NEWS BULLETIN
RE: Headwaters Incorporated
FROM: 10653 South River Front Parkway, Suite 300
South Jordan, UT 84095
FINANCIAL (801) 984-9400
RELATIONS BOARD NYSE: HW
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FOR FURTHER INFORMATION
AT THE COMPANY: AT FINANCIAL RELATIONS BOARD:
Sharon Madden Tricia Ross
Director of Investor Relations Analyst Contact
(801) 984-9400 (617) 520-7064
FOR IMMEDIATE RELEASE:
JULY 27, 2005
HEADWATERS INCORPORATED ANNOUNCES
RECORD RESULTS FOR FISCAL 2005 THIRD QUARTER
o 130% Increase in Revenue to $308.7 Million
o Net Income of $55.3 Million and Diluted EPS of $1.17
o Fiscal 2005 EPS Guidance Increased to $2.20 to $2.30
(excluding $0.39 of non-recurring EPS)
o Increased Guidance Results in Recurring EPS Growth of Between
29% - 35%
SOUTH JORDAN, UTAH, July 27, 2005 (NYSE: HW) - HEADWATERS INCORPORATED today
announced results for its third quarter ended June 30, 2005. Additional
highlights for the quarter include:
o Repayment of $50 million of second lien debt
o Settlement of AJG litigation for $120 million plus ongoing royalties
o New alternative fuel facilities begin operations - effective tax rate
reduced to 30%
o New accounting standard for stock-based payments implemented
Total revenue for the June 2005 quarter was $308.7 million, up 130% from $134.3
million reported in the June 2004 quarter. Operating income was $95.5 million in
the June 2005 quarter (including $26.9 million of non-recurring operating
income), compared to $27.8 million in the June 2004 quarter. Net income for the
June 2005 quarter was $55.3 million or $1.17 of earnings per diluted share,
using 48.0 million weighted-average shares outstanding. Net income for the June
2004 quarter was $16.1 million or $0.45 of earnings per diluted share, using
36.2 million weighted-average shares outstanding.
Total revenue for the nine months ended June 30, 2005 was $749.5 million, up
111% from $355.3 million reported for the nine months ended June 30, 2004.
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Operating income was $166.6 million for the nine months ended June 30, 2005
(including $26.9 million of non-recurring operating income), compared to $87.9
million for the nine months ended June 30, 2004 (including $20.1 million in
non-recurring operating income). Net income for the nine months ended June 30,
2005 was $76.4 million or $1.81 of earnings per diluted share (including $0.39
of non-recurring earnings per share), compared to $44.8 million or $1.36 of
earnings per diluted share for the nine months ended June 30, 2004 (including
$0.25 of non-recurring earnings per share).
June 2005 Quarter Events
The accounting impact of several non-recurring items in the June 2005 quarter is
summarized in the following table:
(Amounts in thousands)
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Net income, as reported $ 55,290
Significant items:
Contract litigation settlement and related items (44,228)
SFAS No. 123R implementation 25,511
Net license fee revenue related to prior periods (8,185)
Income tax effect of significant items 8,070
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Net income after consideration of the above items $ 36,458
==========
Earnings per share after consideration of the above items $ 0.78
==========
Contract litigation settlement and related items - As previously announced,
Headwaters reached a successful settlement agreement with AJG Financial
Services, Inc. ("AJG") with regard to litigation regarding a synfuel licensing
agreement. Among other terms, the litigation was settled for a payment of $50
million received in May 2005 plus a payment of $70 million to be received on or
before January 15, 2006. The $70 million relates to a contract modification
covering calendar years 2005 through 2007 and Headwaters is recognizing this as
revenue, net of amounts owed to a third party, over that period. Headwaters also
was required to pay a portion of the $50 million to that same third party. The
net amounts recorded in the June 2005 quarter which related to periods prior to
April 1, 2005, reduced by related performance-based bonus obligations, totaled
approximately $44.2 million.
SFAS No. 123R implementation - Headwaters elected to early adopt SFAS No. 123R
effective as of October 1, 2004. Under SFAS No. 123R, compensation expense
related to share-based payments to employees is reflected as an expense in the
statement of operations. During the quarter ended June 30, 2005, Headwaters
expensed a total of approximately $27.2 million related to share-based payments,
comprised of options, stock appreciation rights and stock issuances under
Headwaters' employee stock purchase plan. Of the $27.2 million expensed in the
June 2005 quarter, $25.5 million related to the grant of stock appreciation
rights and the acceleration of vesting of certain stock options granted in
periods prior to April 1, 2005. The remaining $1.7 million relates to the
ongoing vesting of awards granted in both the June 2005 quarter and in previous
periods.
In addition, because Headwaters adopted SFAS No. 123R effective as of October 1,
2004, the Statement of Income for the nine months ended June 30, 2005 includes
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the restatement of the six months ended March 31, 2005 to reflect the costs of
share-based payments for that period as an expense. The restatement of the six
months ended March 31, 2005 reduced net income for the nine months ended June
30, 2005 by approximately $3.9 million.
Net license fee revenue related to prior periods - In connection with the
settlement of the AJG litigation, Headwaters also recognized as revenue
approximately $8.2 million of revenue from a licensee with an indirect interest
in that litigation, all of which related to periods prior to January 1, 2005.
Headwaters Construction Materials Performance
Revenues from the construction materials segment were $147.6 million during the
June 2005 quarter, with a gross margin percentage of 34% (gross margin
percentage is calculated as follows: subtract cost of revenues from revenues,
and divide the number so derived by revenues), compared to revenue of $26.8
million and a gross margin of 25% for the June 2004 quarter. The June 2005
quarter includes the operations of Tapco, Eldorado Stone, and Southwest Concrete
Products ("SCP"). In comparison, the June 2004 quarter reflected only one
month's revenues from Eldorado with respect to acquired entities. 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 June 2005 quarter, revenues from Headwaters Resources or the coal
combustion products ("CCPs") segment were $69.5 million with a gross margin of
26% compared to revenue of $58.7 million and a gross margin of 25% for the June
2004 quarter. Both quarters include the operations of VFL Technologies which has
historically had lower margins than Headwaters Resources' base business. Sales
of high-value coal combustion products for the June 2005 quarter totaled
approximately 2.0 million tons, compared to approximately 1.8 million tons in
the June 2004 quarter, resulting in an 11% increase in tons of high-value coal
combustion products sold.
Headwaters Energy Services Performance
Chemical reagent sales increased 27% in the June 2005 quarter to $45.0 million,
compared to $35.3 million in the June 2004 quarter. Headwaters Energy Services'
license fees for the June 2005 quarter were $41.7 million (including $13 million
of non-recurring license fee revenue) compared to $13.4 million in the June 2004
quarter. The increase in license fee revenue in the June 2005 quarter resulted
primarily from the settlement of the AJG litigation. Due to high oil costs,
gross margins on chemical reagent sales were 29% compared to 33% in the June
2004 quarter. Headwaters expects continued pressure on margins throughout the
remainder of the calendar year.
During the June 2005 quarter, Energy Services' licensees sold 12.1 million tons
of solid alternative fuel. This compares to 12.4 million tons sold in the June
2004 quarter and 11.7 million tons sold in the March 2005 quarter. Energy
Services sold 33.3 million pounds of chemical reagent in the June 2005 quarter,
compared to 26.0 million pounds in the June 2004 quarter and 29.6 million pounds
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in the March 2005 quarter. The 12.1 million tons of fuel sold was produced at 24
of the 28 licensed facilities, resulting in average quarterly production of
503,000 tons per facility. The highest number of tons produced from any one
facility in the quarter was 878,000, and the lowest was 80,000. Energy Services
sold chemical reagent to a total of 35 facilities, compared to a total of 30
facilities in the June 2004 quarter. Of the 35 facilities, 19 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." In addition, in April 2005, Headwaters began operating
two other small alternative fuel facilities that it owns. The tax credits from
all of these facilities are the primary reason for the reduction in Headwaters'
estimated effective tax rate for fiscal 2005 to approximately 30%. Generally
accepted accounting principles require tax credits to be recognized
proportionately throughout 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 facilities. The credits that are not recognized in Headwaters' lowest
income producing quarters, December and March, are recognized in the June and
September quarters.
Capital Structure / Indebtedness
In addition to the early repayment of $197 million of its senior debt in March
2005, Headwaters repaid $50 million of its second lien senior debt in May, using
proceeds from the AJG settlement. In connection with this early payment,
Headwaters recognized additional interest expense totaling approximately $2.8
million representing acceleration of amortization of debt issue costs and an
early payment premium.
The major components of Headwaters' long-term senior debt structure as of June
30, 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 $ 50.0 LIBOR + 5.5% September 2012
- --------------------------------------- --------- --------------- --------------
Senior subordinated convertible debt $172.5 2.875% June 2011
- --------------------------------------- --------- --------------- --------------
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").
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.
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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 6/30/05
- --------------------------------------- --------- ------------ ------------
Total Indebtedness to EBITDA(a) 1.53 4.16 2.58
- --------------------------------------- --------- ------------ ------------
EBITDA to Required Interest Payments(a) 7.73 4.60 7.23
- --------------------------------------- --------- ------------ ------------
Current Ratio(a) 1.19 1.24 1.62
- --------------------------------------- --------- ------------ ------------
Total Debt to Equity 0.96 3.16 1.07
- --------------------------------------- --------- ------------ ------------
(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 June 30, 2005 of $260.9 million is derived as follows (in
millions of dollars): Net income of $99.5 plus net interest expense of $59.7,
income taxes of $46.9, and depreciation and amortization of $54.8. Pro forma
EBITDA for the trailing twelve months ended September 30, 2004 of $233.8 million
is derived as follows (in millions of dollars): Net income of $72.9 plus net
interest expense of $63.1, income taxes of $45.6, and depreciation and
amortization of $52.2.
Commentary and Outlook
Steven G. Stewart, Headwaters' Chief Financial Officer, stated, "Given the AJG
settlement and the strong financial performance of our operating companies, we
are pleased to update our earnings forecast for the current fiscal year. We are
raising our forecast of EPS from $2.00 to $2.10 to a new forecast of $2.20 to
$2.30 of diluted EPS, exclusive of non-recurring items totaling $0.39 per share.
These non-recurring items will increase our reported diluted earnings per share
to a range of $2.59 to $2.69 for our fiscal 2005 year ending September 30,
2005."
"In addition to strong operating performance during the quarter, we made
significant progress on the advancement of several of our energy technologies,"
said Kirk A. Benson, Chief Executive Officer. "We are positioned to conduct the
commercial scale test of our HC3 heavy oil technology later this summer and
expect to generate revenues in the calendar year."
Conference Call and Webcast Information
Management will host a conference call with a simultaneous web cast tomorrow at
11:00 a.m. Eastern/9:00 a.m. Mountain to discuss the Company's financial results
and business outlook. The call will be available live via the Internet by
accessing Headwaters' web site at www.headwaters.com and clicking on the
Investor Relations section. To listen to the live broadcast, please go to the
web site at least fifteen minutes early to register, download, and install any
necessary audio software. For those who cannot listen to the live broadcast, an
online replay will be available for 90 days on www.headwaters.com, or a phone
replay will be available through August 3, 2005 by dialing 800-642-1687 or
706-645-9291 and entering the pass code 7810458.
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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
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.
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HEADWATERS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per-share amounts)
Quarter Ended June 30, Nine Months Ended June 30,
2004 2005 2004 2005
---------------------------- ----------------------------
Revenue:
Construction materials $ 26,780 $ 147,582 $ 49,961 $ 370,467
Coal combustion products 58,670 69,453 143,363 170,973
Alternative energy 48,868 91,694 161,984 208,097
---------------------------- ----------------------------
Total revenue 134,318 308,729 355,308 749,537
Operating costs and expenses:
Construction materials 20,001 97,720 39,425 248,140
Coal combustion products 43,794 51,436 106,857 130,882
Alternative energy 23,829 37,874 67,166 91,119
Amortization 2,356 6,126 5,740 18,322
Research and development 1,740 4,758 5,331 10,109
Contract litigation settlement -- (38,252) -- (38,252)
Selling, general and administrative 14,813 53,598 42,934 122,585
---------------------------- ----------------------------
Total operating costs and expenses 106,533 213,260 267,453 582,905
---------------------------- ----------------------------
Operating income 27,785 95,469 87,855 166,632
Interest income (expense), net (1,265) (11,364) (12,253) (45,967)
Other income (expense), net 275 (6,375) (2,118) (11,514)
---------------------------- ----------------------------
Income before income taxes 26,795 77,730 73,484 109,151
Income tax provision (10,735) (22,440) (28,705) (32,750)
---------------------------- ----------------------------
Net income $ 16,060 $ 55,290 $ 44,779 $ 76,401
============================ ============================
Basic earnings per share $ 0.48 $ 1.35 $ 1.43 $ 2.07
============================ ============================
Diluted earnings per share $ 0.45 $ 1.17 $ 1.36 $ 1.81
============================ ============================
Weighted average shares outstanding -- basic 33,118 41,019 31,287 36,877
============================ ============================
Weighted average shares outstanding -- diluted 36,235 47,996 33,140 43,872
============================ ============================
Note: Total depreciation and amortization was $5,129 and $13,635 for the
quarters ended June 30, 2004 and 2005, respectively, and $11,636 and
$41,318 for the nine months ended June 30, 2004 and 2005, respectively.
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HEADWATERS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)
September 30, June 30,
Assets: 2004 2005
------------------------------
Current assets:
Cash and cash equivalents $ 20,851 $ 10,878
Trade receivables, net 129,899 162,296
Other receivable -- 70,000
Inventories 43,812 61,749
Other 36,001 23,764
----------------------------
Total current assets 230,563 328,687
Property, plant and equipment, net 157,611 178,641
Intangible assets, net 298,803 283,698
Goodwill 815,396 813,814
Other assets 38,406 39,736
----------------------------
Total assets $ 1,540,779 $ 1,644,576
============================
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 29,238 $ 33,348
Accrued liabilities 99,065 150,516
Current portion of long-term debt 57,873 19,149
----------------------------
Total current liabilities 186,176 203,013
Long-term debt 914,641 655,189
Deferred income taxes 121,469 108,399
Other long-term liabilities 10,338 47,587
----------------------------
Total liabilities 1,232,624 1,014,188
----------------------------
Stockholders' equity:
Common stock - par value 34 41
Capital in excess of par value 235,581 479,385
Retained earnings 76,530 152,931
Other (3,990) (1,969)
----------------------------
Total stockholders' equity 308,155 630,388
----------------------------
Total liabilities and stockholders' equity $ 1,540,779 $ 1,644,576
============================
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 June 30, 2005 of 1.62 is derived by dividing total
current assets of $328,687 by total current liabilities of $203,013.