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:
January 24, 2006
HEADWATERS INCORPORATED ANNOUNCES RESULTS FOR FISCAL 2006 FIRST QUARTER
o 28% Increase in Revenue to $280.5 Million
o 154% Increase in Net Income to $28.3 Million
o 100% Increase in Diluted EPS to $0.60
o Successful (HC)3TM Commercial Scale Test
o Final $70 Million of Litigation Settlement Received in January
SOUTH JORDAN, UTAH, January 24, 2006 (NYSE: HW) - HEADWATERS INCORPORATED today
announced results for its quarter ended December 31, 2005. Total revenue for the
quarter ended December 31, 2005 was $280.5 million, up 28% from $218.4 million
reported for the December 2004 quarter. Operating income increased 42%, to $50.3
million in the December 2005 quarter compared to $35.3 million in the prior year
quarter. Net income for the December 2005 quarter was $28.3 million or $0.60 of
earnings per diluted share, using 48.6 million weighted-average shares
outstanding. Net income for the December 2004 quarter was $11.1 million or $0.30
of earnings per diluted share, using 40.6 million weighted-average shares
outstanding.
Headwaters Resources Performance
Revenues from Headwaters' coal combustion products ("CCPs") segment during the
quarter ended December 2005 increased $12.1 million or 23%, from $53.1 million
to $65.2 million versus the comparable December 2004 quarter. Gross margin
percentage increased from 23% to 25% versus the comparable 2004 quarter. The
increase in revenue and gross margin percentage resulted from a combination of
continued strong demand for CCPs, upward pricing trends in most concrete
markets, and increased project revenues. In addition, weather conditions in the
south central region of the United States were favorable.
Sales of high-value coal combustion products for the December 2005 quarter
totaled approximately 1.8 million tons, compared to approximately 1.5 million
tons in the December 2004 quarter, resulting in a 19% increase in tons of
high-value coal combustion products sold. High-value CCP sales for the calendar
year 2005 totaled 7.4 million tons, compared to 6.6 million tons in calendar
2004.
Headwaters Construction Materials Performance
Revenues from Headwaters' construction materials segment during the quarter
ended December 2005 increased $16.3 million or 14%, to $130.0 million versus
$113.7 million for the prior year quarter. Gross margin percentage decreased
from 33% for the December 2004 quarter to 31% for the 2005 quarter. Revenue
increases occurred across all major product lines. The primary reason for the
decline in gross margin percentage related to higher raw material costs and
additional expense associated with the ramp-up and restructuring of operations
at certain manufacturing facilities.
In light of a softening in new residential construction, Headwaters'
construction materials segment is benefiting from its product and geographic
diversification. For example, we are beginning to experience sales directly
related to the hurricane reconstruction effort in the Southeast. Our product
diversification allows us to market multiple products in the hurricane affected
region. Furthermore, we are also benefiting from strength in commercial,
infrastructure, and exterior remodeling markets.
Headwaters Energy Services Performance
Chemical reagent sales increased $7.7 million, or 21%, in the December 2005
quarter to $44.5 million, compared to $36.8 million in the December 2004
quarter. Headwaters Energy Services' license fees for the December 2005 quarter
increased $13.5 million or 92%, from $14.6 million in December 2004 to $28.1
million in December 2005. The increase in license fee revenue in the December
2005 quarter resulted primarily from increased production and the settlement of
the AJG litigation. Due to raw material cost increases, gross margins on
chemical reagent sales in the December 2005 quarter were 25% compared to 33% in
the December 2004 quarter. Headwaters expects reagent margins to stabilize in
the 25% range during 2006, depending upon crude oil prices and the availability
of raw material feedstocks.
Tax credits from Headwaters' three investments in Section 29 facilities were the
primary reason for the reduction in Headwaters' effective tax rate for the
December 2005 quarter to 26% from 37% in the December 2004 quarter. Headwaters
realized $11.5 million in revenues from the sale of synfuel produced at its
wholly owned Section 29 facilities and recorded $13.3 million in costs of
synfuel sales.
Tax credits claimed by alternative fuel facility owners may begin to be phased
out or eliminated prior to their scheduled expiration on December 31, 2007 if
the "reference price" of oil enters into or exceeds an established average
annual range of oil prices, adjusted annually for inflation. The reference price
of oil is determined annually and usually released in the first week of April
for the previous year, resulting in a retroactive application of the phase out
process. We will not officially know the reference price for 2006 until the
spring of 2007. Unfortunately, this retroactive application of the reference
price creates an uncertain environment, forcing owners to base current
production decisions on predictions of future oil prices.
We have recently become aware of three facilities owned by a licensee of
Headwaters that have curtailed production due to the uncertain oil price
environment. The decision to curtail production may be temporary or long term
depending upon oil price movement. In addition, there may be a legislative
opportunity to change the phase out to a reference price that is applied
prospectively rather than retroactively. Such a change would eliminate the
uncertainty that currently exists and allow appropriate production decisions to
be made based on historical oil prices. If there is a legislative change that
eliminates the uncertainty, the owner of the three facilities that curtailed
production may reverse its decision.
Headwaters is unaware of any other facilities that have curtailed production.
Several other Headwaters licensees have established hedging positions related to
the price of oil, which may enable them to continue operating. However, high oil
prices create an uncertain environment that could result in further curtailment
of production. As a part of our March quarter earnings release, we expect to
provide an update of the status of our licensee operations and estimate the
financial impact that curtailment will have on Headwaters fiscal 2006 earnings.
Headwaters Technology Innovation Group and New Product Development
As recently announced, HTIG successfully completed its first commercial scale
(HC)3 test in early December 2005. The test results increased the conversion of
heavy oil to lighter distillates as high as 20% above previous limits,
consistent with expectations. The refinery is continuing to evaluate the results
of the test and is considering a license agreement with Headwaters' heavy oil
subsidiary to use (HC)3 technology and purchase catalyst material to enhance the
value of its heavy oil upgrading operations.
Headwater/Degussa direct synthesis hydrogen peroxide demonstration plant is
under construction. Headwaters is reviewing opportunities to accelerate the
commercialization of its hydrogen peroxide technology. Further, we have
completed a series of benchmark reforming catalyst tests providing additional
confirmation of the improvements to the reforming process provided by
Headwaters' technology.
Capital Structure / Indebtedness
The components of Headwaters' debt structure as of December 31, 2005 are as
follows:
Amount
(in millions) Outstanding Interest Rate Maturity
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Senior secured first lien term loan $439.3 LIBOR + 2.25% April 2011
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Industrial Revenue Bond and other $7.9 4.8% to 7.0% Currently
Callable
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Senior revolving credit facility $30.0 Prime + 0.75% September 2009
($60.0 million available less out-
standing letters of credit of
approximately $8.2
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Senior subordinated convertible debt $172.5 2.875% June 2011
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Total $649.7
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In January 2006, Headwaters received the final $70.0 million payment due from
the litigation settlement reached with AJG in 2005. Using these proceeds,
Headwaters repaid all of the $30.0 million outstanding under the revolving
credit facility and also repaid an additional $24.0 million of the first lien
term loan, effectively pre-paying all scheduled principal payments on the
term-debt until November 2007.
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 table highlights certain debt coverage and balance sheet ratios
using period end balances and the trailing twelve months ("TTM") EBITDA:
Pro forma Actual Actual Pro forma
9/30/04 9/30/05 12/31/05 12/31/05
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TTM EBITDA (in millions) $233.8 $277.6 $292.8 $292.8
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Total Indebtedness to TTM EBITDA 4.16 2.36 2.22 2.03
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Current Ratio 1.24 1.49 1.58 1.67
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Total Debt to Equity 3.16 0.95 0.90 0.83
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The pro forma September 2004 calculations assume all of the 2004
acquisitions occurred on October 1, 2003. The pro forma December 2005
calculations assume the $54.0 million of debt repayments made in January 2006
were made on December 31, 2005. 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. Actual EBITDA for the trailing
twelve months ended September 30, 2005 of $277.6 million is derived as follows
(in millions): Net income of $121.3 plus net interest expense of $57.4, income
taxes of $42.5, and depreciation and amortization of $56.4. Actual EBITDA for
the trailing twelve months ended December 31, 2005 of $292.8 million is derived
as follows (in millions): Net income of $138.4 plus net interest expense of
$50.6, income taxes of $46.0, and depreciation and amortization of $57.8. Also,
see "Current Ratio" calculations in financial tables that follow.
Commentary and Outlook
Scott K. Sorensen, Headwaters' Chief Financial Officer, stated, "Our financial
results in our first fiscal quarter continue the track record of consistent
earnings and revenue growth. While uncertainty exists in our synfuels business,
we believe our understanding of the potential financial impact of phase-out due
to high oil prices will improve prior to the end of our fiscal second quarter.
We expect to update our consolidated Headwaters view on guidance estimates for
the full fiscal year in our fiscal second quarter earnings release." Mr.
Sorensen added, "Our operating businesses are performing well and we are very
optimistic about Headwaters' opportunities for further growth and investment."
"We have been able to introduce several new building products during the quarter
that were well received at the national building products show in Orlando this
January. We are excited about our slate roofing and architectural brick
products. Over the next year we plan to expand the distribution of these
products into our network of wholesale distributors," said Kirk A. Benson,
Chairman and Chief Executive Officer. "Our coal cleaning operation is on track,
and with our first facility coming on line the first week of January, we
anticipate receiving revenue from this new business opportunity in the March
quarter."
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 January 31, 2006 by dialing 800-642-1687 or
706-645-9291 and entering the passcode 4338077.
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)3TM 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, which are subject to tax credit phase out risks, 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 in an environment of high oil prices
and potential tax credit phase out,, 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, 2005, 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 December 31,
2004 2005
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Revenue:
Construction materials $ 113,729 $ 129,969
Coal combustion products 53,052 65,165
Alternative energy 51,635 85,414
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Total revenue 218,416 280,548
Operating costs and expenses:
Construction materials 76,603 89,705
Coal combustion products 41,053 48,962
Alternative energy 24,655 47,658
Amortization 6,098 6,036
Research and development 2,384 2,964
Selling, general and administrative 32,323 34,958
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Total operating costs and expenses 183,116 230,283
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Operating income 35,300 50,265
Net interest expense (15,805) (8,951)
Other income (expense), net (1,918) (3,068)
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Income before income taxes 17,577 38,246
Income tax provision (6,440) (9,950)
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Net income $ 11,137 $ 28,296
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Basic earnings per share $ 0.33 $ 0.68
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Diluted earnings per share $ 0.30 $ 0.60
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Weighted average shares outstanding -- basic 33,439 41,605
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Weighted average shares outstanding -- diluted 40,551 48,626
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Notes: The results for the quarter ended December 31, 2004 have been restated
to reflect the early adoption in fiscal 2005 of the fair value method
of accounting for stock-based compensation required by SFAS No. 123R,
effective as of October 1, 2004.
Total depreciation and amortization was $13,587 and $14,963 for the
quarters ended December 31, 2004 and 2005, respectively.
HEADWATERS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)
September 30, December 31,
Assets: 2005 2005
----------------------------
Current assets:
Cash and cash equivalents $ 13,666 $ 24,501
Trade receivables, net 174,127 149,728
Other receivable 70,000 70,000
Inventories 60,519 63,954
Other 36,762 43,168
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Total current assets 355,074 351,351
Property, plant and equipment, net 190,450 196,219
Intangible assets, net 276,248 267,619
Goodwill 811,545 822,987
Other assets 38,339 41,774
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Total assets $ 1,671,656 $ 1,679,950
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Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 43,957 $ 39,516
Accrued liabilities 141,574 131,090
Current portion of long-term debt 52,207 51,310
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Total current liabilities 237,738 221,916
Long-term debt 601,811 598,434
Deferred income taxes 108,449 108,060
Other long-term liabilities 37,345 31,028
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Total liabilities 985,343 959,438
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Stockholders' equity:
Common stock - par value 42 42
Capital in excess of par value 489,602 495,115
Retained earnings 197,808 226,104
Other (1,139) (749)
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Total stockholders' equity 686,313 720,512
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Total liabilities and stockholders' equity $ 1,671,656 $ 1,679,950
============================
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. The
current ratio as of December 31, 2005 of 1.58 is derived by dividing total
current assets of $351,351 by total current liabilities of $221,916.