March 2003
quarters, represents a $30.3 million reduction in the long-term debt incurred to
acquire ISG. Due to the early repayment of over $19.0 million in senior debt,
Headwaters accelerated the amortization of debt discount and capitalized debt
issuance costs totaling $654,000 during the June 2003 quarter and $1,109,000 for
the nine months ended June 30, 2003.
The following table highlights certain debt coverage and balance sheet
ratios using June 30, 2003 balances and the pro forma trailing twelve months
("TTM") earnings before interest, taxes, depreciation and amortization
("EBITDA"), results:
September 2002 June 2003
-------------- ---------
Total Indebtedness to EBITDA(a) 2.43 1.65
EBITDA to Required Interest Payments 5.65 6.85
Current Ratio(a) 1.24 1.18
Total Debt to Equity 1.73 1.10
- --------------------
(a) See "Reconciliation of Net Income to EBITDA and Current Ratio
calculation"
EBITDA and current ratio are widely accepted financial indicators used
by certain investors and financial analysts to assess and compare financial
performance and EBITDA is an integral part of the Company's debt covenants.
Headwaters' goal in fiscal 2003 was 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 through the first three quarters of 2003, Headwaters has already
exceeded its goal.
Headwaters has a current shelf registration in the amount of $250
million which was implemented to provide financial flexibility in connection
with the ISG acquisition. Since the shelf was not needed in connection with the
acquisition, Headwaters' Board of Directors has approved reducing the shelf
registration to $150 million, consistent with the current level of Headwaters'
long-term debt. Headwaters does not currently have any imminent plans to use the
shelf registration but continues to believe that the financial flexibility it
provides is good for Headwaters and its shareholders.
Commentary and Outlook
"We're pleased with the progress and performance of our core
businesses. ISG, which is now fully integrated, was accretive to earnings and
contributed to our solid performance in the third quarter. ISG is currently in
its seasonally strongest period and is delivering increased shipments of CCPs,"
said Kirk A. Benson, Chairman and Chief Executive Officer. "With the temporary
IRS setback to Covol Fuels, our highest priority over the next quarter for that
segment of our business, is to favorably resolve issues raised by the IRS. We
are committing time and resources to that end and believe there will be a
positive outcome."
5
"Based on our sound financial performance for the nine months ended
June 30, 2003, we believe that we will be able to achieve our 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 August 1, 2003, by dialing (800) 642-1687 or (706)
645-9291 and entering the pass code 1742189.
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 September quarter; (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; and (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; (e) limitations in the capital available to Headwaters to execute on
its business plan, and the cost of that capital; (f) the ability of Headwaters
to locate and close on attractive acquisition opportunities; (g) Headwaters'
limited operating history with its new business strategy and its ability to
sustain and manage its growth under that strategy; and (h) the success of
Headwaters in replacing and growing its financial performance before its legacy
alternative fuels business declines.
More information about potential factors which could affect the 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.
6
HEADWATERS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(thousands of dollars and shares, except per-share amounts)
Quarter Ended June 30,
-------------------------------------------
2002 2002 2003
---------- ---------- ----------
Revenue: (PRO FORMA) (ACTUAL) (ACTUAL)
Chemical reagent sales $ 22,234 $ 22,234 $ 35,908
License fees 8,822 8,822 10,120
CCP revenues 49,310 -- 46,005
Manufactured products sales 12,837 -- 13,257
Other 912 912 1,106
---------- ---------- ----------
Total revenue 94,115 31,968 106,396
---------- ---------- ----------
Operating costs and expenses:
Cost of chemical reagents 14,880 14,880 25,271
Cost of CCP revenues 35,452 -- 33,217
Cost of manufactured products 10,039 -- 10,059
Cost of other revenues 1,334 1,334 1,186
Depreciation and amortization 3,334 336 3,409
Research and development 1,068 598 1,052
Selling, general and administrative 10,317 3,905 10,433
---------- ---------- ----------
Total operating costs and expenses 76,424 21,053 84,627
---------- ---------- ----------
Operating income 17,691 10,915 21,769
Interest expense, net (3,418) 417 (4,017)
Other income (expense), net 154 (46) (208)
---------- ---------- ----------
Income before income taxes 14,427 11,286 17,544
Income tax provision (5,830) (4,550) (7,000)
---------- ---------- ----------
Net income $ 8,597 $ 6,736 $ 10,544
========== ========== ==========
Basic net income per share $ 0.32 $ 0.27 $ 0.39
========== ========== ==========
Diluted net income per share $ 0.31 $ 0.26 $ 0.37
========== ========== ==========
Weighted average shares outstanding -- basic 26,606 24,506 27,192
========== ========== ==========
Weighted average shares outstanding -- diluted 28,118 26,018 28,299
========== ========== ==========
Reconciliation of actual results to pro forma results for the quarter ended June 30, 2002:
Headwaters' historical net income as originally reported $ 6,736
ISG's historical net income as originally reported 1,396
Additional amortization expense on ISG's intangible assets (67) A
Elimination of ISG's originally reported interest expense 4,702 B
Interest expense on new debt incurred by Headwaters (3,860) C
Income tax effect of above adjustments (310) D
------------
Pro forma net income shown above $ 8,597
============
A Amortization of increase in recorded value of ISG's identifiable
intangible assets.
B Elimination of ISG's interest on long-term debt retired by Headwaters
at acquisition date.
C Adjustment to record interest on new long-term debt issuance by
Headwaters.
D Income tax effect, calculated using a combined effective federal and
state income tax rate of approximately 40%.
Reconciliation of Net Income to EBITDA for the trailing 12 months ended June 30,
2003:
EBITDA for the trailing 12 months ended June 30, 2003 of $87,630 is derived as
follows: net income of $35,445, plus net interest expense of $16,773, income
taxes of $21,906, and depreciation and amortization of $13,506.
The pro forma accretion for fiscal 2002 of $0.05 per share is derived by
subtracting $0.26 from $0.31.
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HEADWATERS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(thousands of dollars and shares, except per-share amounts)
Nine Months Ended June 30,
-------------------------------------------
2002 2002 2003
---------- ---------- ----------
Revenue: (PRO FORMA) (ACTUAL) (ACTUAL)
Chemical reagent sales $ 49,521 $ 49,521 $ 98,099
License fees 21,263 21,263 27,846
CCP revenues 122,011 -- 115,460
Manufactured products sales 35,913 -- 36,041
Other 4,862 4,862 3,712
---------- ---------- ----------
Total revenue 233,570 75,646 281,158
---------- ---------- ----------
Operating costs and expenses:
Cost of chemical reagents 33,749 33,749 66,065
Cost of CCP revenues 87,402 -- 84,635
Cost of manufactured products 28,367 -- 27,535
Cost of other revenues 4,256 4,256 3,318
Depreciation and amortization 10,022 1,000 9,660
Research and development 3,500 1,727 3,172
Selling, general and administrative 28,830 9,383 30,259
---------- ---------- ----------
Total operating costs and expenses 196,126 50,115 224,644
---------- ---------- ----------
Operating income 37,444 25,531 56,514
Interest expense, net (11,222) 364 (11,913)
Other income (expense), net 2,402 2,047 (2,266)
---------- ---------- ----------
Income before income taxes 28,624 27,942 42,335
Income tax provision (11,541) (11,020) (16,950)
---------- ---------- ----------
Net income $ 17,083 $ 16,922 $ 25,385
========== ========== ==========
Basic net income per share $ 0.65 $ 0.70 $ 0.94
========== ========== ==========
Diluted net income per share $ 0.62 $ 0.66 $ 0.90
========== ========== ==========
Weighted average shares outstanding -- basic 26,107 24,007 27,003
========== ========== ==========
Weighted average shares outstanding -- diluted 27,662 25,562 28,188
========== ========== ==========
Reconciliation of actual results to pro forma results for the nine months ended
June 30, 2002:
Headwaters' historical net income as originally reported $ 16,922
ISG's historical net income as originally reported 19,667
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 (203) C
Elimination of ISG's originally reported interest expense 15,393 D
Interest expense on new debt incurred by Headwaters (11,770) E
Income tax effect of above adjustments (1,370) F
------------
Pro forma net income shown above $ 17,083
============
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%.
8
HEADWATERS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(thousands of dollars)
September 30, June 30,
Assets: 2002 2003
------------ ------------
Current assets:
Cash and short-term investments $ 13,191 $ 15,615
Trade receivables, net 50,331 53,987
Inventories 8,442 9,266
Other 5,969 7,197
------------ ------------
Total current assets 77,933 86,065
Property, plant and equipment, net 50,549 53,463
Notes and accrued interest receivable 4,593 1,989
Intangible assets, net 118,918 114,040
Goodwill 113,367 112,131
Debt issue costs and other assets 7,497 6,135
------------ ------------
Total assets $ 372,857 $ 373,823
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 20,773 $ 21,164
Accrued liabilities 26,559 27,951
Current portion of long-term debt 15,578 23,640
------------ ------------
Total current liabilities 62,910 72,755
Long-term debt 154,552 117,387
Deferred income taxes 51,357 50,739
Other long-term liabilities 5,442 5,247
------------ ------------
Total liabilities 274,261 246,128
------------ ------------
Stockholders' equity:
Common stock - par value 27 28
Capital in excess of par value 126,265 129,786
Retained earnings (24,418) 967
Other, primarily treasury stock (3,278) (3,086)
------------ ------------
Total stockholders' equity 98,596 127,695
------------ ------------
Total liabilities and stockholders' equity $ 372,857 $ 373,823
============ ============
The current ratio as of June 30, 2003 of 1.18 is derived by dividing total current
assets of $86,065 by total current liabilities of $72,755.
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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 hereunto duly authorized.
HEADWATERS INCORPORATED
Registrant
Date: July 23, 2003 /s/ Kirk A. Benson
------------------------------
Kirk A. Benson
Chief Executive Officer and
Principal Executive Officer
10