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
- --------------------------------------------------------------------------------
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:
November 8, 2005
HEADWATERS INCORPORATED ANNOUNCES RECORD RESULTS FOR FISCAL 2005
o 92% Increase in Revenue to $1.065 Billion
o Net Income of $121.3 Million and Diluted EPS of $2.79
(including $0.39 of non-recurring EPS in the June quarter)
o Debt Reduced by $318 Million During the Year to $654 Million
o Fiscal 2006 Diluted EPS Guidance of $2.60 to $2.75
SOUTH JORDAN, UTAH, November 8, 2005 (NYSE: HW) - HEADWATERS INCORPORATED today
announced results for its fourth quarter and fiscal year ended September 30,
2005. Highlights for the quarter include:
o Repayment of $50 million of higher interest rate second lien debt
o Executed (HC)3TM license for Canadian tar sands upgrader
o Announced intention to build H2O2 demonstration plant
Highlights for Fiscal 2005 include:
o Generated fully diluted earnings per share growth in excess of 48%
o Improved pro forma debt-to-EBITDA ratio from 4.16 to 2.36
o Generated $151 million of positive cash flow from operations
o Reduced Section 29 continuing revenue to less than 28% of total
revenue
o Reached $120 million settlement, plus ongoing revenue from positive
resolution of AJG litigation
Total revenue for the quarter ended September 2005 was $315.1 million, up 59%
from $198.6 million reported for the September 2004 quarter. Operating income
increased 76%, to $70.2 million in the September 2005 quarter compared to $39.9
million in the prior year quarter. Net income for the September 2005 quarter was
$44.9 million or $0.95 of earnings per diluted share, using 48.7 million
weighted-average shares outstanding. Net income for the September 2004 quarter
was $19.5 million or $0.51 of earnings per diluted share, using 40.3 million
weighted-average shares outstanding.
Total revenue for the year ended September 30, 2005 was $1.065 billion, up 92%
from $554 million reported for the year ended September 30, 2004. Operating
income increased 85%, to $236.9 million for the year ended September 30, 2005
(including $26.9 million of non-recurring operating income, as described in our
third quarter 2005 earnings release), versus $127.8 million for the year ended
September 30, 2004 (including $20.1 million in non-recurring operating income).
Net income for the year ended September 30, 2005 was $121.3 million or $2.79 of
earnings per diluted share (including $0.39 of non-recurring earnings per
share), compared to $64.3 million or $1.88 of earnings per diluted share for the
year ended September 30, 2004 (including $0.25 of non-recurring earnings per
share).
Headwaters Construction Materials Performance
Revenues from the Construction Materials segment during the quarter ended
September 2005, increased $65.4 million or 78%, to $149.5 million versus $84.1
million for the prior fiscal quarter. Gross margin percentage increased from
33.8% for the September 2004 quarter to 34.2% for the 2005 quarter. The
September 2005 quarter includes the operations of all of the entities acquired
in 2004. In comparison, the September 2004 quarter includes less than one
month's revenues from Tapco (the acquisition of Tapco occurred on September 8,
2004). For fiscal 2005, revenues increased $385.9 million, or 288%, from $134.0
million in fiscal 2004 to $519.9 million in fiscal 2005. On a pro forma basis,
for the fiscal year comparison, revenues increased $62.5 million, or 13.7% from
$457.4 million in fiscal 2004 on a pro forma basis to $519.9 million in fiscal
2005 on an actual basis.
The Construction Materials segment has a pronounced seasonality associated with
its business cycle and the acquisitions of Tapco and Eldorado have accentuated
this seasonality. This seasonality has a more significant impact on operating
income than on revenue due to the relationship between fixed and variable costs.
Headwaters Resources Performance
Revenues from Headwaters Resources or the coal combustion products ("CCPs")
segment during the quarter ended September 2005 increased $9.0 million or 13%,
from $66.8 million to $75.8 million versus the comparable 2004 quarter. Gross
margin percentage increased from 27% to 28% versus the comparable 2004 quarter.
For fiscal 2005, revenues increased $36.6 million or 17%, from $210.2 million in
fiscal 2004 to $246.8 million in fiscal 2005.
Sales of high-value coal combustion products for the September 2005 quarter
totaled approximately 2.20 million tons, compared to approximately 2.08 million
tons in the September 2004 quarter, resulting in a 6% increase in tons of
high-value coal combustion products sold.
Headwaters Energy Services Performance
Chemical reagent sales increased $14.4 million, or 42%, in the September 2005
quarter to $48.6 million, compared to $34.2 million in the September 2004
quarter. Headwaters Energy Services' recurring license fees for the September
2005 quarter increased $15.0 million or 112%, from $13.4 million in fiscal 2004
to $28.4 million in fiscal 2005. The increase in license fee revenue in the
September 2005 quarter resulted primarily from the settlement of the AJG
litigation earlier in the year. Due to high oil costs, gross margins on chemical
reagent sales in the September 2005 quarter were 27% compared to 33% in the
September 2004 quarter. Headwaters expects continued pressure on reagent margins
during the next fiscal year.
In December 2004, Headwaters increased its minority interest in a Section 29
facility in West Virginia from approximately 9% to 19%. Energy Services now
provides reagent to this 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 small alternative fuel
facilities that are wholly owned. The tax credits from all of these facilities
are the primary reason for the reduction in Headwaters' effective tax rate for
fiscal 2005 to approximately 26%.
In 2005, Headwaters does not believe that there will be any phase out of Section
29 based on high oil prices. It is too early to estimate the impact, if any, on
Headwaters of a possible 2006 phase out of Section 29. Headwaters believes that
if 2006 average oil prices are consistent with today's oil prices (November 7th
light sweet crude for December delivery settled at $59.47 per barrel), there
will be little or no phase out of Section 29. Nevertheless, the retroactive
application of the Section 29 phase out provisions creates an environment of
uncertainty and 2006 operational decisions will be made by facility owners later
this year based on available information. If today's oil prices do not increase
significantly in 2006, Headwaters believes that many facilities will continue to
operate. At today's oil prices, Headwaters intends to operate its two small
alternative fuel facilities.
Headwaters Technology Innovation Group and New Product Development
During the year, HTIG completed a number of major milestones in the
commercialization process of its technologies. Most importantly, multiple pilot
plant (HC3) tests were completed, providing the data necessary to move forward
with the commercial scale test announced this week. Headwaters believes (HC)3
could ultimately result in increased production of approximately 350,000 to
600,000 barrels per day of light distillates from heavy oil feedstock material.
Agreements for coal to liquid project analysis were signed in India, the
Philippines, and China. Further, non-binding memorandums of understanding for
development of coal-to-liquid projects were signed for two projects in the
United States.
Headwaters and its hydrogen peroxide development partner concluded that the
pilot plant tests conducted during 2005 were successful and arranged for the
construction of a demonstration facility. The operation of the demonstration
facility will provide the engineering data necessary to use the technology in
commercial scale plants. Headwaters anticipates multiple opportunities for the
implementation of its technology.
During the year, Headwaters successfully tested its reforming catalyst and
demonstrated that it produced results significantly superior to existing
reforming products. Use of Headwaters' reforming catalyst could not only produce
high grade gasoline more efficiently, but also create up to 20% more hydrogen
than is normally produced as a byproduct during the reforming reaction.
Growth Profile
The following table shows the actual and pro forma percentage growth in revenue,
operating income, net income, and fully diluted EPS for the fiscal year 2005.
The pro forma information assumes all of the acquisitions occurred on October 1,
2003.
Actual Pro forma
- ----------------------------- ---------------------- ---------------------
Revenue 92% 19%
Operating Income 85% 27%
Net Income 89% 66%
Diluted EPS 48% 26%
- ----------------------------- ---------------------- ---------------------
Seasonality
Since 2002, Headwaters' business has reflected increased seasonality factors
associated with its Construction Materials and CCP business segments. The
acquisitions completed during fiscal 2004 added to the seasonality of the
business. It has not been Headwaters' practice to provide quarterly estimates
and the Company does not intend to provide quarterly estimates going forward.
However, management believes it is important to provide some initial quarterly
guidance for fiscal 2006 to clarify the seasonality of Headwaters' business.
Accordingly, Headwaters' estimated quarterly revenue and earnings per share for
fiscal 2006, as a percent of the respective estimated totals for the fiscal 2006
year, are as follows:
Revenue Earnings Per Share
- --------------------------------- --------------------- ------------------------
December 31, 2005 quarter 22% - 24% 20% - 22%
March 31, 2006 quarter 21% - 23% 18% - 20%
June 30, 2006 quarter 26% - 28% 28% - 30%
September 30, 2006 quarter 27% - 29% 30% - 32%
- --------------------------------- --------------------- ------------------------
Capital Structure / Indebtedness
In addition to the early repayment of $197 million of its senior debt in March
2005 and $50 million of its second lien senior debt in May 2005, Headwaters
repaid the remaining $50 million of its second lien debt in September 2005. In
connection with this early payment, Headwaters recognized additional interest
expense totaling approximately $2.2 million, representing acceleration of
amortization of debt issuance costs and an early payment premium.
The components of Headwaters' debt structure as of September 30, 2005 are as
follows:
Amount
(in millions) Outstanding Interest Rate Maturity
- ------------------------------------------------ ----------------- ------------------------ -----------------
Senior secured first lien term loan $442.7 LIBOR + 2.25% April 2011
- ------------------------------------------------ ----------------- ------------------------ -----------------
Industrial Revenue Bond and other $8.8 4.5% to 6.25% Currently
Callable
- ------------------------------------------------ ----------------- ------------------------ -----------------
Senior revolving credit facility ($60.0
million available less out- $30.0 Prime + 0.75% September 2009
standing letters of credit of approximately
$8.0)
- ------------------------------------------------ ----------------- ------------------------ -----------------
Senior subordinated convertible debt $172.5 2.875% June 2011
- ------------------------------------------------ ----------------- ------------------------ -----------------
Total $654.0
- ------------------------------------------------ ----------------- ------------------------ -----------------
In October 2005 Headwaters and its senior secured lenders amended the credit
agreement for Headwaters' senior first lien term loan. The amendment permits
Headwaters to participate in joint venture investments, subject to certain
conditions, and increases the amount of capital expenditures Headwaters may make
each year for the remaining term of the loan.
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 net
interest expense, income taxes, depreciation and amortization ("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.
The following related EBITDA table, highlights certain debt coverage and balance
sheet ratios using period end balances and the trailing twelve months ("TTM")
EBITDA:
(DOLLARS IN MILLIONS)
- -------------------------------------------------- -------------- ---------------- -----------------
Actual Pro forma Actual
9/30/03 9/30/04 9/30/05
- -------------------------------------------------- -------------- ---------------- -----------------
EBITDA(a) $88.3 $233.8 $277.6
- -------------------------------------------------- -------------- ---------------- -----------------
Total Indebtedness to EBITDA(a) 1.49 4.16 2.36
- -------------------------------------------------- -------------- ---------------- -----------------
Current Ratio(a) 1.19 1.24 1.49
- -------------------------------------------------- -------------- ---------------- -----------------
Total Debt to Equity 0.94 3.16 0.95
- -------------------------------------------------- -------------- ---------------- -----------------
(a) See "Current Ratio" calculations in financial tables that follow.
Actual EBITDA for 2003 of $88.3 million is derived as follows (in millions of
dollars): Net income of $36.6 plus net interest expense of $15.4, income taxes
of $23.4, and depreciation and amortization of $12.9. Actual EBITDA for 2005 of
$277.6 million is derived as follows (in millions of dollars): Net income of
$121.3 plus net interest expense of $57.4, income taxes of $42.5, and
depreciation and amortization of $56.4. The September 30, 2004 pro forma
calculation 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 September 30, 2004 of $233.8 million is derived as follows (in millions):
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
Scott K. Sorensen, Headwaters' Chief Financial Officer, stated, "First off, I am
delighted to have assumed the role of Chief Financial Officer at Headwaters on
October 1st and see a very bright future for the Company. We are pleased to have
completed a very strong year in 2005. Due to the continued operational strength
we are experiencing, we are providing guidance for Fiscal 2006 in the range of
$2.60 to $2.75. This guidance assumes no phase out of Section 29 during 2006."
"We are very excited about the future at Headwaters," said Kirk A. Benson,
Chairman and Chief Executive Officer. "Our plans to replace Section 29 revenue
are well underway. Specifically, we have made progress in many of our
pre-combustion activities, including coal cleaning and coal treatment. The early
results of the (HC3) tests are positive and we have continuing strength in our
building products segment."
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 November 15, 2005, by dialing 800-642-1687 or
706-645-9291 and entering the passcode 1926204.
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.
* The (HC)3 technology and trademarks are owned by Alberta Science and Research
Authority and used through a license.
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.
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.
HEADWATERS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per-share amounts)
Quarter Ended September 30, Year Ended September 30,
2004 2005 2004 2005
---------------------------- ----------------------------
Revenue:
Construction materials $ 84,066 $ 149,459 $ 134,027 $ 519,926
Coal combustion products 66,792 75,847 210,155 246,819
Alternative energy 47,789 89,796 209,773 297,894
---------------------------- ----------------------------
Total revenue 198,647 315,102 553,955 1,064,639
Operating costs and expenses:
Construction materials 55,838 98,382 95,263 346,521
Coal combustion products 48,873 54,983 155,777 186,133
Alternative energy 23,059 49,853 90,225 140,973
Amortization 3,628 5,843 9,107 24,465
Research and development 2,274 2,512 7,605 12,621
Contract litigation settlement -- -- -- (38,252)
Selling, general and administrative 25,074 33,288 68,221 155,305
---------------------------- ----------------------------
Total operating costs and expenses 158,746 244,861 426,198 827,766
---------------------------- ----------------------------
Operating income 39,901 70,241 127,757 236,873
Net interest expense (6,256) (11,465) (18,509) (57,433)
Other income (expense), net (2,022) (4,119) (4,141) (15,632)
---------------------------- ----------------------------
Income before income taxes 31,623 54,657 105,107 163,808
Income tax provision (12,085) (9,780) (40,790) (42,530)
---------------------------- ----------------------------
Net income $ 19,538 $ 44,877 $ 64,317 $ 121,278
============================ ============================
Basic earnings per share $ 0.59 $ 1.09 $ 2.02 $ 3.19
============================ ============================
Diluted earnings per share $ 0.51 $ 0.95 $ 1.88 $ 2.79
============================ ============================
Weighted average shares outstanding -- basic 33,237 41,340 31,774 37,993
============================ ============================
Weighted average shares outstanding -- diluted 40,322 48,717 34,936 45,083
============================ ============================
Note: Total depreciation and amortization was $8,814 and $15,113 for the
quarters ended September 30, 2004 and 2005, respectively, and $20,189
and $56,376 for the years ended September 30, 2004 and 2005,
respectively.
HEADWATERS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)
September 30,
Assets: 2004 2005
----------------------------
Current assets:
Cash and cash equivalents $ 20,851 $ 13,666
Trade receivables, net 129,899 174,127
Other receivable -- 70,000
Inventories 43,812 60,519
Other 36,001 36,762
----------------------------
Total current assets 230,563 355,074
Property, plant and equipment, net 157,611 190,450
Intangible assets, net 297,818 276,248
Goodwill 815,396 811,545
Other assets 39,391 38,339
----------------------------
Total assets $1,540,779 $1,671,656
============================
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 29,238 $ 43,957
Accrued liabilities 99,065 141,574
Current portion of long-term debt 57,873 52,207
----------------------------
Total current liabilities 186,176 237,738
Long-term debt 914,641 601,811
Deferred income taxes 121,469 108,449
Other long-term liabilities 10,338 37,345
----------------------------
Total liabilities 1,232,624 985,343
----------------------------
Stockholders' equity:
Common stock - par value 34 42
Capital in excess of par value 235,581 489,602
Retained earnings 76,530 197,808
Other (3,990) (1,139)
----------------------------
Total stockholders' equity 308,155 686,313
----------------------------
Total liabilities and stockholders' equity $1,540,779 $1,671,656
============================
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 September 30, 2005 of 1.49 is derived by dividing total
current assets of $355,074 by total current liabilities of $237,738.