Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - HEADWATERS INCFinancial_Report.xls
EX-32 - SECTION 1350 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER &CHIEF FINANCIAL OFFICER - HEADWATERS INCdex32.htm
EX-12 - COMPUTATION OF RATIO OF EARNINGS - HEADWATERS INCdex12.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER - HEADWATERS INCdex311.htm
EX-4.9.3 - THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT, DATED AS OF APRIL 15, 2011 - HEADWATERS INCdex493.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER - HEADWATERS INCdex312.htm
EX-99.32 - MINE SAFETY DISCLOSURE - HEADWATERS INCdex9932.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 1-32459

 

 

HEADWATERS INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   87-0547337

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

10653 South River Front Parkway, Suite 300  
South Jordan, Utah   84095
(Address of principal executive offices)   (Zip Code)

(801) 984-9400

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the Registrant’s common stock as of April 30, 2011 was 60,809,741.

 

 

 


Table of Contents

HEADWATERS INCORPORATED

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION   
         Page No.  

ITEM 1.

 

FINANCIAL STATEMENTS (Unaudited):

  
 

Condensed Consolidated Balance Sheets – As of September 30, 2010 and March 31, 2011

     3   
 

Condensed Consolidated Statements of Operations – For the three and six months ended March 31, 2010 and 2011

     4   
 

Condensed Consolidated Statement of Changes in Stockholders’ Equity – For the six months ended
March 31, 2011

     5   
 

Condensed Consolidated Statements of Cash Flows – For the six months ended Mach 31, 2010 and 2011

     6   
 

Notes to Condensed Consolidated Financial Statements

     7   

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     29   

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     38   

ITEM 4.

 

CONTROLS AND PROCEDURES

     38   
PART II – OTHER INFORMATION   

ITEM 1.

 

LEGAL PROCEEDINGS

     39   

ITEM 1A.

 

RISK FACTORS

     39   

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     39   

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

     39   

ITEM 4.

 

SPECIALIZED DISCLOSURES

     39   

ITEM 5.

 

OTHER INFORMATION

     39   

ITEM 6.

 

EXHIBITS

     40   
SIGNATURES      41   

Forward-looking Statements

This Quarterly Report on Form 10-Q contains 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. In some cases, words such as “may,” “should,” “intends,” “plans,” “expects,” “anticipates,” “targets,” “goals,” “projects,” “believes,” “seeks,” “estimates,” “forecasts,” or variations of such words and similar expressions, or the negative of such terms, may help to identify such forward-looking statements. In addition, 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. For a discussion of the factors that could cause actual results to differ from expectations, please see the risk factors described in Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2010, as updated from time to time. 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 Securities and Exchange Commission (SEC). Our reports can be accessed through the investor relations section of our web site. The information found on our web site is not part of this or any report we file with or furnish to the SEC.

 

2


Table of Contents

ITEM 1. FINANCIAL STATEMENTS

HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     September 30,     March 31,  

(in thousands, except par value)

   2010     2011  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 90,984      $ 50,689   

Trade receivables, net

     92,279        67,885   

Inventories

     40,848        42,067   

Current and deferred income taxes

     12,050        2,958   

Other

     9,106        9,844   
                

Total current assets

     245,267        173,443   
                

Property, plant and equipment, net

     268,650        226,729   
                

Other assets:

    

Intangible assets, net

     183,371        175,393   

Goodwill

     115,999        115,999   

Other

     75,687        75,251   
                

Total other assets

     375,057        366,643   
                

Total assets

   $ 888,974      $ 766,815   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 15,412      $ 12,632   

Accrued personnel costs

     27,703        23,808   

Accrued interest

     17,797        3,409   

Other accrued liabilities

     37,392        49,104   
                

Total current liabilities

     98,304        88,953   
                

Long-term liabilities:

    

Long-term debt

     469,875        537,891   

Deferred income taxes

     9,739        5,580   

Unrecognized income tax benefits

     14,081        9,033   

Other

     15,034        17,608   
                

Total long-term liabilities

     508,729        570,112   
                

Total liabilities

     607,033        659,065   
                

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock, $0.001 par value; authorized 200,000 shares; issued and outstanding:
60,490 shares at September 30, 2010 and 60,809 shares at March 31, 2011

     60        61   

Capital in excess of par value

     633,171        635,610   

Retained earnings (accumulated deficit)

     (350,940     (527,781

Other

     (350     (140
                

Total stockholders’ equity

     281,941        107,750   
                

Total liabilities and stockholders’ equity

   $ 888,974      $ 766,815   
                

See accompanying notes.

 

3


Table of Contents

HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months Ended
March 31,
    Six Months Ended
March 31,
 

(in thousands, except per-share data)

   2010     2011     2010     2011  

Revenue:

        

Light building products

   $ 61,255      $ 62,677      $ 132,486      $ 132,386   

Heavy construction materials

     47,272        45,096        103,147        108,311   

Energy technology

     19,627        19,362        32,167        41,139   
                                

Total revenue

     128,154        127,135        267,800        281,836   

Cost of revenue:

        

Light building products

     46,698        53,831        99,336        107,680   

Heavy construction materials

     38,396        37,509        81,789        85,861   

Energy technology

     15,534        18,253        29,764        37,938   
                                

Total cost of revenue

     100,628        109,593        210,889        231,479   
                                

Gross profit

     27,526        17,542        56,911        50,357   

Operating expenses:

        

Amortization

     5,578        5,606        11,189        11,153   

Research and development

     1,858        2,835        3,773        4,780   

Selling, general and administrative

     24,399        42,834        52,586        70,610   

Asset impairments

     0        38,000        0        38,000   
                                

Total operating expenses

     31,835        89,275        67,548        124,543   
                                

Operating loss

     (4,309     (71,733     (10,637     (74,186

Other income (expense):

        

Net interest expense

     (16,019     (82,689     (33,439     (99,683

Other, net

     (102     8        1,178        328   
                                

Total other income (expense), net

     (16,121     (82,681     (32,261     (99,355
                                

Loss before income taxes

     (20,430     (154,414     (42,898     (173,541

Income tax benefit (provision)

     7,400        (1,740     15,970        (3,300
                                

Net loss

   $ (13,030   $ (156,154   $ (26,928   $ (176,841
                                

Basic loss per share

   $ (0.22   $ (2.58   $ (0.45   $ (2.93
                                

Diluted loss per share

   $ (0.22   $ (2.58   $ (0.45   $ (2.93
                                

See accompanying notes.

 

4


Table of Contents

HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

For the Six Months Ended March 31, 2011

 

            Capital in     

Retained

earnings

          Total  
     Common stock      excess      (accumulated           stockholders’  

(in thousands)

   Shares      Amount      of par value      deficit)     Other     equity  

Balances as of September 30, 2010

     60,490       $ 60       $ 633,171       $ (350,940   $ (350   $ 281,941   

Issuance of restricted stock, net of cancellations

     190         0                0   

Issuance of common stock pursuant to employee stock purchase plan

     109         1         402             403   

Exercise of stock appreciation rights

     20         0                0   

Stock-based compensation

           2,037             2,037   

Other comprehensive income, net of taxes – cash flow hedge

                210        210   

Net loss for the six months ended March 31, 2011

              (176,841       (176,841
                                                   

Balances as of March 31, 2011

     60,809       $ 61       $ 635,610       $ (527,781   $ (140   $ 107,750   
                                                   

See accompanying notes.

 

5


Table of Contents

HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended
March 31,
 

(in thousands)

   2010     2011  

Cash flows from operating activities:

    

Net loss

   $ (26,928   $ (176,841

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     29,156        31,215   

Asset impairments

     0        38,000   

Interest expense related to amortization of debt issue costs and debt discount

     8,315        14,496   

Stock-based compensation

     2,285        2,037   

Deferred income taxes

     (4,078     393   

Net gains of unconsolidated joint ventures

     (8,942     (2,452

Net gain on disposition of property, plant and equipment

     (1,246     (309

Decrease in trade receivables

     21,022        24,394   

Increase in inventories

     (968     (403

Decrease in accounts payable and accrued liabilities

     (3,083     (12,564

Other changes in operating assets and liabilities, net

     4,535        1,085   
                

Net cash provided by (used in) operating activities

     20,068        (80,949
                

Cash flows from investing activities:

    

Purchase of property, plant and equipment

     (13,701     (12,143

Proceeds from disposition of property, plant and equipment

     3,530        413   

Net decrease (increase) in long-term receivables and deposits

     (7,761     526   

Payments for acquisitions

     0        (2,500

Net change in other assets

     (810     (751
                

Net cash used in investing activities

     (18,742     (14,455
                

Cash flows from financing activities:

    

Net proceeds from issuance of long-term debt

     316,187        392,750   

Payments on long-term debt

     (259,795     (338,044

Other debt issue costs

     (2,456     0   

Employee stock purchases

     381        403   
                

Net cash provided by financing activities

     54,317        55,109   
                

Net increase (decrease) in cash and cash equivalents

     55,643        (40,295

Cash and cash equivalents, beginning of period

     15,934        90,984   
                

Cash and cash equivalents, end of period

   $ 71,577      $ 50,689   
                

See accompanying notes.

 

6


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

1. Nature of Operations and Basis of Presentation

Description of Business and Organization – Headwaters Incorporated (Headwaters) is a diversified building products company incorporated in Delaware, which provides products, technologies and services in light and heavy building materials and energy technology. Headwaters’ vision is to improve lives through innovative advancements in construction materials through application, design and purpose.

The light building products segment designs, manufactures, and sells manufactured architectural stone, exterior siding accessories (such as shutters, mounting blocks, and vents), concrete block and other building products. Headwaters believes that many of its branded products have a leading market position. Revenues from Headwaters’ light building products businesses are diversified geographically and also by market, including the new housing and residential repair and remodeling markets, as well as commercial construction markets.

The heavy construction materials segment is a nationwide leader in the management and marketing of coal combustion products (CCPs), including fly ash used as a replacement for portland cement. Headwaters’ heavy construction materials business is comprised of a nationwide storage and distribution network and also provides CCP disposal and other services. Revenue is diversified geographically and by market.

The energy technology segment is focused on reducing waste and increasing the value of energy-related feedstocks, primarily in the areas of low-value coal and oil. In coal, Headwaters owns and operates coal cleaning facilities that separate ash from waste coal to provide a refined coal product that is higher in Btu value and lower in impurities than the feedstock coal. In oil, Headwaters believes that its heavy oil upgrading technology represents a substantial improvement over current refining technologies. Headwaters’ heavy oil upgrading process uses a liquid catalyst precursor to generate a highly active molecular catalyst to convert low-value residual oil from refining into higher-value distillates that can be further refined into gasoline, diesel and other products.

Basis of Presentation – Headwaters’ fiscal year ends on September 30 and unless otherwise noted, references to 2010 refer to Headwaters’ fiscal quarter and/or six months ended March 31, 2010 and references to 2011 refer to Headwaters’ fiscal quarter and/or six months ended March 31, 2011. Other references to years refer to Headwaters’ fiscal year rather than a calendar year.

The condensed consolidated financial statements include the accounts of Headwaters, all of its subsidiaries and other entities in which Headwaters has a controlling interest. All significant intercompany transactions and accounts are eliminated in consolidation. Due to the seasonality of most of Headwaters’ operations and other factors, the consolidated results of operations for any particular period are not indicative of the results to be expected for a full fiscal year. For the six months ended March 31, 2010, approximately 13% of Headwaters’ total revenue and cost of revenue was for services. For the six months ended March 31, 2011, approximately 12% of Headwaters’ total revenue and cost of revenue was for services. Substantially all service-related revenue for both periods was in the heavy construction materials segment.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) for quarterly reports on Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included, and consist of normal recurring adjustments, along with non-routine adjustments to account for the asset impairments described in Note 4, the debt transactions described in Note 5, and the litigation accrual described in Note 11. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Headwaters’ Annual Report on Form 10-K for the year ended September 30, 2010 (Form 10-K) and in Headwaters’ Quarterly Report on Form 10-Q for the quarter ended December 31, 2010.

 

7


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

Recent Accounting Pronouncements – Headwaters has reviewed recently issued accounting standards which have not yet been adopted in order to determine their potential effect, if any, on the results of operations or financial position of Headwaters. Based on that review, Headwaters does not currently believe that any of those accounting pronouncements will have a significant effect on its current or future financial position, results of operations, cash flows or disclosures.

Reclassifications – Certain prior period amounts have been reclassified to conform to the current period’s presentation. The reclassifications had no effect on net income or total assets.

 

2. Segment Reporting

Headwaters currently operates three business segments: light building products, heavy construction materials and energy technology. These segments are managed and evaluated separately by management due to differences in their markets, operations, products and services. Revenues for the light building products segment consist of product sales to wholesale and retail distributors, contractors and other users of building products. Revenues for the heavy construction materials segment consist primarily of CCP product sales to ready-mix concrete businesses, with a smaller amount from services provided to coal-fueled electric generating utilities. Revenues for the energy technology segment consist primarily of coal sales. Intersegment sales are immaterial.

The following segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. Segment performance is evaluated primarily on revenue and operating income, although other factors are also used, such as income tax credits generated by the energy technology segment and adjusted EBITDA, which is defined as net income plus net interest expense, income taxes (as defined), depreciation and amortization, stock-based compensation, foreign currency translation gain or loss, goodwill and other impairments, including other non-routine adjustments that arise from time to time, consistent with the methodology Headwaters has used historically.

Segment costs and expenses considered in deriving segment operating income (loss) include cost of revenue, amortization, research and development, and segment-specific selling, general and administrative expenses. Amounts included in the “Corporate” column represent expenses that are not allocated to any segment and include administrative departmental costs and general corporate overhead. Segment assets reflect those specifically attributable to individual segments and primarily include cash, accounts receivable, inventories, property, plant and equipment, intangible assets and goodwill. Certain other assets are included in the “Corporate” column.

 

     Three Months Ended March 31, 2010  

(in thousands)

   Light
building
products
    Heavy
construction
materials
    Energy
technology
    Corporate     Totals  

Segment revenue

   $ 61,255      $ 47,272      $ 19,627      $ 0      $ 128,154   
                                        

Depreciation and amortization

   $ (7,711   $ (3,425   $ (3,824   $ (32   $ (14,992
                                        

Operating income (loss)

   $ (2,210   $ 2,191      $ (1,818   $ (2,472   $ (4,309
                                  

Net interest expense

             (16,019

Other income (expense), net

             (102

Income tax benefit

             7,400   
                

Net loss

           $ (13,030
                

Capital expenditures

   $ 4,729      $ 724      $ 896      $ 23      $ 6,372   
                                        

Segment assets

   $ 327,108      $ 296,219      $ 200,113      $ 105,852      $ 929,292   
                                        

 

8


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

     Three Months Ended March 31, 2011  

(in thousands)

   Light
building
products
    Heavy
construction
materials
    Energy
technology
    Corporate     Totals  

Segment revenue

   $ 62,677      $ 45,096      $ 19,362      $ 0      $ 127,135   
                                        

Depreciation and amortization

   $ (9,823   $ (3,463   $ (2,816   $ (27   $ (16,129
                                        

Operating income (loss)

   $ (12,989   $ 301      $ (54,547   $ (4,498   $ (71,733
                                  

Net interest expense

             (82,689

Other income (expense), net

             8   

Income tax provision

             (1,740
                

Net loss

           $ (156,154
                

Capital expenditures

   $ 4,365      $ 829      $ 1,746      $ 0      $ 6,940   
                                        

Segment assets

   $ 303,077      $ 301,166      $ 102,746      $ 59,826      $ 766,815   
                                        
     Six Months Ended March 31, 2010  

(in thousands)

   Light
building
products
    Heavy
construction
materials
    Energy
technology
    Corporate     Totals  

Segment revenue

   $ 132,486      $ 103,147      $ 32,167      $ 0      $ 267,800   
                                        

Depreciation and amortization

   $ (15,567   $ (6,777   $ (6,740   $ (72   $ (29,156
                                        

Operating income (loss)

   $ (802   $ 8,031      $ (7,852   $ (10,014   $ (10,637
                                  

Net interest expense

             (33,439

Other income (expense), net

             1,178   

Income tax benefit

             15,970   
                

Net loss

           $ (26,928
                

Capital expenditures

   $ 9,571      $ 2,314      $ 1,789      $ 27      $ 13,701   
                                        
     Six Months Ended March 31, 2011  

(in thousands)

   Light
building
products
    Heavy
construction
materials
    Energy
technology
    Corporate     Totals  

Segment revenue

   $ 132,386      $ 108,311      $ 41,139      $ 0      $ 281,836   
                                        

Depreciation and amortization

   $ (18,363   $ (6,904   $ (5,892   $ (56   $ (31,215
                                        

Operating income (loss)

   $ (15,237   $ 8,131      $ (57,304   $ (9,776   $ (74,186
                                  

Net interest expense

             (99,683

Other income (expense), net

             328   

Income tax provision

             (3,300
                

Net loss

           $ (176,841
                

Capital expenditures

   $ 7,975      $ 1,127      $ 3,041      $ 0      $ 12,143   
                                        

 

9


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

3. Inventories

Inventories consisted of the following at:

 

(in thousands)

   September 30, 2010      March 31, 2011  

Raw materials

   $ 15,262       $ 8,610   

Finished goods

     25,586         33,457   
                 
   $ 40,848       $ 42,067   
                 

 

4. Long-lived Assets

Asset Impairments – During the March 2011 quarter, Headwaters recorded asset impairments totaling $38.0 million, consisting of $37.0 million of assets in the energy technology segment and $1.0 million of restructuring costs in the light building products segment. The impaired energy technology segment assets consisted of approximately $32.0 million of property, plant and equipment and approximately $5.0 million of other assets, all related to Headwaters’ coal cleaning business. The impaired light building products segment assets consisted of property, plant and equipment.

The carrying value of a long-lived asset, including property, plant and equipment, is considered impaired when the anticipated cumulative undiscounted cash flow from that asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. A number of Headwaters’ coal cleaning assets remain idle or are producing coal at low levels. These low production levels have resulted in a current forecast of future cash flows that indicated an impairment existed at March 31, 2011. Management used its best efforts to reasonably estimate all of the inputs in the cash flow models utilized; however, it is probable that actual results could differ from these estimates and the differences could be material. Materially different input estimates and assumptions, including the probabilities of differing potential outcomes, would necessarily result in materially different calculations of expected future cash flows and asset fair values and materially different impairment estimates. Headwaters will reassess its cash flow input estimates and assumptions, including probabilities related thereto, if triggering events arise in the future. If assumptions regarding future cash flows related to the coal cleaning assets prove to be incorrect, Headwaters may be required to record additional impairment charges in future periods.

Intangible Assets – All of Headwaters’ identified intangible assets are being amortized. The following table summarizes the gross carrying amounts and related accumulated amortization of intangible assets as of:

 

            September 30, 2010      March 31, 2011  

(in thousands)

   Estimated
useful lives
     Gross
Carrying
Amount
     Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization
 

CCP contracts

     8 -20 years       $ 117,690       $ 51,912       $ 117,690       $ 55,278   

Customer relationships

     7 1/2 -15 years         77,603         32,537         77,603         35,465   

Trade names

     5 - 20 years         67,425         20,114         67,725         21,852   

Patents and patented technologies

     4 - 19 years         53,426         31,044         54,198         33,607   

Other

     2 - 17 years         5,661         2,827         7,764         3,385   
                                      
      $ 321,805       $ 138,434       $ 324,980       $ 149,587   
                                      

 

10


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

Total amortization expense related to intangible assets was approximately $5.6 million for both the quarter ended March 31, 2010 and 2011, and approximately $11.2 million for both the six months ended March 31, 2010 and 2011. Total estimated annual amortization expense for fiscal years 2011 through 2016 is shown in the following table.

 

Year ending September 30:

   (in thousands)  

2011

   $ 22,283   

2012

     20,552   

2013

     19,570   

2014

     19,047   

2015

     14,927   

2016

     14,805   

 

5. Long-term Debt

The total undiscounted face amount of Headwaters’ outstanding long-term debt was $495.8 million as of September 30, 2010 and $557.5 million as of March 31, 2011. As of those dates, long-term debt consisted of the following:

 

(in thousands)

   September 30,
2010
     March  31,
2011
 

7 5/8% Senior secured notes

   $ 0       $ 400,000   

11 3/8% Senior secured notes (face amount $328,250), net of discount

     325,800         0   

Convertible senior subordinated notes:

     

16%, due 2016 with put date of June 2012 (face amount $19,277 at
September 30, 2010 and $9,233 at March 31, 2011), net of discount

     18,152         8,852   

2.50%, due 2014 (face amount $120,900), net of discount

     101,120         103,867   

14.75%, due 2014 (face amount $27,370), net of discount

     24,803         25,172   
                 

Total convertible notes, net of applicable discounts

     144,075         137,891   
                 

Carrying amount of long-term debt, net of discounts

   $ 469,875       $ 537,891   
                 

Senior Secured Debt Repaid in October 2009 – Headwaters’ senior secured borrowings as of September 30, 2009 consisted of a first lien term loan in the amount of $163.0 million, plus $25.0 million outstanding under an associated revolving credit arrangement. As described below, in October 2009 Headwaters issued $328.3 million of 11 3/8% senior secured notes due 2014 and used most of the proceeds to repay all amounts owed under the senior secured credit facility, at which time the facility was terminated. In connection with the termination of the credit facility and early repayment of the outstanding debt, Headwaters wrote off all remaining related debt issue costs, aggregating approximately $2.0 million. In addition, in connection with consultations related to recapitalization transactions that occurred in October 2009 and other periods, Headwaters incurred $3.3 million of costs that were expensed during the December 2009 quarter, which amount is included in selling, general and administrative expenses in the 2010 consolidated statement of operations.

11 3/8% Senior Secured Notes – In October 2009, Headwaters issued approximately $328.3 million of 11 3/8% senior secured notes for net proceeds of approximately $316.2 million. Headwaters used most of the net proceeds to repay all of its obligations under the former senior secured credit facility described above and the outstanding 2.875% convertible senior subordinated notes. Also in October 2009, Headwaters entered into a $70.0 million asset-based revolving loan facility (ABL Revolver), described below. The 11 3/8% senior secured notes, which were to mature in November 2014, were repaid in March 2011 with proceeds from the new issuance of 7 5/8% senior secured notes described below. The 11 3/8% notes were issued at 99.067% of face value, or a discount of approximately $3.1 million, which discount was being amortized to interest expense over the five-year term. Upon early repayment in March 2011, the remaining unamortized balances of approximately $2.2 million of debt discount and $6.6 million of debt issue costs were written off and charged to interest expense.

 

11


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

7 5/8% Senior Secured Notes – In March 2011, Headwaters issued $400.0 million of 7 5/8% senior secured notes for net proceeds of approximately $392.8 million. Headwaters used most of the net proceeds to repay the 11 3/8% senior secured notes described above and the related early repayment premium of approximately $59.0 million (which premium was charged to interest expense). The 7 5/8% notes mature in April 2019 and bear interest at a rate of 7.625%, payable semiannually. The notes are secured by substantially all assets of Headwaters, with the exception of joint venture assets; however, the note holders have a second priority position with respect to the assets that secure the ABL Revolver, currently consisting of certain trade receivables and inventories of Headwaters’ light building products and heavy construction materials segments. The notes are senior in priority to all other outstanding and future subordinated debt.

Headwaters can redeem the 7 5/8% notes, in whole or in part, at any time after March 2015 at redemption prices ranging from 103.8% to 100.0%, depending on the redemption date. In addition, through March 2014 Headwaters can redeem at a price of 107.6% up to 35% of the outstanding notes with the net proceeds from one or more equity offerings. Headwaters can also redeem up to 10% of the notes in any 12-month period through March 2014 at a price of 103%, and can redeem any portion of the notes at any time through March 2015 at a price equal to 100% plus a make-whole premium.

The senior secured notes limit Headwaters in the incurrence of additional debt and liens on assets, prepayment of future subordinated debt, merging or consolidating with another company, selling all or substantially all assets, making investments and the payment of dividends or distributions, among other things. Headwaters was in compliance with all debt covenants as of March 31, 2011.

ABL Revolver – Since entering into the ABL Revolver, Headwaters has not borrowed any funds under the terms of the ABL Revolver and has no borrowings outstanding as of March 31, 2011. Availability under the ABL Revolver cannot exceed $70.0 million, which includes a $35.0 million sub-line for letters of credit and a $10.5 million swingline facility. Availability under the ABL Revolver is further limited by the borrowing base valuations of the assets of Headwaters’ light building products and heavy construction materials segments which secure the borrowings, currently consisting of certain trade receivables and inventories. In addition to the first lien position on these assets, the ABL Revolver lenders have a second priority position on substantially all other assets of Headwaters. As of March 31, 2011, availability under the ABL Revolver was approximately $50.0 million. Subsequent to March 31, 2011, Headwaters secured a letter of credit under terms of the ABL Revolver for approximately $16.1 million in order to post bond to enable the potential filing of an appeal in the Boynton matter described in Note 11. If this letter of credit had been obtained prior to March 31, 2011, it would not have changed availability under the ABL Revolver.

Outstanding borrowings under the ABL Revolver accrue interest at Headwaters’ option, at either i) the London Interbank Offered Rate (LIBOR) plus 2.25%, 2.50% or 2.75%, depending on Headwaters’ fixed charge coverage ratio; or ii) the “Base Rate” plus 1.0%, 1.25% or 1.5%, again depending on the fixed charge coverage ratio. The base rate is subject to a floor equal to the highest of i) the prime rate, ii) the federal funds rate plus 0.5%, and iii) the 30-day LIBOR rate plus 1.0%. Fees on the unused portion of the ABL Revolver range from 0.25% to 0.50%, depending on the amount of the credit facility which is utilized. If there would have been borrowings outstanding under the ABL Revolver as of March 31, 2011, the interest rate on those borrowings would have been approximately 3.1%. The ABL Revolver terminates three months prior to the earliest maturity date of the senior secured notes or any of the convertible senior subordinated notes, but no later than October 2014, at which time any amounts borrowed must be repaid.

The ABL Revolver contains restrictions and covenants common to such agreements, including limitations on the incurrence of additional debt and liens on assets, prepayment of subordinated debt, merging or consolidating with another company, selling assets, making capital expenditures, making acquisitions and investments and the payment of dividends or distributions, among other things. In addition, if availability under the ABL Revolver is less than a specified percentage, Headwaters is required to maintain a monthly fixed charge coverage ratio of at least 1.0x for the preceding twelve-month period.

2.875% Convertible Senior Subordinated Notes Due 2016 – In October 2009, Headwaters repaid the remaining balance of $71.8 million of the 2.875% convertible senior subordinated notes with a portion of the proceeds from the issuance of the 11 3/8% senior secured notes described above. In connection with the October 2009 early repayment of the 2.875% notes, Headwaters wrote off all remaining related debt issue costs, aggregating approximately $0.6 million.

 

12


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

16% Convertible Senior Subordinated Notes Due 2016 – The Form 10-K includes a detailed description of Headwaters’ 16% convertible senior subordinated notes. In November 2010, Headwaters repurchased and canceled approximately $10.0 million in aggregate principal amount of the 16% notes. Terms of repayment included premiums totaling approximately $1.7 million, which were recorded as interest expense. Accelerated debt discount and debt issue costs aggregating approximately $0.6 million were also charged to interest expense. Following the repurchases, approximately $9.2 million of these notes remained outstanding as of March 31, 2011.

Headwaters may redeem at par any portion of the 16% notes on or after June 4, 2012. In addition, the holders of the notes have the right to require Headwaters to repurchase all or a portion of the notes on June 1, 2012.

2.50% and 14.75% Convertible Senior Subordinated Notes Due 2014 – The Form 10-K includes a detailed description of Headwaters’ 2.50% and 14.75% convertible senior subordinated notes. The 2.50% and 14.75% notes are subordinate to the senior secured notes and rank equally with the 16% convertible senior subordinated notes and any future issuances of senior subordinated debt.

Interest and Debt Maturities – During the March 2010 and 2011 quarters, Headwaters incurred total interest costs of approximately $16.3 million and $82.8 million, respectively, including approximately $2.9 million and $11.2 million, respectively, of non-cash interest expense and approximately $0.2 million and $0 million, respectively, of interest costs that were capitalized. During the six months ended March 31, 2010 and 2011, Headwaters incurred total interest costs of approximately $34.0 million and $99.8 million, respectively, including approximately $8.3 million and $14.5 million, respectively, of non-cash interest expense and approximately $0.4 million and $0 million, respectively, of interest costs that were capitalized. Interest expense in both the March 2011 quarter and the six months ended March 31, 2011 includes approximately $59.0 million of early repayment premium relating to the retirement of the 11 3/8% senior secured notes in March 2011.

Interest income was approximately $0.1 million for both the March 2010 and 2011 quarters, and $0.2 million and $0.1 million for the six months ended March 31, 2010 and 2011, respectively. The weighted-average interest rate on the face amount of outstanding long-term debt, disregarding amortization of debt discount and debt issue costs, was approximately 9.6% at September 30, 2010 and 7.0% at March 31, 2011.

There are currently no maturities of debt prior to 2014, unless the holders of the 16% convertible senior subordinated notes exercise their put option in 2012 (or Headwaters calls the notes for redemption).

 

6. Fair Value of Financial Instruments

Headwaters’ financial instruments consist primarily of cash and cash equivalents, trade receivables, accounts payable and long-term debt. All of these financial instruments except long-term debt are either carried at fair value in the consolidated balance sheets or are short-term in nature. Accordingly, the carrying values for those financial instruments as reflected in the consolidated balance sheets closely approximate their fair values.

All of Headwaters’ outstanding long-term debt as of September 30, 2010 and March 31, 2011 was fixed-rate. Using fair values for the debt, the aggregate fair value of Headwaters’ long-term debt as of September 30, 2010 would have been approximately $495.0 million, compared to a carrying value of $469.9 million, and the aggregate fair value as of March 31, 2011 would have been approximately $551.7 million, compared to a carrying value of $537.9 million.

Fair value “Level 2” estimates for the long-term debt were based primarily on discounted future cash flows using estimated current risk-adjusted borrowing rates for similar instruments. The fair values for long-term debt differ from the carrying values primarily due to interest rates that differ from current market interest rates and differences between Headwaters’ common stock price at the balance sheet measurement dates and the conversion prices for the convertible senior subordinated notes.

 

13


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

7. Income Taxes

Headwaters’ estimated effective income tax rate for the fiscal year ending September 30, 2011, exclusive of discrete items, is currently estimated to be approximately negative (1)%, which estimated rate was used to calculate income taxes for the 2011 quarterly and six-month periods. Headwaters also recognized approximately $1.3 million of net income tax expense in the six months ended March 31, 2011 for discrete items that did not affect the calculation of the estimated effective income tax rate for the 2011 fiscal year. Included in this amount is a $1.0 million out-of-period adjustment, consisting primarily of changes in the valuation allowance and uncertain tax positions, that is not deemed material to fiscal 2010 or fiscal 2011. For the six months ended March 31, 2010, Headwaters used an estimated effective income tax benefit rate of 44%, net of approximately $2.9 million of income tax expense for discrete items.

Headwaters has utilized its fiscal 2009 and prior year net operating losses (NOLs) by carrying these amounts back to prior years, receiving income tax refunds. Fiscal 2010 NOLs and tax credit carryforwards were offset by Headwaters’ existing deferred income tax liabilities resulting in a near $0 deferred tax position as of September 30, 2010. Accordingly, in fiscal 2011, during which Headwaters currently expects to realize a loss before income taxes, Headwaters is recording a full valuation allowance on its net amortizable deferred tax assets and has recorded income tax expense for the six months ended March 31, 2011 even though there was a pre-tax loss of approximately $173.5 million. A valuation allowance is required when there is significant uncertainty as to the realizability of deferred tax assets. Because the realization of the deferred tax assets related to most of Headwaters’ NOLs, capital losses and tax credits is dependent upon future income or capital gains related to domestic and foreign jurisdictional operations that have historically generated losses, management determined that Headwaters no longer meets the “more likely than not” threshold that those NOLs, capital losses and tax credits will be realized. Accordingly, a valuation allowance is required.

The estimated effective income tax rate for fiscal 2011 of negative (1)% is due primarily to the combination of not recognizing benefit for expected pre-tax losses and tax credits, but recognizing state income taxes in certain state jurisdictions where Headwaters expects to generate taxable income. As of March 31, 2011, Headwaters’ NOL carryforwards total approximately $67.0 million. The U.S. and state NOLs and capital losses expire from 2012 to 2031. Substantially all of the non-U.S. NOLs do not expire. In addition, there are approximately $21.0 million of tax credit carryforwards as of March 31, 2011, which expire from 2014 to 2031.

The estimated effective tax rate for fiscal 2010 of 44%, which was used to calculate income taxes for the six months ended March 31, 2010, exclusive of discrete items, was higher than the statutory rate primarily due to the pre-tax loss projected for the 2010 fiscal year combined with projected Section 45 refined coal tax credits, which increased the income tax benefit otherwise recorded. The discrete items recorded during the six months ended March 31, 2010 represented primarily changes in estimates related to tax credits and other permanent differences.

Section 45 refined coal tax credits are generated by coal cleaning facilities that Headwaters owns and operates. Headwaters believes it is more likely than not that a significant portion of the refined coal produced at its coal cleaning facilities qualifies for tax credits pursuant to Section 45 of the Internal Revenue Code. Excluding the effect of Section 45 tax credits, Headwaters’ estimated effective tax rate for fiscal 2010 would have been approximately 32% instead of 44%, which was lower than the statutory rate due primarily to the effect of valuation allowances and permanent differences.

The calculation of tax liabilities involves uncertainties in the application of complex tax regulations in multiple jurisdictions. Headwaters recently completed an audit by the IRS for the years 2005 through 2008, which did not result in any material changes to earnings or tax-related liabilities. Headwaters is currently under audit by the IRS for 2009 and has open tax periods subject to examination by taxing authorities for the years 2005 through 2010. Headwaters recognizes potential liabilities for anticipated tax audit issues in the U.S. and state tax jurisdictions based on estimates of whether, and the extent to which, additional taxes and interest will be due. If events occur (or do not occur) as expected and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax

 

14


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

benefits being recognized in the period when it is determined the liabilities are no longer required to be recorded in the consolidated financial statements. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. It is reasonably possible that the amount of Headwaters’ unrecognized income tax benefits will change significantly within the next 12 months. These changes could be the result of Headwaters’ ongoing tax audits or the settlement of outstanding audit issues. However, due to the issues being examined, at the current time, an estimate of the range of reasonably possible outcomes cannot be made, beyond amounts currently accrued.

 

8. Equity Securities and Stock-based Compensation

Authorized Common Stock – During the March 2011 quarter, Headwaters’ stockholders approved an increase in the number of shares of authorized common stock from 100.0 million to 200.0 million.

Shelf Registration – Approximately $212.6 million remains available for future offerings of securities under a universal shelf registration statement on file with the SEC. A prospectus supplement describing the terms of any additional securities to be issued is required to be filed before any future offering could commence under the registration statement.

Stock-based Compensation – During the December 2010 quarter, the Compensation Committee (the Committee) of the Board of Directors granted approximately 0.7 million stock-based awards to officers and employees under the terms of the 2010 Incentive Compensation Plan (2010 ICP). The awards vest over an approximate three-year period. The Committee also granted some cash-settled stock appreciation rights (SARs) as more fully described in Note 11. During the March 2011 quarter, the Committee granted approximately 0.1 million restricted stock units to the non-affiliated directors of Headwaters. The units were granted subject to the terms of the 2010 ICP and vest during calendar year 2011.

Stock-based compensation expense was approximately $1.0 million for each of the quarters ended March 31, 2010 and 2011, and approximately $2.3 million and $2.0 million for the six months ended March 31, 2010 and 2011, respectively. As of March 31, 2011, there was approximately $3.3 million of total compensation cost related to unvested awards not yet recognized, which will be recognized in future periods in accordance with applicable vesting terms.

 

9. Earnings per Share

The following table sets forth the computation of basic and diluted EPS for the periods indicated.

 

     Three Months Ended
March 31,
    Six Months Ended
March 31,
 

(in thousands, except per-share data)

   2010     2011     2010     2011  

Numerator:

        

Numerator for basic and diluted earnings per share – net loss

   $ (13,030   $ (156,154   $ (26,928   $ (176,841
                                

Denominator:

        

Denominator for basic and diluted earnings per share – weighted-average shares outstanding

     59,944        60,423        59,922        60,375   
                                

Basic loss per share

   $ (0.22   $ (2.58   $ (0.45   $ (2.93
                                

Diluted loss per share

   $ (0.22   $ (2.58   $ (0.45   $ (2.93
                                

Anti-dilutive securities not considered in diluted EPS calculation:

        

SARs

     2,683        2,352        2,695        2,773   

Stock options

     1,811        1,789        1,811        1,791   

Restricted stock

     136        0        166        105   

Shares issuable upon conversion of convertible notes

     0        0        351        0   

 

15


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

10. Acquisitions

During the December 2010 quarter, Headwaters acquired certain assets and assumed certain liabilities of two privately-held companies in the light building products industry for total consideration of approximately $2.5 million.

 

11. Commitments and Contingencies

Significant new commitments, material changes in commitments and ongoing contingencies as of March 31, 2011, not disclosed elsewhere, are as follows.

Compensation ArrangementsCash Performance Unit Awards. In fiscal 2009, the Compensation Committee approved grants of performance unit awards to certain officers and employees, to be settled in cash, based on the achievement of goals tied to cumulative divisional free cash flow generated subsequent to September 30, 2008 and prior to September 30, 2028. These awards replaced all existing long-term cash awards, except for certain awards already earned at the date of grant. For purposes of these awards, free cash flow is generally defined as operating income plus depreciation, amortization and asset impairments, reduced by capital expenditures. Payments vest according to a predetermined schedule as free cash flow accumulates over time.

In fiscal 2010, the Committee terminated the performance unit awards for all participants in the corporate business unit and assigned a five-year performance period term to the free cash flow goals, aggregating $850.0 million, for the remaining participating business units. As of March 31, 2011, these remaining business units had generated approximately $158.9 million of free cash flow and accrued approximately $1.6 million of expense for the awards, including approximately $0.7 million which was paid in the December 2010 quarter. The maximum payout under the amended performance unit awards if all performance criteria were to be achieved by all participating operating divisions would be approximately $30.8 million. Due to the shortened term of the performance period, it is currently expected that the ultimate payout will be significantly less than the maximum payout.

Also in fiscal 2010, in accordance with terms of the 2010 ICP, the Committee approved grants of performance unit awards to certain officers and employees in the corporate business unit, to be settled in cash, based on the achievement of goals related to consolidated free cash flow generated in the second half of fiscal 2010. For purposes of these awards, free cash flow is generally defined as operating income plus depreciation, amortization, asset impairments and Section 45 tax credits, reduced by capital expenditures. The awards were calculated using a target compensation amount for each participant and were adjusted, subject to prescribed limitations, based on the actual consolidated free cash flow generated during the six-month performance period ended September 30, 2010, using a threshold/target/maximum adjustment structure. The free cash flow generated during the performance period exceeded the maximum level, and accordingly, the awards will vest and be settled in cash in annual installments at the end of fiscal 2011 and 2012, provided the participant is still employed by Headwaters at the respective vesting dates. The awards will be further adjusted using Headwaters’ average stock price for the 60 days immediately preceding each vest date.

In the December 2010 quarter, Headwaters recognized approximately $0.6 million of expense related solely to the increase in the average 60-day stock price from September 30, 2010 to December 31, 2010. Likewise, in the March 2011 quarter, Headwaters recognized approximately $0.8 million of additional expense related solely to the increase in the average 60-day stock price from December 31, 2010 to March 31, 2011. All future changes in Headwaters’ stock price through the final vest date of September 30, 2012 will result in adjustment of the expected liability, which adjustment (whether positive or negative) will be reflected in Headwaters’ statements of operations each quarter. Assuming the average closing stock price for the 60 days in the period ended March 31, 2011 of $5.37 remains unchanged for the September 30, 2011 and 2012 vesting dates, the payouts under this arrangement, all of which have been accrued as of March 31, 2011, would be approximately $3.9 million.

In the December 2010 quarter, in accordance with terms of the 2010 ICP, the Committee approved grants of performance unit awards to participants in the corporate business unit related to consolidated free cash flow generated during fiscal year 2011, with terms similar to those described above for the 2010 six-month period. The ultimate liability for the 2011 year

 

16


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

performance unit awards will be adjusted depending on fiscal 2011 performance as well as changes in Headwaters’ stock price through the final vest date of September 30, 2013. As of March 31, 2011, approximately $1.0 million has been accrued for these awards.

Cash-Settled SAR Grants. Also during the December 2010 quarter, the Committee approved grants to certain employees of approximately 0.4 million cash-settled SARs. These SARs will vest in annual installments through September 30, 2013, provided the participant is still employed at the respective vesting dates, and will be settled in cash upon exercise by the employee. The SARs terminate on September 30, 2015 and must be exercised on or before that date. As of March 31, 2011, approximately $0.2 million has been accrued for these awards. Future changes in Headwaters’ stock price (in any amount beyond the grant-date stock price of $3.81) through September 30, 2015 will result in adjustment to the expected liability, which adjustment (whether positive or negative) will be reflected in Headwaters’ statements of operations each quarter.

Property, Plant and Equipment – As of March 31, 2011, Headwaters was committed to spend approximately $0.4 million on capital projects that were in various stages of completion.

Legal Matters – Headwaters has ongoing litigation and asserted claims which have been incurred during the normal course of business, including the specific matters discussed below. Headwaters intends to vigorously defend or resolve these matters by settlement, as appropriate. Management does not currently believe that the outcome of these matters will have a material adverse effect on Headwaters’ operations, cash flow or financial position.

During the six months ended March 31, 2010 and 2011, Headwaters incurred approximately $3.0 million and $15.8 million, respectively, of expense for legal matters. Historically, costs paid to outside legal counsel for litigation have comprised a majority of Headwaters’ litigation-related costs. Headwaters currently believes the range of potential loss for all unresolved legal matters, excluding costs for outside counsel, is from $16.0 million up to the amounts sought by claimants and has recorded a total estimated liability as of March 31, 2011 of $16.0 million, of which $15.0 million was expensed during the March 2011 quarter. Claims and damages sought by claimants in excess of this amount are not deemed to be probable. Headwaters’ outside counsel and management currently believe that unfavorable outcomes of outstanding litigation are neither probable nor remote. Accordingly, management cannot express an opinion as to the ultimate amount, if any, of Headwaters’ liability, nor is it possible to estimate what litigation-related costs will be in future periods.

The specific matters discussed below raise difficult and complex legal and factual issues, and the resolution of these issues is subject to many uncertainties, including the facts and circumstances of each case, the jurisdiction in which each case is brought, and the future decisions of juries, judges, and arbitrators. Therefore, although management believes that the claims asserted against Headwaters in the named cases lack merit, there is a possibility of material losses in excess of the amounts accrued if one or more of the cases were to be determined adversely against Headwaters for a substantial amount of the damages asserted. It is possible that a change in the estimates of probable liability could occur, and the changes could be material. Additionally, as with any litigation, these proceedings require that Headwaters incur substantial costs, including attorneys’ fees, managerial time and other personnel resources, in pursuing resolution.

Boynton. In 1998, Headwaters entered into a technology purchase agreement with James G. Davidson and Adtech, Inc. The transaction transferred certain patent and royalty rights to Headwaters related to a synthetic fuel technology invented by Davidson. In 2002, Headwaters received a summons and complaint from the United States District Court for the Western District of Tennessee filed by former stockholders of Adtech alleging, among other things, fraud, conspiracy, constructive trust, conversion, patent infringement and interference with contract arising out of the 1998 technology purchase agreement entered into between Davidson and Adtech on the one hand, and Headwaters on the other. All claims against Headwaters were dismissed in pretrial proceedings except claims of conspiracy and constructive trust. The District Court certified a class comprised of substantially all purported stockholders of Adtech, Inc. The plaintiffs sought compensatory damages from Headwaters in the approximate amount of $43.0 million plus prejudgment interest and punitive damages. In June 2009, a jury reached a verdict in a trial in the amount of $8.7 million for the eight named plaintiffs representing a portion of the class members. In September 2010, a jury reached a verdict after a trial for the remaining 46 members of the class in the amount of $7.3 million. In April 2011, the trial court entered an order for a

 

17


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

constructive trust in the amount of approximately $16.0 million (the same amount as the sum of the previous jury verdicts), denied all other outstanding motions, and entered judgment against Headwaters in the total approximate amount of $16.0 million, in accordance with the verdicts and order on constructive trust. Headwaters has filed a supersedeas bond for the judgment. The parties may seek relief from the judgment by motion to the trial court and, upon resolution of such motions, the parties may appeal. Because the resolution of the litigation including appeals is uncertain, legal counsel and management cannot express an opinion as to the ultimate amount, if any, of Headwaters’ liability.

Mainland Laboratory. HRI entered into a license agreement for the use of a fly ash carbon treatment technology with Mainland Laboratory, LTD (Mainland) in 2000. The agreement grants exclusive rights to the patented carbon treatment technology owned by Mainland. In 2006, HRI became aware of prior art relating to the Mainland patented technology which Headwaters believed invalidated the Mainland patent and HRI stopped paying royalties under the agreement. In 2007, Mainland filed suit against HRI in the United States District Court for the Southern District of Texas with a demand for arbitration under the terms of the license agreement, for breach of contract and patent infringement. Mainland is seeking approximately $23.0 million in damages, enhancement of any damages award based on alleged willful infringement of its patent, and recovery of its costs associated with the litigation, including its attorneys’ fees. Additionally, Mainland is seeking an injunction to stop HRI from practicing the technology covered by the patent. In fiscal 2009, the District Court ruled that Mainland’s patent is invalid and remanded the case to arbitration for further proceedings; however, there has been no scheduling activity in the arbitration. Because the resolution of remaining claims in arbitration is uncertain, legal counsel and management cannot express an opinion concerning the likely outcome of this matter or the liability of HRI, if any.

Fentress Families Trust. VFL Technology Corporation (VFL), acquired by HRI in 2004, provides services related to fly ash disposal to Virginia Electric and Power Company. Approximately 395 plaintiffs, most of whom are homeowners living in the City of Chesapeake, Virginia, filed a complaint in March 2009 in the State of Virginia Chesapeake Circuit Court against 16 named defendants, including Virginia Electric and Power Company, certain persons associated with the Battlefield Golf Course, including the owner, developer, and contractors, and others, including VFL and HRI. The complaint alleges that fly ash used to construct the golf course has contaminated area ground water exposing plaintiffs to toxic chemicals and causing property damage. The amended complaint alleges negligence and nuisance and seeks a new water system, monitoring costs, site clean-up, and other damages totaling approximately $1.8 billion, including certain injunctive relief. A second lawsuit was filed in August 2009 and has been consolidated with the first action where approximately 62 plaintiffs have sued essentially the same defendants, alleging similar claims and requests for damages, in excess of $1.5 billion. A defendant filed a cross-claim for indemnity, breach of contract, negligent and intentional misrepresentation, and tortious interference against other defendants, including HRI, claiming compensatory damages of approximately $15.0 million, punitive damages, as well as remediation of the golf course site. Discovery of evidence among the parties has begun. HRI has filed insurance claims, which are the subject of dispute and a separate lawsuit, although insurance is paying for the defense of the underlying case. The amount of the claims against HRI exceeds the amount of insurance. Because resolution of the litigation is uncertain, legal counsel and management cannot express an opinion as to the ultimate amount, if any, of HRI’s liability, or the insurers’ obligation to indemnify HRI against loss, if any.

Archstone. Archstone owns an apartment complex in Westbury, New York. Archstone alleges that moisture penetrated the building envelope and damaged moisture sensitive parts of the buildings which began to rot and grow mold. In 2008, Archstone evicted its tenants and began repairing the twenty-one apartment buildings. Also in 2008, Archstone filed a complaint in the Nassau County Supreme Court of the State of New York against the prime contractor and its performance bond surety, the designer, and Eldorado Stone, LLC which supplied architectural stone that was installed by others during construction. The prime contractor then sued over a dozen subcontractors who in turn sued others. Archstone claims as damages approximately $36.0 million in repair costs, $15.0 million in lost lease payments, $7.0 million paid to tenants who sued Archstone, and $7.0 million for class action defense fees, plus prejudgment interest and attorney’s fees. Eldorado Stone answered denying liability and tendered the matter to its insurers who are paying for the defense of the case. The court has dismissed all claims against Eldorado Stone, except the claim of negligence, and discovery is under way. Because the resolution of the action is uncertain, legal counsel and management cannot express an opinion concerning the likely outcome of this matter, the liability of Eldorado Stone, if any, or the insurers’ obligation to indemnify Eldorado Stone against loss, if any.

 

18


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

Headwaters Building Products Matters. There are litigation and pending and threatened claims made against certain subsidiaries of Headwaters Building Products (HBP), a division within Headwaters’ light building products segment, with respect to several types of exterior finish systems manufactured and sold by its subsidiaries for application by contractors on residential and commercial buildings. Typically, litigation and these claims are defended by such subsidiaries’ insurance carriers. The plaintiffs or claimants in these matters have alleged that the structures have suffered damage from latent or progressive water penetration due to some alleged failure of the building product or wall system. One claim involves alleged defects associated with components of an Exterior Insulating and Finish System (EIFS) which was produced for a limited time (through 1997) by the HBP subsidiaries. Other claims involve alleged liabilities associated with certain stucco, mortar, aerated concrete block and architectural stone products which are produced and sold by certain subsidiaries of HBP.

Typically, the claims cite damages for alleged personal injuries and punitive damages for alleged unfair business practices in addition to asserting more conventional damage claims for alleged economic loss and damage to property. To date, claims made against such subsidiaries have been paid by their insurers, with the exception of minor deductibles or self-insured retentions, although such insurance carriers typically have issued “reservation of rights” letters. While, to date, none of these proceedings have required that HBP incur substantial costs, there is no guarantee of insurance coverage or continuing coverage. These and future proceedings may result in substantial costs to HBP, including attorneys’ fees, managerial time and other personnel resources and costs. Adverse resolution of these proceedings could have a materially negative effect on HBP’s business, financial condition, and results of operation, and its ability to meet its financial obligations. Although HBP carries general and product liability insurance, HBP cannot assure that such insurance coverage will remain available, that HBP’s insurance carrier will remain viable, or that the insured amounts will cover all future claims in excess of HBP’s uninsured retention. Future rate increases may also make such insurance uneconomical for HBP to maintain. In addition, the insurance policies maintained by HBP exclude claims for damages resulting from exterior insulating finish systems, or EIFS, that have manifested after March 2003. Because resolution of the litigation and claims is uncertain, legal counsel and management cannot express an opinion as to the ultimate amount, if any, of HBP’s liability.

Other. Headwaters and its subsidiaries are also involved in other legal proceedings that have arisen in the normal course of business.

Section 45 Tax Credits – As explained in Note 7, Headwaters’ effective tax rate for 2010 was different from the statutory rate in part due to refined coal tax credits related to facilities that Headwaters owns and operates. Headwaters believes the refined coal produced at these facilities and sold to qualified buyers qualifies for tax credits under Section 45 of the Internal Revenue Code. In September 2010, the IRS issued Notice 2010-54 (Notice) giving some public guidance about how this tax credit program will be administered and some of the restrictions on the availability of such credits. Among other things, the Notice requires that for coal cleaning operations to qualify for Section 45 credits, the facilities must have been placed into service for the purpose of producing refined coal and must produce refined coal from waste coal. In addition, the Notice gives guidance about the testing that must be conducted to certify the emissions reduction required by Section 45. Based on the language of Section 45 and the Notice, Headwaters believes that its coal cleaning facilities are eligible for Section 45 refined coal tax credits, and as a result, has recognized a benefit for such credits in its income tax provisions beginning in fiscal 2007 and continuing through fiscal 2010. The ability to claim tax credits is dependent upon a number of conditions, including, but not limited to:

 

   

Placing facilities in service on or before December 31, 2008;

 

   

Producing a fuel from coal that is lower in NOx and either SOx or mercury emissions by the specified amount as compared to the emissions of the feedstock;

 

   

Producing a fuel at least 50% more valuable than the feedstock; and

 

   

Sale of the fuel to a third party for the purpose of producing steam.

 

19


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

During the March 2011 quarter, Headwaters completed an audit by the IRS concerning, among other things, the Section 45 tax credits generated in 2007 and 2008. Four facilities were placed in service during the December 2008 quarter and were not included in the recently-completed IRS audit. The IRS proposed no adjustments with respect to Section 45 tax credits for the facilities placed in service during the period audited. Through September 30, 2010, Headwaters recognized income tax benefits totaling approximately $15.9 million related to Section 45 tax credits. During the six months ended March 31, 2011, Headwaters generated an additional $3.8 million of Section 45 tax credits; however, a full valuation allowance has been provided on these tax credits as explained in Note 7.

 

12. Condensed Consolidating Financial Information

Headwaters’ 7 5/8% senior secured notes are jointly and severally, fully and unconditionally guaranteed by Headwaters Incorporated and by all of Headwaters’ wholly-owned domestic subsidiaries. The non-guaranteeing entities include primarily joint ventures in which Headwaters has a non-controlling ownership interest. Separate stand-alone financial statements and disclosures for Headwaters Incorporated and each of the guarantor subsidiaries are not presented because the guarantees are full and unconditional and the guarantor subsidiaries have joint and several liability.

There are no significant restrictions on the ability of Headwaters Incorporated to obtain funds from the guarantor subsidiaries nor on the ability of the guarantor subsidiaries to obtain funds from Headwaters Incorporated or other guarantor subsidiaries. The non-guaranteeing entities represent less than 3% of consolidated assets, stockholders’ equity, revenues, income before taxes and cash flow from operating activities. Accordingly, the following condensed consolidating financial information does not present separately the non-guarantor entities’ information.

 

20


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET – September 30, 2010

 

     Guarantor     Parent     Eliminations and     Headwaters  

(in thousands)

   Subsidiaries     Company     Reclassifications     Consolidated  

ASSETS

        

Current assets:

        

Cash and cash equivalents

   $ 21,168      $ 69,816      $ —        $ 90,984   

Trade receivables, net

     92,279            92,279   

Inventories

     40,848            40,848   

Current and deferred income taxes

     7,487        7,579        (3,016     12,050   

Other

     8,911        195          9,106   
                                

Total current assets

     170,693        77,590        (3,016     245,267   
                                

Property, plant and equipment, net

     268,300        350          268,650   
                          

Other assets:

        

Intangible assets, net

     183,371            183,371   

Goodwill

     115,999            115,999   

Investments in subsidiaries and intercompany accounts

     311,417        147,081        (458,498     0   

Intercompany notes

     (637,046     637,046          0   

Deferred income taxes

     74,369        27,300        (101,669     0   

Other

     49,200        26,487          75,687   
                                

Total other assets

     97,310        837,914        (560,167     375,057   
                                

Total assets

   $ 536,303      $ 915,854      $ (563,183   $ 888,974   
                                

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current liabilities:

        

Accounts payable

   $ 15,263      $ 149      $ —        $ 15,412   

Accrued personnel costs

     13,033        14,670          27,703   

Accrued interest

       17,797          17,797   

Current and deferred income taxes

     4,000        (984     (3,016     0   

Other accrued liabilities

     35,257        2,135          37,392   
                                

Total current liabilities

     67,553        33,767        (3,016     98,304   
                                

Long-term liabilities:

        

Long-term debt

       469,875          469,875   

Deferred income taxes

     86,698        24,710        (101,669     9,739   

Unrecognized income tax benefits

     9,697        4,384          14,081   

Other

     9,987        5,047          15,034   
                                

Total long-term liabilities

     106,382        504,016        (101,669     508,729   
                                

Total liabilities

     173,935        537,783        (104,685     607,033   
                                

Commitments and contingencies

        

Stockholders’ equity:

        

Common stock

     209,346        60        (209,346     60   

Capital in excess of par value

     249,152        633,171        (249,152     633,171   

Retained earnings (accumulated deficit)

     (95,780     (255,160       (350,940

Other

     (350         (350
                                

Total stockholders’ equity

     362,368        378,071        (458,498     281,941   
                                

Total liabilities and stockholders’ equity

   $ 536,303      $ 915,854      $ (563,183   $ 888,974   
                                

 

21


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET – March 31, 2011

 

     Guarantor     Parent     Eliminations and     Headwaters  

(in thousands)

   Subsidiaries     Company     Reclassifications     Consolidated  

ASSETS

        

Current assets:

        

Cash and cash equivalents

   $ 23,246      $ 27,443      $ —        $ 50,689   

Trade receivables, net

     67,885            67,885   

Inventories

     42,067            42,067   

Current and deferred income taxes

     5,638        5,135        (7,815     2,958   

Other

     8,888        956          9,844   
                                

Total current assets

     147,724        33,534        (7,815     173,443   
                                

Property, plant and equipment, net

     226,435        294          226,729   
                          

Other assets:

        

Intangible assets, net

     175,393            175,393   

Goodwill

     115,999            115,999   

Investments in subsidiaries and intercompany accounts

     321,266        137,232        (458,498     0   

Intercompany notes

     (637,046     637,046          0   

Deferred income taxes

     76,383        37,173        (113,556     0   

Other

     48,588        26,663          75,251   
                                

Total other assets

     100,583        838,114        (572,054     366,643   
                                

Total assets

   $ 474,742      $ 871,942      $ (579,869   $ 766,815   
                                

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current liabilities:

        

Accounts payable

   $ 12,325      $ 307      $ —        $ 12,632   

Accrued personnel costs

     9,541        14,267          23,808   

Accrued interest

       3,409          3,409   

Current and deferred income taxes

     715        9,729        (7,815     2,629   

Other accrued liabilities

     43,531        2,944          46,475   
                                

Total current liabilities

     66,112        30,656        (7,815     88,953   
                                

Long-term liabilities:

        

Long-term debt

       537,891          537,891   

Deferred income taxes

     95,801        23,335        (113,556     5,580   

Unrecognized income tax benefits

     3,961        5,072          9,033   

Other

     11,300        6,308          17,608   
                                

Total long-term liabilities

     111,062        572,606        (113,556     570,112   
                                

Total liabilities

     177,174        603,262        (121,371     659,065   
                                

Commitments and contingencies

        

Stockholders’ equity:

        

Common stock

     209,346        61        (209,346     61   

Capital in excess of par value

     249,152        635,610        (249,152     635,610   

Retained earnings (accumulated deficit)

     (160,790     (366,991       (527,781

Other

     (140         (140
                                

Total stockholders’ equity

     297,568        268,680        (458,498     107,750   
                                

Total liabilities and stockholders’ equity

   $ 474,742      $ 871,942      $ (579,869   $ 766,815   
                                

 

22


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended March 31, 2010

 

     Guarantor     Parent     Headwaters  

(in thousands)

   Subsidiaries     Company     Consolidated  

Revenue:

      

Light building products

   $ 61,255      $ —        $ 61,255   

Heavy construction materials

     47,272          47,272   

Energy technology

     19,627          19,627   
                        

Total revenue

     128,154        —          128,154   

Cost of revenue:

      

Light building products

     46,698          46,698   

Heavy construction materials

     38,396          38,396   

Energy technology

     15,534          15,534   
                        

Total cost of revenue

     100,628        —          100,628   
                        

Gross profit

     27,526        —          27,526   

Operating expenses:

      

Amortization

     5,578          5,578   

Research and development

     1,858          1,858   

Selling, general and administrative

     21,927        2,472        24,399   
                        

Total operating expenses

     29,363        2,472        31,835   
                        

Operating loss

     (1,837     (2,472     (4,309

Other income (expense):

      

Net interest expense

     (129     (15,890     (16,019

Other, net

     (102       (102
                        

Total other income (expense), net

     (231     (15,890     (16,121
                        

Loss before income taxes

     (2,068     (18,362     (20,430

Income tax benefit

     877        6,523        7,400   
                        

Net loss

   $ (1,191   $ (11,839   $ (13,030
                        

 

23


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended March 31, 2011

 

     Guarantor     Parent     Headwaters  

(in thousands)

   Subsidiaries     Company     Consolidated  

Revenue:

      

Light building products

   $ 62,677      $ —        $ 62,677   

Heavy construction materials

     45,096          45,096   

Energy technology

     19,362          19,362   
                        

Total revenue

     127,135        —          127,135   

Cost of revenue:

      

Light building products

     53,831          53,831   

Heavy construction materials

     37,509          37,509   

Energy technology

     18,253          18,253   
                        

Total cost of revenue

     109,593        —          109,593   
                        

Gross profit

     17,542        —          17,542   

Operating expenses:

      

Amortization

     5,606          5,606   

Research and development

     2,835          2,835   

Selling, general and administrative

     38,336        4,498        42,834   

Asset impairments

     38,000          38,000   
                        

Total operating expenses

     84,777        4,498        89,275   
                        

Operating loss

     (67,235     (4,498     (71,733

Other income (expense):

      

Net interest expense

     (102     (82,587     (82,689

Other, net

     8          8   
                        

Total other income (expense), net

     (94     (82,587     (82,681
                        

Loss before income taxes

     (67,329     (87,085     (154,414

Income tax provision

     (894     (846     (1,740
                        

Net loss

   $ (68,223   $ (87,931   $ (156,154
                        

 

24


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended March 31, 2010

 

     Guarantor     Parent     Headwaters  

(in thousands)

   Subsidiaries     Company     Consolidated  

Revenue:

      

Light building products

   $ 132,486      $ —        $ 132,486   

Heavy construction materials

     103,147          103,147   

Energy technology

     32,167          32,167   
                        

Total revenue

     267,800        —          267,800   

Cost of revenue:

      

Light building products

     99,336          99,336   

Heavy construction materials

     81,789          81,789   

Energy technology

     29,764          29,764   
                        

Total cost of revenue

     210,889        —          210,889   
                        

Gross profit

     56,911        —          56,911   

Operating expenses:

      

Amortization

     11,189          11,189   

Research and development

     3,773          3,773   

Selling, general and administrative

     42,572        10,014        52,586   
                        

Total operating expenses

     57,534        10,014        67,548   
                        

Operating loss

     (623     (10,014     (10,637

Other income (expense):

      

Net interest expense

     (301     (33,138     (33,439

Other, net

     1,178          1,178   
                        

Total other income (expense), net

     877        (33,138     (32,261
                        

Income (loss) before income taxes

     254        (43,152     (42,898

Income tax benefit

     296        15,674        15,970   
                        

Net income (loss)

   $ 550      $ (27,478   $ (26,928
                        

 

25


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended March 31, 2011

 

     Guarantor     Parent     Headwaters  

(in thousands)

   Subsidiaries     Company     Consolidated  

Revenue:

      

Light building products

   $ 132,386      $ —        $ 132,386   

Heavy construction materials

     108,311          108,311   

Energy technology

     41,139          41,139   
                        

Total revenue

     281,836        —          281,836   

Cost of revenue:

      

Light building products

     107,680          107,680   

Heavy construction materials

     85,861          85,861   

Energy technology

     37,938          37,938   
                        

Total cost of revenue

     231,479        —          231,479   
                        

Gross profit

     50,357        —          50,357   

Operating expenses:

      

Amortization

     11,153          11,153   

Research and development

     4,780          4,780   

Selling, general and administrative

     60,834        9,776        70,610   

Asset impairments

     38,000          38,000   
                        

Total operating expenses

     114,767        9,776        124,543   
                        

Operating loss

     (64,410     (9,776     (74,186

Other income (expense):

      

Net interest expense

     (187     (99,496     (99,683

Other, net

     328          328   
                        

Total other income (expense), net

     141        (99,496     (99,355
                        

Loss before income taxes

     (64,269     (109,272     (173,541

Income tax provision

     (741     (2,559     (3,300
                        

Net loss

   $ (65,010   $ (111,831   $ (176,841
                        

 

26


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended March 31, 2010

 

     Guarantor     Parent     Headwaters  

(in thousands)

   Subsidiaries     Company     Consolidated  

Cash flows from operating activities:

      

Net income (loss)

   $ 550      $ (27,478   $ (26,928

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

      

Depreciation and amortization

     29,084        72        29,156   

Interest expense related to amortization of debt issue costs and debt discount

       8,315        8,315   

Stock-based compensation

     1,572        713        2,285   

Deferred income taxes

     3,294        (7,372     (4,078

Net gains of unconsolidated joint ventures

     (8,942       (8,942

Net gain on disposition of property, plant and equipment

     (1,246       (1,246

Decrease in trade receivables

     21,022          21,022   

Increase in inventories

     (968       (968

Decrease (increase) in accounts payable and accrued liabilities

     (17,493     14,410        (3,083

Other changes in operating assets and liabilities, net

     8,070        (3,535     4,535   
                        

Net cash provided by (used in) operating activities

     34,943        (14,875     20,068   
                        

Cash flows from investing activities:

      

Purchase of property, plant and equipment

     (13,674     (27     (13,701

Proceeds from disposition of property, plant and equipment

     3,530          3,530   

Net decrease (increase) in long-term receivables and deposits

     (8,761     1,000        (7,761

Net change in other assets

     (391     (419     (810
                        

Net cash provided by (used in) investing activities

     (19,296     554        (18,742
                        

Cash flows from financing activities:

      

Net proceeds from issuance of long-term debt

       316,187        316,187   

Payments on long-term debt

       (259,795     (259,795

Other debt issue costs

       (2,456     (2,456

Employee stock purchases

     327        54        381   
                        

Net cash provided by financing activities

     327        53,990        54,317   
                        

Net increase in cash and cash equivalents

     15,974        39,669        55,643   

Cash and cash equivalents, beginning of period

     (2,947     18,881        15,934   
                        

Cash and cash equivalents, end of period

   $ 13,027      $ 58,550      $ 71,577   
                        

 

27


Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended March 31, 2011

 

     Guarantor     Parent     Headwaters  

(in thousands)

   Subsidiaries     Company     Consolidated  

Cash flows from operating activities:

      

Net loss

   $ (65,010   $ (111,831   $ (176,841

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

      

Depreciation and amortization

     31,159        56        31,215   

Asset impairments

     38,000          38,000   

Interest expense related to amortization of debt issue costs and debt discount

       14,496        14,496   

Stock-based compensation

     1,220        817        2,037   

Deferred income taxes

     8,783        (8,390     393   

Net gains of unconsolidated joint ventures

     (2,452       (2,452

Net gain on disposition of property, plant and equipment

     (309       (309

Decrease in trade receivables

     24,394          24,394   

Increase in inventories

     (403       (403

Increase (decrease) in accounts payable and accrued liabilities

     1,258        (13,822     (12,564

Other changes in operating assets and liabilities, net

     (20,515     21,600        1,085   
                        

Net cash provided by (used in) operating activities

     16,125        (97,074     (80,949
                        

Cash flows from investing activities:

      

Purchase of property, plant and equipment

     (12,143       (12,143

Proceeds from disposition of property, plant and equipment

     413          413   

Net decrease in long-term receivables and deposits

     526          526   

Payments for acquisitions

     (2,500       (2,500

Net change in other assets

     (651     (100     (751
                        

Net cash used in investing activities

     (14,355     (100     (14,455
                        

Cash flows from financing activities:

      

Net proceeds from issuance of long-term debt

       392,750        392,750   

Payments on long-term debt

       (338,044     (338,044

Employee stock purchases

     308        95        403   
                        

Net cash provided by financing activities

     308        54,801        55,109   
                        

Net increase (decrease) in cash and cash equivalents

     2,078        (42,373     (40,295

Cash and cash equivalents, beginning of period

     21,168        69,816        90,984   
                        

Cash and cash equivalents, end of period

   $ 23,246      $ 27,443      $ 50,689   
                        

 

28


Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the interim condensed consolidated financial statements and related notes included in this Form 10-Q. Our fiscal year ends on September 30 and unless otherwise noted, references to 2010 refer to our fiscal quarter and/or six months ended March 31, 2010 and references to 2011 refer to our fiscal quarter and/or six months ended March 31, 2011. Other references to years refer to our fiscal year rather than a calendar year.

Overview

Consolidation and Segments. The consolidated financial statements include the accounts of Headwaters, all of our subsidiaries, and other entities in which we have a controlling interest. All significant intercompany transactions and accounts are eliminated in consolidation.

We currently operate in three industries: light building products, heavy construction materials and energy technology. In the light building products segment, we design, manufacture, and sell manufactured architectural stone, exterior siding accessories (such as shutters, mounting blocks, and vents), concrete block and other building products. Revenues consist of product sales to wholesale and retail distributors, contractors and other users of building products. Revenues in the heavy construction materials segment consist primarily of CCP product sales, including fly ash used as a replacement for portland cement, along with a smaller amount from services. In the energy technology segment, we are focused on reducing waste and increasing the value of energy-related feedstocks, primarily in the areas of low-value coal and oil. Revenues for the energy technology segment consist primarily of coal sales, with smaller amounts of catalyst sales and equity earnings in joint ventures.

Operations and Strategy. During the past several years, we have executed our two-fold plan of maximizing cash flow from our existing operating business units and diversifying away from our historical reliance on the legacy energy technology Section 45K business. Our past acquisition strategy targeted businesses that were leading companies in their respective industries and that had strong operating margins, thus providing additional cash flow that complements the financial performance of our existing businesses. With the addition and expansion of our CCP management and marketing business through acquisitions beginning in 2002, and the growth of our light building products business through several acquisitions beginning in 2004, we have achieved revenue growth and diversification in three business segments. In 2005 and subsequent years, we focused on the integration of our large 2004 acquisitions, including the marketing of diverse kinds of building products through our national distribution network. In 2006, we began to acquire small companies in the light building products industry with innovative products that could be marketed using the extensive distribution channels we have developed over many years.

During 2008 and 2009, our primary focus was on the development of our coal cleaning business in the energy technology segment and our use of cash consisted primarily of growth capital expenditures, a major portion of which related to coal cleaning facilities. In late fiscal 2008 and subsequent years, as the economy deteriorated, we focused on operational efficiency improvements and cost reductions in order to strengthen our balance sheet. We engaged in significant cost savings efforts in our light building products segment by reducing advertising, employee, transportation and other expenses. Our continuous improvement initiatives within our heavy construction materials segment focused on reducing our cost structure through process improvements, headcount reductions, lower maintenance spending and improved terms on operating leases. We consolidated our coal cleaning business under our heavy construction materials management to reduce overhead. We also significantly reduced corporate and research and development spending.

Light Building Products Segment. The key strategic element of our building products strategy is to introduce new products into our extensive distribution system, providing us a means to rapidly increase geographic coverage for new products. Our light building products segment has been significantly affected by the depressed new housing and residential remodeling markets. Accordingly, we have significantly reduced operating costs to be positively positioned to take advantage of a sustained industry turnaround when it occurs.

There has been a severe slowing in the calendar years 2007 through 2010 of new housing starts and in home sales generally, which has continued into 2011. Bank foreclosures have put a large number of homes into the market for sale, effectively limiting some of the incentives to build new homes. During fiscal 2010 and in 2011, the homebuilding industry continued to experience a decline in demand for new homes and an oversupply of new and existing homes available for sale. Because our light building products business relies on the home improvement and remodeling markets as well as new construction, we experienced a further slowdown in sales activity but believe some stabilization occurred during the latter part of fiscal 2010 with small increases in some of our year over year comparables. Limits on credit availability, further home foreclosures, home price depreciation, and an oversupply of homes for sale in the market may adversely affect homeowners’ and/or homebuilders’ ability or desire to engage in construction or remodeling, resulting in an extended period of low new construction starts and slow increases in remodeling and repair activities.

 

29


Table of Contents

We, like many others in the light building products industry, experienced a large drop in orders and a reduction in our margins in fiscal 2008 and 2009 relative to prior years. In fiscal 2007, 2008 and 2009, we recorded significant goodwill impairments associated with our light building products business. None of the impairment charges in these years affected our cash position, cash flow from operating activities or debt covenant compliance. Weakness continued in fiscal 2010 and in 2011 and while our end markets appear to have stabilized, they have not strengthened appreciably. It is not possible to know when improved market conditions and a housing recovery will become sustainable. We can provide no assurances that the light building products market will improve in the near future.

The financial crisis affecting the banking system and financial markets and the going concern threats to banks and other financial institutions resulted in a tightening of the credit markets and a low level of liquidity in many financial markets. While mortgage and home equity loan rates have decreased, volatility continues to exist in credit and equity markets, increased borrowing requirements prevent many potential buyers from qualifying for home mortgages and equity loans and there exists a continued lack of consumer confidence. Continued tightness of mortgage lending or mortgage financing requirements could adversely affect the availability of credit for purchasers of our products and thereby reduce our sales. There could be a number of follow-on effects from the credit crisis on our business, including the inability of prospective homebuyers or remodelers to obtain credit for financing the purchase of our building products. These and other similar factors could cause decisions to delay or forego new home construction or improvement projects, cause our customers to delay or decide not to purchase our building products, or lead to a decline in customer transactions and our financial performance.

Heavy Construction Materials Segment. Our business strategy in the heavy construction materials industry is to negotiate long-term contracts with suppliers, supported by investment in transportation and storage infrastructure for the marketing and sale of CCPs. We are also continuing our efforts to expand the use of high-value CCPs, develop more uses for lower-value CCPs, and expand our CCP disposal services. While all of our businesses have been affected by the current recession, the impact on our heavy construction materials segment has been somewhat less severe than on our other segments. Finally, a key element of our strategy is to increase our site service revenue generated from CCP management.

Energy Technology Segment. We own and operate newly-constructed and recently-renovated coal cleaning facilities that remove impurities from waste coal, resulting in higher-value, marketable coal. Construction of these facilities was our largest single investment of cash during fiscal 2008 and 2009, which construction was completed as of December 31, 2009. Capital expenditures in fiscal 2008 and 2009 were financed primarily with available cash from operations and lease financing.

A number of our coal cleaning facilities have produced coal at low levels and during the March 2011 quarter the facilities operated at less than 25% of capacity, primarily because of feedstock-related issues. As of March 31, 2011, we have temporarily curtailed operations at three of our coal cleaning facilities and reduced staffing at other facilities to better match coal production with current demand, resulting in a current forecast of future cash flows that indicated an impairment existed at March 31, 2011. Accordingly, a non-cash impairment charge of $37.0 million was recorded in the March 2011 quarter. Using assumptions in a forecast of future cash flows that were based primarily on historical operating conditions, we determined that a coal cleaning asset impairment existed at September 30, 2010 and recorded a non-cash impairment charge of $34.5 million in fiscal 2010. If assumptions regarding future cash flows related to the coal cleaning assets prove to be incorrect, we may be required to record additional impairment charges in future periods.

We continue to invest in research and development activities focused on energy-related technologies and nanotechnology, but at decreased levels compared to earlier years. We participate in a joint venture that operates an ethanol plant located in North Dakota. We also participated in a joint venture that owns a hydrogen peroxide plant in South Korea, but we sold our interest in that joint venture during fiscal 2010. We are also investing in other energy projects such as the refining of heavy crude oils into lighter transportation fuels. In January 2011, we announced the decision by a refinery to commercially implement our HCAT® technology following a lengthy evaluation of the technology.

Seasonality and Weather. Both our light building products and our heavy construction materials segments are greatly impacted by seasonality. Revenues, profitability and EBITDA are generally highest in the June and September quarters. Further, both segments are affected by weather to the extent it impacts construction activities.

Debt and Liquidity. We incurred indebtedness in prior years to make strategic acquisitions, but were also able to increase cash flows and utilize that cash to reduce debt levels. We became highly leveraged as a result of acquisitions, but reduced our outstanding debt significantly through 2008 by using cash generated from operations, from underwritten public offerings of common stock and from proceeds from settlement of litigation. During 2005 through 2008, we made several early repayments of our long-term debt. In fiscal 2008 and 2009, early repayments of long-term debt decreased as compared to earlier years primarily due to our investments of available cash in the development of our coal cleaning business in the energy technology segment.

 

30


Table of Contents

In fiscal 2010, we issued 11 3/8% senior secured notes aggregating approximately $328.3 million, for net proceeds of approximately $316.2 million. We used approximately $260.0 million of the proceeds to repay all of our obligations under the former senior secured credit facility and virtually all of our outstanding 2.875% convertible senior subordinated notes. We also entered into a $70.0 million asset based revolving loan facility (ABL Revolver), which is currently undrawn, and retired high-interest convertible debt and increased our cash balance with proceeds from the sale of our interest in the South Korean hydrogen peroxide joint venture and a federal income tax refund. During fiscal 2010 and the December 2010 quarter, we repaid approximately $39.0 million of our 16% convertible senior subordinated notes leaving a balance of approximately $9.2 million. In 2011, we again restructured our long-term debt by issuing $400.0 million of 7 5/8% senior secured notes for net proceeds of approximately $392.8 million. We used most of those net proceeds to repay the 11 3/8% senior secured notes issued in fiscal 2010 and the related early repayment premium of approximately $59.0 million. The 7 5/8% senior secured notes mature in April 2019. We now have no debt maturities prior to 2014, unless the holders of the remaining 16% convertible senior subordinated notes exercise their put option on June 1, 2012.

Capital expenditures in fiscal 2010 were significantly lower than prior years and this trend is currently expected to continue in fiscal 2011 and into the future. This has allowed us to focus on liquidity and the early repayment of debt and enabled us to continue implementing our overall operational strategy. We currently have approximately $50.7 million of cash on hand and additional cash flow is expected to be generated from operations over the next 12 months.

In summary, our strategy for 2011 and subsequent years is to continue capital expenditures at reduced levels, continue activities to improve operations and reduce operating and general overhead costs, and to reduce our outstanding debt levels using cash on hand and cash flow from operations to the extent possible. We also may review strategic acquisitions of products or entities that expand our current operating platform when opportunities arise.

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

The information set forth below compares our operating results for the quarter ended March 31, 2011 (2011) with operating results for the quarter ended March 31, 2010 (2010).

Summary. Our total revenue for the March 2011 quarter was $127.1 million, down 1% from $128.2 million for the March 2010 quarter. Gross profit decreased 36%, from $27.5 million in 2010 to $17.5 million in 2011. Our operating loss increased from $(4.3) million in 2010 to $(71.7) million in 2011, and the net loss increased from $(13.0) million or a diluted loss per share of $(0.22) in 2010, to a net loss of $(156.2) million, or $(2.58) per diluted share, in 2011. There were several significant non-routine adjustments recorded in the March 2011 quarter, including approximately $68.9 million of interest expense related to our senior debt refinancing (of which approximately $59.0 million was for the early repayment premium relating to the repurchase of the 11 3/8% senior secured notes in March 2011), $38.0 million of asset impairments, and $15.0 million of accrued legal costs related to a judgment in an ongoing legal matter. In addition, in fiscal 2011, we are not recognizing income tax benefits attributable to our pre-tax operating losses and tax credits as we have in prior years. These adjustments and others are discussed in more detail below.

Revenue and Gross Margins. The major components of revenue, along with gross margins, are discussed in the sections below, by segment.

Light Building Products Segment. Sales of light building products in 2011 were $62.7 million with a corresponding gross profit of $8.8 million. Sales of light building products in 2010 were $61.3 million with a corresponding gross profit of $14.6 million. The increase in our sales of light building products in 2011 was due primarily to higher sales from our manufactured architectural stone and regional concrete block categories, where sales improved approximately $2.6 million, or 7%, in the quarter. Sales in our siding accessory category declined approximately 4% in 2011, due to adverse weather conditions in the Northeast and Midwest and continued slowness in end markets. The gross margin decreased primarily because of increases in freight, material (especially siding accessories) and production costs, along with costs related to the elimination of certain operating lines and the consolidation of operating locations.

The significant weakness in the new housing and residential remodeling market which began several years ago has continued in fiscal 2011 and while our end markets appear to have stabilized, they have not strengthened appreciably. We believe our niche strategy, the introduction of new products and our focus on productivity improvements and cost reductions have tempered somewhat the impact of the severe slowdown in the housing market; however, the recession has resulted in high unemployment, adding to the high level of home foreclosures, putting additional homes on the market and further reducing the demand for new construction.

 

31


Table of Contents

New housing starts according to the National Association of Home Builders were 0.6 million and 0.5 million units in calendar 2009 and 2010, respectively, compared to 10- and 50-year averages of 1.4 million and 1.5 million units, respectively. Our light building products business relies on the home improvement and remodeling market as well as new construction. The U.S. Census Bureau’s Value of Private Residential Construction Spending Put in Place data on homeowner improvement activity shows that the four-quarter moving average peaked at $146.2 billion in the second quarter of calendar 2007, fell to $112.0 billion in the fourth quarter of calendar 2009, and then rose to $114.9 billion in the fourth quarter of calendar 2010. The Leading Indicator of Remodeling Activity estimate issued by the Joint Center for Housing Studies at Harvard University has estimated that the four-quarter moving average will be $130.2 billion in the second quarter of calendar 2011, before falling to $115.2 billion in the fourth quarter of calendar 2011, a level comparable to the levels experienced in calendar 2010.

Given our market leadership positions and reduced cost structure, we believe that we are positioned to benefit from a rebound in the housing market when it occurs. We believe the long-term growth prospects in the industry are strong because the current seasonally-adjusted annualized housing starts are still well below the 10- and 50-year averages. According to the Harvard Joint Center for Housing Studies, the nation’s housing stock will have to accommodate approximately 12.5 million to 14.8 million additional households due to population growth over the next decade, or approximately 1.3 million to 1.5 million households per year.

Heavy Construction Materials Segment. Heavy construction materials revenues for 2011 were $45.1 million with a corresponding gross profit of $7.6 million. Heavy construction materials revenues for 2010 were $47.3 million with a corresponding gross profit of $8.9 million. The decrease in heavy construction materials revenues in 2011 compared to 2010 was primarily due to lower service revenues in 2011, in turn due to the completion of a major service project. The gross margin percentage decreased from 2010 to 2011 primarily due to sales mix and the decline in revenue.

It is not possible to accurately predict the future trends of either cement consumption or cement prices, nor the correlation between cement usage and prices and fly ash sales and prices. Nevertheless, because fly ash is sold as a replacement for portland cement in a wide variety of concrete uses—including infrastructure, commercial, and residential construction—statistics and trends for portland and blended cement sales can be an indicator for fly ash sales. According to the Bureau of Labor Statistics, the Producer Price Index for cement declined 1.4% in calendar 2009 and we believe there may have been further declines in calendar 2010. In April 2011, the Portland Cement Association’s cement consumption forecast reflected a 2.0% increase for calendar 2011 and an 8.5% increase for calendar 2012, followed by sustained growth for calendar 2013 and beyond.

In June 2010, the EPA proposed two alternative rules to regulate CCPs generated by electric utilities and independent power producers. One proposed option would classify CCPs disposed of in surface impoundments or landfills as “special wastes” subject to federal hazardous waste regulation under Subtitle C of the Resource Conservation and Recovery Act (RCRA). The second proposed option would instead regulate CCPs as non-hazardous waste under Subtitle D of RCRA, with states retaining the lead authority on regulating their handling, storage and disposal. Under both options, the current exemption from hazardous waste regulation for CCPs that are recycled for beneficial uses would remain in effect. However, the EPA has received comments on refining the definition of beneficial uses subject to the exemption, which could result in a narrowing of the scope of exempt uses in the final rule. Both rule options are controversial and the EPA extended the deadline for public comments to November 19, 2010. The EPA has informally estimated that it could take another year to evaluate the 450,000 comments received during the public comment period. Additionally, the EPA has indicated that it will reopen comments on information received during the comment period.

Members of Congress have expressed interest in resolving the EPA controversy through legislation. Two bills filed in the U.S. House of Representatives during April 2011—HR 1391 and HR 1405—would allow EPA rulemaking activities to continue, but prohibit the use of Subtitle C in those proceedings. HR 1391 has attracted 33 bipartisan co-sponsors to date and has already been the subject of a subcommittee hearing.

At this time, it is not possible to predict what form the final regulations will take. Either option is likely to increase the complexity and cost of managing and disposing of CCPs. If the EPA decides to regulate CCPs as hazardous waste under RCRA Subtitle C, CCPs would become subject to a variety of regulations. Regulation of CCPs as hazardous waste would likely have an adverse effect on beneficial use and sales of CCPs and our relationships with utilities. There can be no guarantee that such regulations would not reduce or eliminate our supply or our ability to market fly ash and other CCPs which would have a material adverse impact on our operations and financial condition.

Energy Technology Segment. Energy technology segment revenues for 2011 were $19.4 million with a corresponding gross profit of $1.1 million. Revenues for 2010 were $19.6 million with a corresponding gross profit of $4.1 million. Segment revenues consisted primarily of coal sales related to our coal cleaning business, but also include equity earnings from our joint venture investment in an ethanol plant located in North Dakota. Revenues in 2011 include

 

32


Table of Contents

approximately $4.5 million of catalyst sales, which were $0 in 2010, and revenues in 2010 include $3.4 million of equity earnings from our joint venture investment in a hydrogen peroxide plant in South Korea which was sold in late fiscal 2010. Commercialization efforts for our proprietary HCAT® hydrocracking technology catalyst have increased due to the positive operating impact our HCAT has had at a major refinery. Additional refineries have sought commercial and technical proposals as technical risks have been eliminated and refineries are seeking the commercial benefits of HCAT.

Coal sales were not significantly different between 2010 and 2011, with both tons sold and prices per ton remaining relatively constant. Cost of revenue related to our coal cleaning business exceeded revenue in both 2010 and 2011, due largely to the ongoing situation of low capacity utilization and idled facilities. As of March 31, 2011, we have temporarily idled three of our coal cleaning facilities to align production to sales and to concentrate production in fewer facilities. We have also reduced staffing at other facilities and cut costs at all locations to reduce the breakeven point for the coal cleaning business. However, to be successful, we must overcome operational issues, including securing and maintaining strategic relationships with coal companies, landowners, and others that host our coal cleaning facilities; securing adequate coal feedstock and selling our product at reasonable prices; efficiently handling and transporting materials; and efficiently operating our dredging, slurry piping and coal cleaning equipment.

In the future, we will likely need to undertake the significant disruption and expense of relocating facilities and entering into new strategic relationships where feedstock is exhausted or other critical arrangements come to an end. The primary factor influencing a decision to relocate a facility is the quantity, quality and cost of available feedstock at or near the current site. If either or both the amount of feedstock or the projected clean coal recoverability of the feedstock is deemed to be insufficient at a current location, we will consider relocating a facility to increase our opportunity for profitable operations and positive cash flow. Ultimately, we may relocate most if not all of our 11 facilities, and currently, we are considering the potential future relocation within the next five years of up to five of the facilities, but have no plans for relocation of any facilities earlier than 2012. Relocation of a facility would result in ceasing operations for a period of approximately six to nine months. Estimated relocation costs for a facility vary considerably and range from approximately $3.0 million to $8.0 million. Relocation of a facility would be undertaken only if the likelihood of future positive cash flows were sufficient to warrant the incurrence of relocation costs and other related costs such as for the establishment of new contractual arrangements to obtain feedstock and to secure a site lease.

Operating Expenses, including Asset Impairments. Amortization expenses were materially consistent from 2010 to 2011 and are currently expected to remain relatively consistent year over year for the remainder of fiscal 2011. Research and development expenses in 2011 were approximately $1.0 million higher than in 2010 due primarily to expenses incurred in product development in the light building products segment. Selling, general and administrative expenses increased $18.4 million, to $42.8 million in 2011 from $24.4 million in 2010. The increase in 2011 was due primarily to a $15.0 million accrual for litigation expense recognized during 2011 (reference is made to Note 11 to the consolidated financial statements). Excluding the $15.0 million expense for litigation, our selling, general and administrative expenses increased approximately $3.4 million, or 14%, from 2010 to 2011, which increase was attributable primarily to severance costs incurred in 2011 and expenses related to the cash performance unit awards described in Note 11 to the consolidated financial statements.

Despite some stabilization and operational improvements, our coal cleaning business has not achieved the planned economies of scale based on budgeted full production, and to date, our coal cleaning facilities have not consistently operated at a cost that is less than the revenues generated. Profitability depends on our ability to increase production, price and sales of cleaned coal. A number of our coal cleaning facilities have produced coal at low levels and during the March 2011 quarter the facilities operated at less than 25% of capacity. As of March 31, 2011, we have temporarily curtailed operations at three of our coal cleaning facilities and reduced staffing at other facilities to better match coal production with current demand, resulting in a current forecast of future cash flows that indicated an impairment existed at March 31, 2011. Accordingly, a non-cash impairment charge of $37.0 million was recorded in the March 2011 quarter. Following the impairment, the coal cleaning operations’ carrying value of property, plant and equipment was approximately $45.0 million. If these facilities operate at low production levels or cannot produce fuel at a cost and quality satisfactory to customers, these operations may not become profitable and some of the facilities could be further impaired, potentially requiring an additional charge to earnings in the period of impairment. Reference is made to the section titled “Critical Accounting Policies and Estimates—Valuation of Long-Lived Assets, including Property, Plant and Equipment, Intangible Assets and Goodwill” in our Form 10-K for a more detailed description of the procedures and estimates used in calculating an impairment.

We may sell some or all of the coal cleaning facilities in the future and we are marketing our coal cleaning facilities to various parties. We currently estimate that the process of selling the facilities could take 18-24 months, but it is not possible to predict the final proceeds or ultimate success of this effort. The requirements for classification of the facilities as “held for sale,” which requirements include a relatively high degree of probability and specificity as to how and when the assets will be sold, have not been met.

 

33


Table of Contents

In addition to the $37.0 million asset impairment charge related to coal cleaning assets, a $1.0 million impairment charge was also recognized in the light building products segment related to the elimination of a product line.

Other Income and Expense. For 2011, we reported net other expense of $82.7 million, compared to net other expense of $16.1 million for 2010. The increase in net other expense of $66.6 million was comprised almost solely of an increase in net interest expense of approximately $66.7 million.

Net interest expense increased from $16.0 million in 2010 to $82.7 million in 2011 due primarily to approximately $59.0 million of premium relating to the early retirement of our 11 3/8% senior secured notes plus approximately $8.8 million of accelerated debt discount and debt issue costs associated with that early repayment, all as described in Note 5 to the consolidated financial statements. Interest expense in fiscal 2011 is currently expected to total approximately $125.0 million.

Income Tax Provision. Reference is made to Note 7 to the consolidated financial statements for a detailed description of the income tax provision recorded in 2011 and the income tax benefit recorded in 2010, including the reasons for recording a full valuation allowance on net operating losses and tax credits for the 2011 fiscal year. We currently expect to record a full valuation allowance on our net amortizable deferred tax assets until such time as we return to profitability.

Six Months Ended March 31, 2011 Compared to Six Months Ended March 31, 2010

The information set forth below compares our operating results for the six months ended March 31, 2011 (2011) with operating results for the six months ended March 31, 2010 (2010).

Summary. Our total revenue for the six months ended March 31, 2011 was $281.8 million, up 5% from $267.8 million for the six months ended March 31, 2010. Gross profit decreased 11%, from $56.9 million in 2010 to $50.4 million in 2011. Our operating loss increased from $(10.6) million in 2010 to $(74.2) million in 2011, and the net loss increased from $(26.9) million or a diluted loss per share of $(0.45) in 2010, to a net loss of $(176.8) million, or $(2.93) per diluted share, in 2011.

Revenue and Gross Margins. The major components of revenue, along with gross margins, are discussed in the sections below, by segment.

Light Building Products Segment. Sales of light building products in 2011 were $132.4 million with a corresponding gross profit of $24.7 million. Sales of light building products in 2010 were $132.5 million with a corresponding gross profit of $33.2 million. The gross margin decreased primarily because of increases in freight, material (especially siding accessories) and production costs, along with costs related to the elimination of certain operating lines and the consolidation of operating locations.

Heavy Construction Materials Segment. Heavy construction materials revenues for 2011 were $108.3 million with a corresponding gross profit of $22.5 million. Heavy construction materials revenues for 2010 were $103.1 million with a corresponding gross profit of $21.4 million. The increase in heavy construction materials revenues in 2011 compared to 2010 was due primarily to higher product revenues in 2011, particularly in our Central and Eastern regions.

Energy Technology Segment. Energy technology segment revenues for 2011 were $41.1 million with a corresponding gross profit of $3.2 million. Revenues for 2010 were $32.2 million with a corresponding gross profit of $2.4 million. Segment revenues consisted primarily of coal sales related to our coal cleaning business, but also include equity earnings from our joint venture investment in an ethanol plant located in North Dakota. Revenues in 2011 include approximately $6.6 million of catalyst sales, which were $0 in 2010, and revenues in 2010 include $3.9 million of equity earnings from our joint venture investment in a hydrogen peroxide plant in South Korea which was sold in late fiscal 2010.

Coal sales increased approximately $9.2 million between 2010 and 2011, primarily due to increased coal shipments during the December 2010 quarter as compared to the December 2009 quarter. Cost of revenue related to our coal cleaning business exceeded revenue in both 2010 and 2011, due largely to the ongoing situation of low capacity utilization and idled facilities.

Operating Expenses, including Asset Impairments. Amortization expenses were materially consistent from 2010 to 2011. Research and development expenses in 2011 were approximately $1.0 million higher than in 2010 due primarily to expenses incurred in product development in the light building products segment. Selling, general and administrative expenses increased $18.0 million, to $70.6 million in 2011 from $52.6 million in 2010. The increase in 2011 was due primarily to the $15.0 million accrual for litigation expense recognized during 2011. Excluding the $15.0 million expense for litigation, our selling, general and administrative expenses increased approximately $3.0 million, or 6%, from 2010 to 2011, which was attributable primarily to severance costs incurred in 2011 and expenses related to the cash performance unit awards described in Note 11 to the consolidated financial statements, partially offset by a decrease in certain professional services expenses, particularly $3.3 million of costs that were expensed in 2010 for consultations related to recapitalization transactions that occurred in 2010 and other periods.

 

34


Table of Contents

As described in detail previously, a non-cash impairment charge of $37.0 million was recorded related to our coal cleaning assets in the energy technology segment along with $1.0 million of restructuring costs in the light building products segment related to the elimination of a product line.

Other Income and Expense. For 2011, we reported net other expense of $99.4 million, compared to net other expense of $32.3 million for 2010. The increase in net other expense of $67.1 million was comprised of an increase in net interest expense of approximately $66.3 million plus a decrease in net other income of approximately $0.8 million.

Net interest expense increased from $33.4 million in 2010 to $99.7 million in 2011 due primarily to approximately $59.0 million of premium relating to the early retirement of our 11 3/8% senior secured notes plus approximately $8.8 million of accelerated debt discount and debt issue costs associated with that early repayment, all as described in Note 5 to the consolidated financial statements. The decrease in net other income of $0.8 million was primarily the result of a $1.3 million gain on the sale of non-strategic property, plant and equipment in the light building products segment in 2010.

Income Tax Provision. Reference is made to Note 7 to the consolidated financial statements for a detailed description of the income tax provision recorded in 2011 and the income tax benefit recorded in 2010, including the reasons for recording a full valuation allowance on net operating losses and tax credits for the 2011 fiscal year.

Impact of Inflation and Related Matters

In certain periods, some of our operations have been negatively impacted by increased raw materials costs for commodities, such as polypropylene and poly-vinyl chloride in the light building products segment. While the negative impact was generally somewhat less significant during the 2010 fiscal year than during prior years, during the six months ended March 31, 2011, we have experienced cost increases for certain raw materials and transportation fuel. We currently believe it is possible that costs for raw materials and other commodities such as fuels, along with the prices of other goods and services could increase significantly during 2011 and future periods. In prior periods, we have passed through certain increased raw materials costs to customers, but it is not possible to accurately predict the future trends of these costs, nor our ability to pass on future price increases.

Liquidity and Capital Resources

Summary of Cash Flow Activities. Net cash used in operating activities during the six months ended March 31, 2011 (2011) was $(80.9) million, compared to net cash provided by operating activities of $20.1 million during the six months ended March 31, 2010 (2010). The net loss in 2011 exceeded the net loss in 2010 primarily due to several non-routine adjustments (some of which did not involve the use of cash), including approximately $68.9 million of interest expense related to our senior debt refinancing, $38.0 million of asset impairments, and $15.0 million of accrued legal costs related to a judgment in an ongoing legal matter. In addition, in 2010, we reported income tax benefit of approximately $16.0 million (and had approximately $12.9 million of income tax refunds), while in 2011, we reported income tax expense of $(3.3) million. The cash-related change in net loss constitutes the most significant difference between the two periods in cash flows from operating activities.

In both periods, our primary investing activity consisted of the purchase of property, plant and equipment. Also in both periods, our financing activities consisted primarily of a significant restructuring of our long-term debt, resulting in the issuance of new senior secured notes and the repayment of former senior secured debt and a portion of our outstanding convertible debt. More details about these and other investing and financing activities are provided in the following paragraphs.

Investing Activities. Total expenditures for property, plant and equipment in 2011 were $12.1 million, a decrease of $1.6 million from 2010. In both periods, the majority of capital expenditures related to the maintenance of operating capacity in our light building products segment. Total fiscal year 2011 capital expenditures are currently expected to be near the fiscal 2010 level.

Capital expenditures are limited by the terms of our ABL Revolver to $55.0 million in 2011 and $60.0 million in 2012. As of March 31, 2011, we were committed to spend approximately $0.4 million on capital projects that were in various stages of completion. In 2010 and 2011, we realized $3.5 million and $0.4 million, respectively, of proceeds from the sale of property, plant and equipment, most of which represented non-strategic assets in our light building products segment. In 2010, we had a net increase of approximately $7.8 million for long-term receivables and deposits, primarily in the energy technology segment. In 2011, we acquired certain assets and assumed certain liabilities of two privately-held companies in the light building products industry for total consideration of approximately $2.5 million.

 

35


Table of Contents

We intend to continue to expand our business through growth of existing operations and commercialization of technologies currently being developed. Acquisitions have historically been an important part of our long-term business strategy; however, primarily because of covenant restrictions under our former senior secured notes, but also due to cash flow considerations and recent events affecting the debt and equity markets, we made only one small acquisition in fiscal 2010 and two small acquistions in 2011. We have also invested in joint ventures, one of which was sold in fiscal 2010, which are accounted for using the equity method of accounting. We do not currently have plans to significantly increase our investments in any of the remaining joint venture entities. Current debt agreements limit potential acquisitions and investments in joint ventures. During the four-year term of the ABL Revolver, our acquisitions and investments in joint ventures and other less than 100%-owned entities are limited to total cumulative consideration of $30.0 million and $10.0 million annually.

Financing Activities. In October 2009, we issued approximately $328.3 million of 11 3/8% senior secured notes due 2014 for net proceeds of approximately $316.2 million. We used most of the net proceeds to repay all of our obligations under the former senior secured credit facility and the outstanding 2.875% convertible senior subordinated notes. In connection with the termination of the former credit facility and early repayment of the debt, we wrote off all remaining related debt issue costs, aggregating approximately $2.0 million. In addition, in connection with consultations related to recapitalization transactions that occurred in 2010 and other periods, we incurred $3.3 million of costs that were expensed during 2010, which amount is included in selling, general and administrative expenses in the statement of operations. Also in October 2009, we entered into a $70.0 million ABL Revolver for which we incurred approximately $2.5 million of debt issue costs.

In March 2011, we issued $400.0 million of 7 5/8% senior secured notes for net proceeds of approximately $392.8 million. We used most of the net proceeds to repay the 11 3/8% senior secured notes described above and the related early repayment premium of approximately $59.0 million (which premium was charged to interest expense). The 7 5/8% notes mature in April 2019 and bear interest at a rate of 7.625%, payable semiannually. The notes are secured by substantially all assets of Headwaters, with the exception of joint venture assets; however, the note holders have a second priority position with respect to the assets that secure the ABL Revolver, currently consisting of certain trade receivables and inventories of our light building products and heavy construction materials segments. The notes are senior in priority to all other outstanding and future subordinated debt. The March 2011 refinancing accomplished several objectives, the most important of which was to extend the maturity of our senior debt. It also reduced our future annual interest expense by approximately $8.3 million and increased our future annual cash flow by approximately $6.8 million.

Other terms of the new senior secured notes, including redemption features, and the ABL Revolver and our outstanding convertible senior subordinated notes, are described in Note 5 to the consolidated financial statements and in the Form 10-K.

In 2011, we repurchased and canceled $10.0 million in aggregate principal amount of the 16% convertible senior subordinated notes. Terms of repayment included premiums totaling approximately $1.7 million, which were recorded as interest expense. Accelerated debt discount and debt issue costs aggregating approximately $0.6 million were also charged to interest expense. Following these transactions, approximately $9.2 million of these notes remained outstanding as of March 31, 2011. There are currently no maturities of debt prior to 2014, unless the holders of the 16% notes exercise their put option on June 1, 2012. We also have the option to redeem the 16% notes on or after June 4, 2012.

Following certain asset sales, as defined, we could be required to prepay a portion of the senior secured notes. Interest costs on all long-term debt in fiscal 2011 are currently expected to total approximately $125.0 million, with approximately $105.0 million involving the expenditure of cash.

We were in compliance with all debt covenants as of March 31, 2011. The senior secured notes and ABL Revolver limit the incurrence of additional debt and liens on assets, prepayment of future subordinated debt, merging or consolidating with another company, selling all or substantially all assets, making capital expenditures, making acquisitions and investments and the payment of dividends or distributions, among other things. In addition, if availability under the ABL Revolver is less than 15% of the total $70.0 million commitment, or $10.5 million currently, we are required to maintain a monthly fixed charge coverage ratio of at least 1.0x for the preceding twelve-month period.

There have been no borrowings under the ABL Revolver since it was entered into in October 2009. The ABL Revolver terminates three months prior to the earliest maturity date of the senior secured notes or any of the convertible senior subordinated notes (currently November 2013), but no later than October 2014, at which time any amounts borrowed must be repaid. Availability under the ABL Revolver cannot exceed $70.0 million, which includes a $35.0 million sub-line for letters of credit and a $10.5 million swingline facility. Availability under the ABL Revolver is further limited by the borrowing base valuations of the assets of our light building products and heavy construction materials segments which secure the borrowings, currently consisting of certain trade receivables and inventories. In addition to the first lien position on these assets, the ABL Revolver lenders have a second priority position on substantially all other assets. As of March 31, 2011, availability under the ABL Revolver was approximately $50.0 million. However, due primarily to the seasonality of our operations, the amount of availability varies from period to period and it is possible that the availability under the ABL Revolver could fall below the 15% threshold, or $10.5 million, in a future period.

 

36


Table of Contents

As of March 31, 2011, our fixed charge coverage ratio, as defined in the ABL Revolver agreement, is approximately 0.6. The fixed charge coverage ratio is calculated by dividing EBITDAR minus capital expenditures and cash payments for income taxes by fixed charges. EBITDAR consists of net income (loss) i) plus net interest expense, income taxes (as defined), depreciation and amortization, non-cash charges such as goodwill and other impairments, and rent expense; ii) plus or minus other specified adjustments such as equity earnings or loss in joint ventures. Fixed charges consist of cash payments for debt service plus rent expense. If availability under the ABL Revolver were to decline below $10.5 million at some future date and the fixed charge coverage ratio were to also be below 1.0, the ABL Revolver lender could issue a notice of default. If a notice of default were to become imminent, we would seek an amendment to the ABL Revolver, or alternatively, a waiver of the availability requirement and/or fixed charge coverage ratio for a period of time.

Approximately $212.6 million remains available for future offerings of securities under a universal shelf registration statement filed with the SEC in 2008. A prospectus supplement describing the terms of any additional securities to be issued is required to be filed before any future offering could commence under the registration statement.

In both periods, cash proceeds from employee stock purchases and the exercise of options were not material. Option exercise activity is primarily dependent on our stock price and is not predictable. To the extent non-qualified stock options are exercised, or there are disqualifying dispositions of shares obtained upon the exercise of incentive stock options, we receive an income tax deduction generally equal to the income recognized by the optionee. Such amounts were not material in either period.

Working Capital. As of March 31, 2011, our working capital was $84.5 million (including $50.7 million of cash and cash equivalents) compared to $147.0 million as of September 30, 2010. The decrease in working capital resulted primarily from cash used in operations and for debt service, all as described previously. Notwithstanding the continuing pressure on our revenues as a result of existing economic conditions, we currently expect operations to produce positive cash flow for the remainder of fiscal 2011 and in future years. We currently believe working capital will be sufficient for our operating needs for the next 12 months, and that it will not be necessary to utilize borrowing capacity under the ABL Revolver for our seasonal operational cash needs during that period of time.

Income Taxes. For the fiscal 2011 year, during which we currently expect to realize a loss before income taxes, cash outlays for income taxes will be minimal, consisting primarily of state income taxes in certain state jurisdictions where we expect to generate taxable income. We have utilized our fiscal 2009 and prior year NOLs by carrying these amounts back to prior years, receiving income tax refunds (which totaled approximately $37.1 million in fiscal 2010). Fiscal 2010 NOLs and tax credit carryforwards were offset by our existing deferred income tax liabilities resulting in a near $0 deferred tax position as of September 30, 2010, and in 2011, we are recording a full valuation allowance on our net amortizable deferred tax assets. As of March 31, 2011, our NOL carryforwards total approximately $67.0 million. The U.S. and state NOLs and capital losses expire from 2012 to 2031. Substantially all of the non-U.S. NOLs do not expire. In addition, there are approximately $21.0 million of tax credit carryforwards as of March 31, 2011, which expire from 2014 to 2031.

As discussed previously, cash payments for income taxes are reduced for tax deductions resulting from disqualifying dispositions of incentive stock options and from the exercise of non-qualified stock options, which amounts were not material in either period. Option exercise activity is primarily dependent on our stock price which is not predictable, and likewise, it is not possible to estimate what tax benefits may be realized from future option exercises.

Summary of Future Cash Requirements. Significant cash requirements for the next 12 months, beyond seasonal operational working capital requirements, consist primarily of interest payments on long-term debt and capital expenditures. In future periods, significant cash requirements will also include the repayment of debt, but not prior to 2014, or June 2012 if the 16% convertible senior subordinated notes totaling approximately $9.2 million are put to us. Reference is made to Note 11 to the consolidated financial statements where the potential risks of future litigation are described in detail.

Legal Matters

We have ongoing litigation and asserted claims which have been incurred during the normal course of business. Reference is made to Note 11 to the consolidated financial statements for a description of our accounting for legal costs and for other information about legal matters.

Recent Accounting Pronouncements

Reference is made to Note 1 to the consolidated financial statements for a discussion of accounting pronouncements that have been recently issued which we have not yet adopted.

 

37


Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, primarily related to our stock price and the activities of one of our joint ventures, the Blue Flint joint venture, which has derivatives in place related to variable interest rates and commodities. We do not use derivative financial instruments for speculative or trading purposes. Future borrowings, if any, under our ABL Revolver will bear interest at a variable rate, as described in Note 5.

Subsequent to the sale in fiscal 2010 of our interest in the South Korean joint venture with Evonik Industries AG, we have limited operations in foreign jurisdictions. The South Korean joint venture was subject to foreign currency exchange rate movements through the date of sale. During the six months ended March 31, 2010, the joint venture recorded foreign currency exchange gains, of which $1.9 million was included in our results of operations.

As described in more detail in Note 11 to the consolidated financial statements, the Compensation Committee approved grants of performance unit awards to certain officers and employees in the corporate business unit, to be settled in cash, based on the achievement of goals related to consolidated free cash flow generated in the second half of fiscal 2010. Assuming the average closing stock price for the 60 days in the period ended March 31, 2011 of $5.37 remains unchanged for the September 30, 2011 and 2012 vesting dates, the payouts under this arrangement would be approximately $3.9 million. At each of the two vesting dates, the payouts under the awards will be adjusted using the average stock price for the 60 days immediately preceding the respective vest dates. A change in the 60-day stock price of 10% from the March 31, 2011 average of $5.37 would result in an increase or decrease of approximately $0.4 million in the payout liability.

In the December 2010 quarter, the Committee approved grants of performance unit awards to participants in the corporate business unit related to consolidated free cash flow generated during fiscal year 2011, with terms similar to those described above for the 2010 six-month period. The ultimate liability for the 2011 year performance unit awards will be adjusted depending on fiscal 2011 performance as well as changes in our stock price through the final vest date of September 30, 2013. As of March 31, 2011, approximately $1.0 million has been accrued for these awards. Assuming 2011 cash flow generation is at target, a change in the 60-day stock price of 10% from the March 31, 2011 average of $5.37 would result in an increase or decrease of approximately $0.2 million in the projected 2011 payout liability.

Also in the December 2010 quarter, the Committee approved grants to certain employees of approximately 0.4 million cash-settled stock appreciation rights (SARs). These SARs will vest in annual installments through September 30, 2013, provided the participant is still employed at the respective vesting dates, and will be settled in cash upon exercise by the employee. The SARs terminate on September 30, 2015 and must be exercised on or before that date. As of March 31, 2011, approximately $0.2 million has been accrued for these awards. Future changes in our stock price (in any amount beyond the grant-date stock price of $3.81) through September 30, 2015 will result in adjustment to the expected liability, which adjustment (whether positive or negative) will be reflected in our statement of operations each quarter. If all of the SARs ultimately vest and the stock price remains above the grant-date stock price, a change in the stock price of $1.00 would result in an increase or decrease of approximately $0.4 million in the ultimate payout liability.

 

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures – We maintain disclosure controls and procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 (the Exchange Act), such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified by SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), to allow timely decisions regarding required disclosure.

Our management evaluated, with the participation of our CEO and CFO, the effectiveness of our disclosure controls and procedures as of March 31, 2011, pursuant to paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act. This evaluation included a review of the controls’ objectives and design, the operation of the controls, and the effect of the controls on the information presented in this Quarterly Report. Our management, including the CEO and CFO, do not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our disclosure controls and procedures are designed to provide such reasonable assurance of achieving their objectives. Also, the projection of any evaluation of the disclosure controls and procedures to future periods is subject to the risk that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

38


Table of Contents

Based on their review and evaluation, and subject to the inherent limitations described above, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of March 31, 2011 at the above-described reasonable assurance level.

Internal Control over Financial Reporting – Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even internal controls determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The effectiveness of our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the possibility of human error, and the risk of fraud. The projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies may deteriorate. Because of these limitations, there can be no assurance that any system of internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

See “Legal Matters” in Note 11 to the consolidated financial statements for a description of current legal proceedings.

 

ITEM 1A. RISK FACTORS

Risks relating to our business, our common stock and indebtedness are described in Item 1A of our Form 10-K.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. SPECIALIZED DISCLOSURES

Our coal cleaning operations are subject to regulation by the federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). Information concerning mine safety violations or other regulatory matters required by section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the recently proposed Item 106 of Regulation S-K (17 CFR 229.106) is included in Exhibit 99.32 to this quarterly report.

 

ITEM 5. OTHER INFORMATION

None.

 

39


Table of Contents
ITEM 6. EXHIBITS

The following exhibits are included herein:

 

4.9.3   

Third Amendment to Loan and Security Agreement, dated as of April 15, 2011 among Headwaters, certain Headwaters subsidiaries and certain lenders named therein

   *
12   

Computation of ratio of earnings to combined fixed charges and preferred stock dividends

   *
31.1   

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

   *
31.2   

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

   *
32   

Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer

   *
99.32   

Mine Safety Disclosure

   *
101.INS   

XBRL Instance document

   **
101.SCH   

XBRL Taxonomy extension schema

   **
101.CAL   

XBRL Taxonomy extension calculation linkbase

   **
101.DEF   

XBRL Taxonomy extension definition linkbase

   **
100.LAB   

XBRL Taxonomy extension label linkbase

   **
101.PRE   

XBRL Taxonomy extension presentation linkbase

   **

 

* Filed herewith.
** Furnished herewith.

 

40


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      HEADWATERS INCORPORATED

Date: May 9, 2011

    By:  

/s/ Kirk A. Benson

              Kirk A. Benson, Chief Executive Officer
              (Principal Executive Officer)

Date: May 9, 2011

    By:  

/s/ Donald P. Newman

              Donald P. Newman, Chief Financial Officer
              (Principal Financial Officer)

 

41