NEWS BULLETIN
RE: Headwaters Incorporated
FROM: 10653 South Riverfront Parkway, Suite 300
South Jordan, UT 84095
(801) 984-9400
NYSE: HW
- --------------------------------------------------------------------------------
FOR FURTHER INFORMATION
AT THE COMPANY: AT FINANCIAL RELATIONS BOARD:
Sharon Madden Tricia Ross
Director of Investor Relations Analyst Contact
(801) 984-9400 (617) 520-7064
FOR IMMEDIATE RELEASE:
April 21, 2005
HEADWATERS INCORPORATED ANNOUNCES
RESULTS FOR FISCAL 2005 SECOND QUARTER
o 86% Increase in Revenues to $222.4 Million
o Net Income of $12.0 Million and Diluted EPS of $0.30
o Repayment of $197 Million of Senior Debt
o Affirms Fiscal 2005 EPS Guidance of $2.00 to $2.10
SOUTH JORDAN, UTAH, APRIL 21, 2005 (NYSE: HW) - HEADWATERS INCORPORATED today
announced results for its second quarter ended March 31, 2005. Additional
highlights from the quarter include:
o Construction completed on two FlexCrete plants
o Memorandum of Understanding signed to develop coal liquefaction
technologies with the Philippines
o Coal cleaning project commenced - increased Btu, decreased mercury and
sulfur
o Reforming nanocatalyst independently tested - significant improvement
over existing technology
o H2O2 nanocatalyst pilot plant successfully operated
o Lowered interest rate on senior secured first lien debt by 100 basis
points
o Debt to equity ratio lowered from 3.16 to 1.35
o Positive outcome in Gallagher litigation - jury verdict of $175 million
o Completed common stock offering generating net cash proceeds of $199
million
Total revenue for the March 2005 quarter was $222.4 million, up 86% from $119.5
million reported in the March 2004 quarter. Operating income was $38.5 million
in the March 2005 quarter, compared to $38.0 million in the March 2004 quarter
(the March 2004 quarter included $20.1 million in nonrecurring operating
income). Net income for the March 2005 quarter was $12.0 million or $0.30
-more-
Headwaters Incorporated
Page 2 of 9
earnings per diluted share, using 43.1 million weighted-average shares
outstanding. Net income for the March 2004 quarter was $18.6 million or $0.55
earnings per diluted share (the March 2004 quarter included $0.25 of
nonrecurring earnings per share), using 34.1 million weighted-average shares
outstanding.
Total revenue for the six months ended March 31, 2005 was $440.8 million, up 99%
from $221.0 million reported for the six months ended March 31, 2004. Operating
income was $76.2 million for the six months ended March 31, 2005, compared to
$60.1 million for the six months ended March 31, 2004 (the March 2004 quarter
included $20.1 million in nonrecurring operating income). Net income for the six
months ended March 31, 2005 was $25.0 million or $0.65 earnings per diluted
share, compared to $28.7 million or $0.91 earnings per diluted share for the six
months ended March 31, 2004 (the March 2004 quarter included $0.25 of
nonrecurring earnings per share).
Both the quarter and six-month period ended March 31, 2004 included the effect
of several nonrecurring items when compared to the corresponding March 2005
periods, all as explained in detail in prior announcements and SEC filings.
Headwaters Construction Materials Performance
Revenues from the construction materials segment were $109.2 million during the
March 2005 quarter, with a gross margin percentage (gross margin percentage is
calculated as follows: subtract cost of revenues from revenues, and divide the
number so derived by revenues) of 32%, compared to revenue of $11.2 million and
a gross margin of 12% for the March 2004 quarter. The March 2005 quarter
includes the operations of Tapco, Eldorado Stone, and Southwest Concrete
Products ("SCP"). There were no revenues from these acquired entities in the
March 2004 quarter. The Construction Materials segment has a pronounced
seasonality. The seasonality has a more significant impact on net income than on
revenue due to the relationship between fixed and variable costs.
Headwaters Resources Performance
During the March 2005 quarter, revenues from Headwaters Resources or the coal
combustion products ("CCPs") segment were $48.5 million with a gross margin of
21% compared to revenue of $39.6 million and a gross margin of 25% for the March
2004 quarter. The March 2005 quarter includes the operations of VFL Technologies
which has historically had lower margins than Headwaters Resources' base
business. The gross margin percentage is expected to increase in the June and
September quarters as sales increase. Sales of high-value coal combustion
products for the March 2005 quarter totaled approximately 1.3 million tons,
compared to approximately 1.1 million tons in the March 2004 quarter, resulting
in a 18% increase in tons of high-value coal combustion products sold.
Headwaters Energy Services Performance
Chemical reagent sales increased 24% in the March 2005 quarter to $39.9 million,
compared to $32.2 million in the March 2004 quarter. Headwaters Energy Services'
license fees for the March 2005 quarter were $24.6 million compared to $36.3
million in the March 2004 quarter. The decrease in license fee revenue in March
-more-
Headwaters Incorporated
Page 3 of 9
2005 resulted from the recognition of net revenues in March 2004 relating to
certain funds previously deposited in an escrow account of approximately $25
million. Gross margins on chemical reagent sales were 29% compared to 32% in the
March 2004 quarter. Headwaters expects continued pressure on margins throughout
the remainder of the calendar year due to high oil costs.
During the March 2005 quarter, Energy Services' licensees sold 11.4 million tons
of solid alternative fuel. This compares to 10.0 million tons sold in the March
2004 quarter and 11.1 million tons sold in the December 2004 quarter. Energy
Services sold 29.6 million pounds of chemical reagent in the March 2005 quarter,
compared to 23.8 million pounds in the March 2004 quarter and 26.9 million
pounds in the December 2004 quarter. The 11.4 million tons of fuel sold was
produced at 23 of the 28 licensed facilities, resulting in average quarterly
production of 497,000 tons per facility. The highest number of tons produced
from any one facility in the quarter was 856,000, and the lowest was 183,000.
Energy Services sold chemical reagent to a total of 34 facilities. Of the 34
facilities, 18 were licensee facilities and 16 were facilities where solely
chemical reagent was sold.
During December 2004, Headwaters increased its minority interest in a Section 29
facility currently operating in West Virginia from approximately 9% to 19%.
Energy Services has been providing reagent to the facility and is currently
recognizing its portion of the facility's operating expenses, included in "Other
Income (Expense)", and the tax credits generated by the facility, included in
"Income Tax Provision." These tax credits account for the reduction in
Headwaters' effective tax rate to approximately 31.5%. Generally accepted
accounting principles require tax credits to be recognized proportionately
through-out the year in relation to a company's projected annual taxable income.
This results in fewer tax credits being recognized in Headwaters' December and
March quarters than are actually being generated at the Section 29 facility. The
credits that are not recognized in Headwaters' lowest income producing quarters,
December and March, will be recognized in the June and September quarters.
Revenue and Cash Flow Diversification
The acquisitions in fiscal 2004 of Tapco, Eldorado Stone, SCP and VFL
significantly broaden the scope of products and services Headwaters offers,
particularly in the construction materials segment. Consistent with Headwaters'
diversification strategy, revenue from the Section 29 business of Energy
Services continues to decline as a percentage of total revenue. Headwaters'
revenue that is dependent on Section 29 has declined from approximately 90% in
fiscal 2002, 57% in fiscal 2004 and approximately 29% during the quarter ended
March 31, 2005.
New Product and Technology Development
Headwaters continues to develop new products and technologies to drive future
earnings growth. Highlights of Headwaters technology development during the
March 2005 quarter include the following:
Construction completed on two FlexCrete plants
- ----------------------------------------------
During the quarter, Headwaters completed the construction of two FlexCrete
plants, one owned by the Navajo Housing Authority, and one owned by a
Headwaters' subsidiary. FlexCrete is a light weight, fire proof, cost effective
-more-
Headwaters Incorporated
Page 4 of 9
building product made using high levels of fly ash. It is anticipated that sales
will commence from the facilities over the next two quarters.
Agreement to develop coal liquefaction technologies with the Philippines
- ------------------------------------------------------------------------
Headwaters entered into a Memorandum of Understanding with the Philippine
Department of Energy for the development of coal-to-liquids projects in the
Philippines. It was recently reported that coal liquefaction is a high priority
for the Department of Energy. Headwaters now has coal liquefaction agreements in
China, India, and the Philippines.
Coal cleaning project commenced
- -------------------------------
Headwaters has commenced construction of a coal cleaning project in Price, Utah.
The project will produce cleaner coal fuel, reducing the amount of new waste
coal generated annually, and removing undesirable pollutants such as sulfur and
mercury. The Company anticipates additional facilities using the coal cleaning
technology will be constructed in the future.
Nanocatalyst achievements
- -------------------------
During the quarter, a new Headwaters reforming nanocatalyst was independently
tested confirming that the nanocatalyst will enhance the upgrading of gasoline
and production of hydrogen. Further, the Degussa/Headwaters pilot plant
successfully integrated direct synthesis hydrogen peroxide in the manufacturing
of propylene oxide. The joint venture thus reached an important milestone in
developing and marketing direct synthesis hydrogen peroxide.
Capital Structure / Indebtedness
In March, Headwaters completed an offering of common stock resulting in net cash
proceeds of $199 million. These proceeds were used to reduce outstanding senior
indebtedness. Also in March, Headwaters completed an amendment to its senior
secured credit facility which, among other things, lowered the interest rate on
this debt by 100 basis points.
As a result of the early repayment of senior debt in March, additional interest
expense totaling approximately $5.5 million was recognized, representing
acceleration of amortization of debt issue costs and an early payment penalty.
These accelerated expenses were substantially offset by higher than expected
license fees in Headwaters Energy Services business.
The major components of Headwaters' long-term senior debt structure as of March
31, 2005 are as follows:
- -------------------------------------------- ------------------- --------------------- -----------------------
(in millions) Amount Interest Rate Maturity
- -------------------------------------------- ------------------- --------------------- -----------------------
Senior secured first lien term loan $442.7 LIBOR + 2.25% April 2011
- -------------------------------------------- ------------------- --------------------- -----------------------
Second lien term loan $100.0 LIBOR + 5.5% September 2012
- -------------------------------------------- ------------------- --------------------- -----------------------
Senior subordinated convertible debt $172.5 2.875% June 2011
- -------------------------------------------- ------------------- --------------------- -----------------------
$60 million senior revolving credit facility $10.0 LIBOR + 2.5% September 2009
- -------------------------------------------- ------------------- --------------------- -----------------------
To supplement our condensed consolidated financial statements presented in
accordance with generally accepted accounting principles ("GAAP"), we use a
non-GAAP measure called EBITDA. EBITDA is net income adjusted by adding
depreciation, amortization, net interest expense and income taxes ("EBITDA").
-more-
Headwaters Incorporated
Page 5 of 9
Management uses EBITDA internally to measure the amount of cash generated by
Headwaters and to make decisions about the amount of capital expenditures
Headwaters will make and where to allocate capital. EBITDA is also provided to
enhance the user's overall understanding of our current financial performance,
our ability to service our debt, our compliance with current debt covenants and
our ability to fund future growth. Therefore, we believe that EBITDA provides
useful information to our investors regarding our performance and overall
results of operations. Our EBITDA measure presented here may not be comparable
to similarly titled measures presented by other companies.
The following table highlights certain debt coverage and balance sheet ratios
using period end balances and the trailing twelve months ("TTM") EBITDA:
Pro forma Pro forma
9/30/03 9/30/04 3/31/05
- ---------------------------------------- ----------- ------------- -------------
Total Indebtedness to EBITDA(a) 1.53 4.16 3.22
- ---------------------------------------- ----------- ------------- -------------
EBITDA to Required Interest Payments(a) 7.73 4.60 6.40
- ---------------------------------------- ----------- ------------- -------------
Current Ratio(a) 1.19 1.24 1.52
- ---------------------------------------- ----------- ------------- -------------
Total Debt to Equity 0.96 3.16 1.35
- ---------------------------------------- ----------- ------------- -------------
(a)See "Current Ratio" calculations in financial tables that follow. The
pro forma calculations of Total Indebtedness to EBITDA assumes all of the 2004
acquisitions occurred on October 1, 2003. Pro forma EBITDA for the trailing
twelve months ended March 31, 2005 of $228.3 million is derived as follows (in
millions of dollars): Net income of $72.0 plus net interest expense of $61.3,
income taxes of $40.8, and depreciation and amortization of $54.2. Pro forma
EBITDA for the trailing twelve months ended September 30, 2004 of $233.8 million
is derived as follows: Net income of $72.9 plus net interest expense of $63.1,
income taxes of $45.6, and depreciation and amortization of $52.2.
Litigation
For the period ended December 31, 2004, a jury awarded Headwaters approximately
$175 million in damages and interest for breach of contract by AJG Financial
Services, Inc. AJG has moved for a new trial and for a judgment notwithstanding
the verdict. Headwaters has filed a motion for a declaratory judgment covering
prospective damages for periods after 2004. The trial judge is scheduled to
determine the motions' outcome in May, 2005.
Commentary and Outlook
Steven G. Stewart, Headwaters' Chief Financial Officer, stated, "We have now
completed the two quarters during which revenues are at seasonal lows, and the
performance of the Company was in line with management's expectations.
Accordingly, we are reaffirming our earnings guidance for the year of $2.00 to
$2.10 diluted earnings per share. Further, recent financing activities have
greatly reduced our financial leverage which will result in significantly
reduced interest costs and position us favorably should interest rates continue
to increase."
"Our integration activities are on track with plan," said Kirk A. Benson,
Chairman and Chief Executive Officer. "We are finding additional synergies as we
-more-
Headwaters Incorporated
Page 6 of 9
proceed with the integration of the companies that are new to Headwaters.
Probably the most gratifying experience during the quarter was the progress that
we made in new product development, and particularly with our nanocatalysts. In
addition to the development of the reforming nanocatalyst, our NOX nanocatalyst,
and the hydrogen peroxide nanocatalyst pilot plant tests, we recently ordered
the HC3 catalyst precursor for our commercial scale test at a refinery. We
continue to move closer to commercialization of these advanced catalyst
products."
Conference Call and Webcast Information
Management will host a conference call with a simultaneous web cast today at
11:00 a.m. Eastern/9:00 a.m. Mountain to discuss the Company's financial results
and business outlook. The call will be available live via the Internet by
accessing Headwaters' web site at www.headwaters.com and clicking on the
Investor Relations section. To listen to the live broadcast, please go to the
web site at least fifteen minutes early to register, download, and install any
necessary audio software. For those who cannot listen to the live broadcast, an
online replay will be available for 90 days on www.headwaters.com, or a phone
replay will be available through April 28, 2005 by dialing 800-642-1687 or
706-645-9291 and entering the pass code 5523754.
About Headwaters Incorporated
Headwaters Incorporated is a world leader in creating value through innovative
advancements in the utilization of natural resources. Headwaters is a
diversified growth company providing products, technologies and services to the
energy, construction and home improvement industries. Through its alternative
energy, coal combustion products, and building materials businesses, the Company
earns a growing revenue stream that provides the capital needed to expand and
acquire synergistic new business opportunities.
Pro Forma Information
The pro forma financial information is presented for illustrative purposes only
and does not purport to be indicative of the results of operations which
actually would have resulted had the acquisitions occurred on October 1, 2003,
nor is it indicative of the results that may be expected in future periods. The
pro forma adjustments are based upon information and assumptions available as of
the date hereof.
Forward Looking Statements
Certain statements contained in this report are forward-looking statements
within the meaning of federal securities laws and Headwaters intends that such
forward-looking statements be subject to the safe-harbor created thereby.
Forward-looking statements include Headwaters' expectations as to the managing
and marketing of coal combustion products, the production and marketing of
building materials and products, the licensing of technology and chemical sales
to alternative fuel facilities, the receipt of product sales, license fees and
royalty revenues, the development, commercialization, and financing of new
technologies and other strategic business opportunities and acquisitions, and
other information about Headwaters. Such statements that are not purely
historical by nature, including those statements regarding Headwaters' future
-more-
Headwaters Incorporated
Page 7 of 9
business plans, the operation of facilities, the availability of tax credits,
the availability of feedstocks, and the marketability of the coal combustion
products, building products, and synthetic fuel, are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
regarding future events and our future results that are based on current
expectations, estimates, forecasts, and projections about the industries in
which we operate and the beliefs and assumptions of our management. Actual
results may vary materially from such expectations. Words such as "expects,"
"anticipates," "targets," "goals," "projects," "believes," "seeks," "estimates,"
variations of such words, and similar expressions are intended to identify such
forward-looking statements. Any statements that refer to projections of our
future financial performance, our anticipated growth and trends in our
businesses, and other characterizations of future events or circumstances, are
forward-looking.
In addition to matters affecting the coal combustion product, alternative fuel,
and building products industries or the economy generally, factors which could
cause actual results to differ from expectations stated in forward-looking
statements include, among others, the factors described in the captions entitled
"Forward-looking Statements" and "Risk Factors" in Item 7 in Headwaters' Annual
Report on Form 10-K for the fiscal year ended September 30, 2004, Quarterly
Reports on Form 10-Q, and other periodic filings and prospectuses.
Although Headwaters believes that its expectations are based on reasonable
assumptions within the bounds of its knowledge of its business and operations,
there can be no assurance that our results of operations will not be adversely
affected by such factors. Unless legally required, we undertake no obligation to
revise or update any forward-looking statements for any reason. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report.
Our internet address is www.headwaters.com. There we make available, free of
charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and any amendments to those reports, as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the SEC. Our reports can be accessed through the investor relations section of
our web site.
-Financial Tables to Follow-
-more-
Headwaters Incorporated
Page 8 of 9
HEADWATERS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per-share amounts)
Quarter Ended March 31, Six Months Ended March 31,
2004 2005 2004 2005
---------------------------- ----------------------------
Revenue:
Construction materials $ 11,248 $ 109,157 $ 23,181 $ 222,885
Coal combustion products 39,592 48,467 84,692 101,519
Alternative energy 68,681 64,768 113,116 116,404
---------------------------- ----------------------------
Total revenue 119,521 222,392 220,989 440,808
Operating costs and expenses:
Construction materials 9,950 73,685 19,344 150,153
Coal combustion products 29,666 38,335 63,063 79,330
Alternative energy 22,011 28,590 43,336 53,245
Amortization 1,664 6,181 3,384 12,362
Research and development 1,517 2,876 3,591 5,162
Selling, general and administrative 16,690 34,212 28,200 64,312
---------------------------- ----------------------------
Total operating costs and expenses 81,498 183,879 160,918 364,564
---------------------------- ----------------------------
Operating income 38,023 38,513 60,071 76,244
Interest income (expense), net (5,697) (18,798) (10,988) (34,603)
Other income (expense), net (1,889) (3,222) (2,394) (5,140)
---------------------------- ----------------------------
Income before income taxes 30,437 16,493 46,689 36,501
Income tax provision (11,810) (4,500) (17,970) (11,500)
---------------------------- ----------------------------
Net income $ 18,627 $ 11,993 $ 28,719 $ 25,001
============================ ============================
Basic earnings per share $ 0.57 $ 0.33 $ 0.95 $ 0.72
============================ ============================
Diluted earnings per share $ 0.55 $ 0.30 $ 0.91 $ 0.65
============================ ============================
Weighted average shares outstanding -- basic 32,782 36,172 30,371 34,806
============================ ============================
Weighted average shares outstanding -- diluted 34,104 43,068 31,593 41,810
============================ ============================
Note: Total depreciation and amortization was $3,205 and $14,179 for the quarters ended March 31, 2004 and 2005,
respectively, and $6,507 and $27,849 for the six months ended March 31, 2004 and 2005, respectively.
Headwaters Incorporated
Page 9 of 9
HEADWATERS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)
September 30, March 31,
Assets: 2004 2005
----------------------------
Current assets:
Cash and short-term investments $ 27,586 $ 5,943
Trade receivables, net 129,899 122,900
Inventories 43,812 57,002
Other 29,266 29,511
----------------------------
Total current assets 230,563 215,356
Property, plant and equipment, net 157,611 166,214
Intangible assets, net 298,803 286,578
Goodwill 815,396 815,396
Debt issue costs and other assets 38,406 48,850
----------------------------
Total assets $1,540,779 $1,532,394
============================
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 29,238 $ 36,739
Accrued liabilities 99,065 79,274
Current portion of long-term debt 57,873 26,093
----------------------------
Total current liabilities 186,176 142,106
Long-term debt 914,641 708,569
Deferred income taxes 121,469 123,079
Other long-term liabilities 10,338 13,361
----------------------------
Total liabilities 1,232,624 987,115
----------------------------
Stockholders' equity:
Common stock - par value 34 41
Capital in excess of par value 235,581 444,934
Retained earnings 76,530 101,531
Other (3,990) (1,227)
----------------------------
Total stockholders' equity 308,155 545,279
----------------------------
Total liabilities and stockholders' equity $1,540,779 $1,532,394
============================
The current ratio as of September 30, 2004 of 1.24 is derived by dividing total current assets of $230,563
by total current liabilities of $186,176. The current ratio as of March 31, 2005 of 1.52 is derived
by dividing total current assets of $215,356 by total current liabilities of $142,106.