Headwaters Incorporated Announces Results for Fiscal 2006.SOUTH JORDAN, Utah South Jordan is a city in Salt Lake County in the U.S. state of Utah. The population was 29,437 at the 2000 census. As of September 1, 2007, the population was estimated at 50,109 [1]. South Jordan has been one of the fastest-growing cities in Utah since the early 1990s. -- Headwaters Incorporated (NYSE NYSE See: New York Stock Exchange : HW): * Revenue of $1.121 Billion * Net Income of $102 Million * Diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. EPS (Encapsulated PostScript) A PostScript file format used to transfer a graphic image between applications and platforms. EPS files contain PostScript code as well as an optional preview image in TIFF, WMF, PICT or EPSI, the latter being an ASCII-only format. of $2.19 * $223 Million of Operating Cash Flow Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. HEADWATERS INCORPORATED (NYSE: HW) today announced results for the fourth quarter and fiscal year ended September 30, 2006. Highlights for the quarter include: * Second Commercial-Scale Run of HCAT HCAT Hastings College of Arts & Technology (UK) HCAT Hard Chrome Alternatives Team HCAT Headquarters Contingency Action Team (NASA) HCAT Himalayan Committee for Action on Tibet (TM) Catalyst * Closed the Acquisition of the Kemira Hydrogen Peroxide hydrogen peroxide, chemical compound, H2O2, a colorless, syrupy liquid that is a strong oxidizing agent and, in water solution, a weak acid. It is miscible with cold water and is soluble in alcohol and ether. Facility and Associated Project Financing Project financing A form of asset-based financing in which a firm finances a discrete set of assets on a stand-alone basis. * Agreement to Acquire Dutch Quality Stone, Inc. - Expected to Close in November * Synfuel syn·fu·el n. A liquid or gaseous fuel derived from coal, shale, or tar sand, or obtained by fermentation of certain substances, such as grain. [syn(thetic) + fuel.] Industry Operations Accelerated Due to Lower Oil Prices * Completed Amendment to Senior Debt Agreement To Facilitate Future Growth Highlights for the fiscal year 2006 include: * Two Commercial Runs of the HCAT Catalyst * Completed Pilot Plant Testing on Hydrogen Peroxide Nanocatalyst * Made Significant Progress on Construction of Ethanol Plant - on Schedule for Early 2007 Startup of Commercial Operations * Mineral Rights Completed for 150 Million Tons of Waste Coal Reserves * 5 Acquisitions Within the Construction Materials Group September 2006 Quarter Total revenue, operating income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. , and net income for the September 2006 quarter were down versus the prior year quarter, consistent with expectations, primarily due to the phase-out of Section 45K (formerly Section 29) of the Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. . Headwaters continues the process of transitioning away from its Section 45K business. For example, in the quarter ended September 30, 2006, Headwaters' Section 45K business contributed only 15% of total revenues. Headwaters total revenue for the September 2006 quarter was $275.2 million, down 13% due to the Section 45K phase-out, from $315.1 million reported for the September 2005 quarter. Operating income decreased 36% to $44.6 million in the September 2006 quarter compared to $70.2 million in the September 2005 quarter. While exceeding the high end of our forecasted range, net income for the September 2006 quarter was $28.0 million or $0.61 of earnings per diluted share, down 38% from the September 2005 quarter of $44.9 million or $0.95 of earnings per diluted share. Full Fiscal Year 2006 Even with the decline in revenue associated with the phase out of Section 45K, total revenue for the year ended September 30, 2006 was $1.121 billion, up 5% from $1.065 billion reported for the year ended September 30, 2005, reflecting solid growth in our building material businesses. Operating income decreased 23%, to $181.8 million for fiscal 2006 compared to $236.9 million in the prior year. Net income for the 2006 year was $102.1 million or $2.19 of earnings per diluted share, using 48.6 million weighted-average shares outstanding. Net income for fiscal 2005 was $121.3 million or $2.79 of earnings per diluted share, using 45.1 million weighted-average shares outstanding. The primary driver of decreased operating results for the full fiscal year was the impact of phase-out and a lower contribution from the Company's Section 45K business. Operating Performance - Fourth Quarter Building Materials Building materials used in the construction industry to create . These categories of materials and products are used by and construction project managers to specify the materials and methods used for . . Revenues from Headwaters' coal combustion products Coal combustion products (CCPs) are categorized in four groups, each based on physical and chemical forms derived from coal combustion methods and emission controls:
A ratio used to measure a company's pricing strategy and operating efficiency. Calculated by: percentage increased to 23.5% compared to 19.4% in the September 2005 quarter. The increases in revenue and operating margin percentage resulted primarily from upward pricing trends in most cement markets. Demand for CCPs remains strong as we continue to expand our distribution and storage system. For the full year, revenues grew by almost 14% and operating margins improved by 400 basis points. Consistent with industry trends, revenues from Headwaters' construction materials segment during the September 2006 quarter were impacted negatively by a downturn in the residential housing market. Revenues for the September 2006 quarter were essentially flat at $149.6 million versus $149.5 million for the September 2005 quarter. Operating margin percentage decreased to 12.9% for the September 2006 quarter compared to 19.6% in the prior year quarter. During the quarter, Headwaters accelerated certain depreciation expenses associated with manufacturing assets, reflecting a shorter estimated life and incurred additional operating costs operating costs npl → gastos mpl operacionales as production levels were managed downward. In addition, lower volumes led to mix erosion and lower absorption of fixed costs fixed costs, n.pl the costs that do not change to meet fluctuations in enrollment or in use of services (e.g., salaries, rent, business license fees, and depreciation). . We continue to actively pursue opportunities to improve performance and anticipate that operating margins should be in the range of 14% to 16% for the full fiscal year 2007, depending upon sales volumes and the depth and duration of the residential housing cycle downturn. For the full fiscal 2006 year, Headwaters' construction materials segment experienced over a 10% growth in revenue and a 5% growth in operating income. An important element of Headwaters' construction materials strategy is to introduce new products into our distribution system. Early in the quarter, Headwaters acquired the assets of Wellcraft, Inc. Wellcraft offers a complete line of egress See ingress. window wells and well covers, and is being integrated into Headwaters' existing business and distribution system. In addition, we entered into an agreement to acquire Dutch Quality Stone, Inc., a regional manufacturer of architectural stone, to combine with our Eldorado brand. This acquisition should close in the December quarter. Alternative Energy Segment. As a result of the partial phase-out of Section 45K for calendar year 2006, chemical reagent reagent /re·a·gent/ (re-a´jent) a substance used to produce a chemical reaction so as to detect, measure, produce, etc., other substances. re·a·gent n. sales decreased 72% in the September 2006 quarter to $13.6 million. The decrease in chemical reagent sales was a result of significantly lower production of synfuel by Headwaters' licensees and other customers, due to concerns about the phase-out of Section 45K. Due to raw material cost increases, the gross margin on chemical reagent sales in the September 2006 quarter was 22% compared to 27% in the September 2005 quarter. We anticipate that reagent margins in fiscal 2007 will be in the 17% to 20% range. License fees for the September 2006 quarter decreased $10.5 million or 37%, from $28.4 million in the September 2005 quarter to $17.9 million in the September 2006 quarter. The decrease in license fee revenues in the September 2006 quarter resulted partially from reduced recognition of license fees which are based on a portion of the tax credits earned. Only $10 million of such tax credit-based license fees were recognized in the fourth quarter. During the quarter, there were 4 licensees and other Section 45K customers out of a total potential customer base of 44 lines that operated continuously throughout the quarter. As oil prices declined towards the end of the quarter and into the fourth calendar quarter, additional customers have recommenced operations. Today, 43 Section 45K lines are operating out of a potential customer base of 44. Due to the uncertainty surrounding the phase-out of Section 45K tax credits in calendar 2006, no revenues were recognized in the June 2006 and March 2006 quarters for several licensees whose payments to Headwaters are based on a portion of the tax credits earned by the licensee licensee n. a person given a license by government or under private agreement. (See: license, licensor) LICENSEE. One to whom a license has been given. 1 M. Q. & S. 699 n. . The September 2006 quarter is the first period in calendar 2006 that license fees have been recognized for these licensees due to the accounting rules governing revenue recognition that require that the seller's price to the buyer be "fixed or determinable Liable to come to an end upon the happening of a certain contingency. Susceptible of being determined, found out, definitely decided upon, or settled. determinable adj. ." These accounting rules, combined with the uncertainty surrounding the effect that high oil prices could have on the potential phase-out of Section 45K in calendar 2006, precluded any revenue recognition prior to September 2006, as well as precluding full recognition in the September quarter. Depending on the level of oil prices in the last calendar quarter of 2006 and the ultimate phase-out percentage of Section 45K for calendar 2006, Headwaters could recognize additional license fee revenue in future quarters, much of which would relate to fiscal 2006. As of September 30, Headwaters has approximately $30 million of deferred license fee revenue, assuming 0% phase-out. For calendar 2006, Headwaters estimates that the phase-out range (computed by increasing the 2005 inflation adjustment factor by 2%) begins at a reference price of $54.27 and completes phase-out at $68.12 per barrel. Using available information as of September 30, 2006, and consistent with the methodology employed at the end of the March 2006 and June 2006 quarters, Headwaters calculated an estimated phase-out percentage for Section 45K tax credits for calendar year 2006 of 42%. As of October 31, 2006, Headwaters' estimated phase-out percentage is 35%. Headwaters' effective income tax rate for both fiscal 2006 and 2005 was 26%. Headwaters used the estimated phase-out percentage of 42% in calculating tax credits for fiscal 2006, resulting in a tax provision lower than the statutory rate. Replacement of Section 45K Earnings Due to the anticipated termination of Section 45K on December 31, 2007, Headwaters has been diversifying away from reliance on Section 45K revenues and earnings. For fiscal 2006, 23% of revenue was associated with Section 45K, compared to 28% in 2005 and 37% in 2004. The following table presents Headwaters' results of operations for the three fiscal years in the periods ended September 30, with adjustments to eliminate Headwaters' Section 45K business and certain other material non-recurring items directly and indirectly related to Section 45K. [TABLE OMITTED] Headwaters compounded growth rate from 2004 to 2006 in EPS unrelated to Section 45K was 205%. We anticipate EPS in fiscal 2007 unrelated to Section 45K to be in the range of $1.00 to $1.05 per share, reflecting a growth rate in fiscal 2007 of 54% to 62%. New Product Development The construction of the Headwaters/Degussa direct synthesis hydrogen peroxide (H2O2) demonstration plant located in Germany was completed and start-up began in October. The operating results from the demonstration plant will provide engineering data to enable the joint venture to construct a commercial scale direct synthesis hydrogen peroxide manufacturing facility. In addition, Headwaters, along with its joint venture partner Degussa AG, acquired a hydrogen peroxide plant in Korea to be a platform for the advancement of the joint venture's hydrogen peroxide for propylene oxide propylene oxide a gas used to disinfect animal feeds. business and the commercialization of Headwaters' NxCat nanocatalysts. This facility is currently being expanded. The second commercial run of Headwaters' heavy oil upgrading catalyst technology was conducted during the quarter. In addition, we have executed agreements for the third commercial run of our catalyst material. We continue to gather positive operating data from commercial and pilot plant runs to support the ultimate commercialization of this technology. Headwaters believes that the Headwaters heavy oil upgrading technology represents a leap forward from current refining refining, any of various processes for separating impurities from crude or semifinished materials. It includes the finer processes of metallurgy, the fractional distillation of petroleum into its commercial products, and the purifying of cane, beet, and maple sugar technologies that have been in use for over 50 years. The Headwaters process uses the HCAT liquid catalyst precursor precursor /pre·cur·sor/ (pre´kur-ser) something that precedes. In biological processes, a substance from which another, usually more active or mature, substance is formed. In clinical medicine, a sign or symptom that heralds another. to generate a highly active molecular catalyst to convert residual oil residual oil n. The low-grade oil products that remain after the distillation of petroleum, used in adhesives, roofing compounds, and asphalt manufacture. Noun 1. feedstocks into higher-value distillates that can be easily refined into gasoline gasoline or petrol, light, volatile mixture of hydrocarbons for use in the internal-combustion engine and as an organic solvent, obtained primarily by fractional distillation and "cracking" of petroleum, but also obtained from natural gas, by , diesel and other fuel products. By improving the conversion of lower value and often difficult to process, bottom of the barrel oil, the Headwaters process is expected to create significant additional value for petroleum refineries. Rather than $50 billion in annual incremental Additional or increased growth, bulk, quantity, number, or value; enlarged. Incremental cost is additional or increased cost of an item or service apart from its actual cost. value creation as was previously reported, an international consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee consulting company business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a estimated that the technology may create future refining improvements with more than $50 billion of net present value for the refining industry. The construction of Headwaters' ethanol manufacturing facility continues on schedule and should begin production during the March 2007 quarter. Based on the equity method of accounting, we expect the facility in 2007 to produce aggregate net revenue to Headwaters of $5 to $8 million, on gross revenues to the joint venture of over $60 million. Headwaters is now operating two coal cleaning facilities, having acquired rights during fiscal 2006 to mine approximately 150 million tons of waste coal. Recent tests on the gob and pond waste coal materials previously acquired supports the construction of 3 new coal cleaning facilities. Based on the pending acquisition of additional waste coal materials, Headwaters anticipates the construction of 2 to 5 additional coal cleaning facilities. Headwaters' research and development costs, which are reported in our alternative energy segment, totaled $12.2 million for fiscal 2006, and a similar expenditure is anticipated in 2007. Capital Structure / Indebtedness The components of Headwaters' debt structure as of September 30, 2006 are as follows: [TABLE OMITTED] To supplement our condensed con·dense v. con·densed, con·dens·ing, con·dens·es v.tr. 1. To reduce the volume or compass of. 2. To make more concise; abridge or shorten. 3. Physics a. consolidated financial statements Consolidated Financial Statements The combined financial statements of a parent company and its subsidiaries. Notes: Because consolidated financial statements present an aggregated look at the financial position of a parent and its subsidiaries, they enable you to gauge presented in accordance with generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting ("GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). "), we use a non-GAAP measure called EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become . EBITDA is net income adjusted by adding net interest expense, income taxes, depreciation and amortization ("EBITDA"). Management uses EBITDA internally to measure the amount of cash generated by Headwaters and to make decisions about the amount of capital expenditures Headwaters will make and where to allocate capital. EBITDA is also provided to enhance the user's overall understanding of our current financial performance, our ability to service our debt, our compliance with current debt covenants and our ability to fund future growth. Therefore, we believe that EBITDA provides useful information to our investors regarding our performance and overall results of operations. Our EBITDA measure presented here may not be comparable to similarly titled measures presented by other companies. The following table highlights certain debt coverage and balance sheet ratios using period end balances and the trailing twelve months In commerce, the trailing twelve months (TTM) is a moving measurement (for example, an average or a sum) over the 12 previous months, using the most recent data available. Also sometimes known as last twelve months (LTM). ("TTM TTM Trailing 12 months. Often used with Earnings Per Share. ") EBITDA: [TABLE OMITTED] The pro forma As a matter of form or for the sake of form. Used to describe accounting, financial, and other statements or conclusions based upon assumed or anticipated facts. The phrase pro forma September 2004 calculations assume all of the 2004 acquisitions occurred on October 1, 2003. Pro forma EBITDA for the trailing twelve months ended September 30, 2004 of $233.8 million is derived as follows (in millions): Net income of $72.9 plus net interest expense of $63.1, income taxes of $45.6, and depreciation and amortization of $52.2. Actual EBITDA for the trailing twelve months ended September 30, 2005 of $277.6 million is derived as follows (in millions): Net income of $121.3 plus net interest expense of $57.4, income taxes of $42.5, and depreciation and amortization of $56.4. Actual EBITDA for the trailing twelve months ended September 30, 2006 of $235.5 million is derived as follows (in millions): Net income of $102.1 plus net interest expense of $34.0, income taxes of $35.7, and depreciation and amortization of $63.7. See "Current Ratio" calculations in financial tables that follow. During the quarter, Headwaters amended its senior debt agreement to facilitate the growth of the business. The amendment includes provisions to: i) increase the amount Headwaters can borrow under its revolving credit Revolving Credit A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is usually used for operating purposes, fluctuating each month depending on the customers current cash flow needs. arrangement, subject to obtaining additional revolving loan commitments; ii) increase the amount that Headwaters can invest in joint ventures, subject to certain conditions; and iii) increase the amount of capital expenditures Headwaters may make each year for the remaining term of the loan. Commentary and Outlook Scott K. Sorensen, Headwaters' Chief Financial Officer, stated, "Our financial performance for the fourth fiscal quarter was impacted by lower oil prices, which improved our Section 45K business, but we also experienced more pressure on our construction materials segment than expected. Since all but one of our Section 45K customers are currently operating, we expect a robust first fiscal quarter in synfuel. In addition, we have deferred license fee revenues which we will recognize when the appropriate certainty is reached. We believe that our earnings for fiscal 2007 should be in the range of $1.60 to $1.80 per diluted share, with $1.00 to $1.05 coming from our ongoing businesses, and $0.60 to $0.75 coming from our synfuel business. If oil prices remain at lower levels into 2007, earnings could be significantly higher than our forecasted range." "We are faced with a down cycle in our building materials business, but we believe the downward pressures can be alleviated by introducing new products into our distribution system together with the possibility of achieving manufacturing efficiencies," said Kirk A. Benson, Chairman and Chief Executive Officer. "In addition, we continue on a path of creating material revenue growth opportunities for fiscal 2008 and beyond as we commercialize our new energy and nanocatalyst technologies." Management will host a conference call with a simultaneous web cast today at 11:00 a.m. Eastern/9:00 a.m. Mountain to discuss the Company's financial results and business outlook. The call will be available live via the Internet by accessing Headwaters' web site at www.headwaters.com and clicking on the Investor Relations Investor relations The process by which the corporation communicates with its investors. section. To listen to the live broadcast, please go to the web site at least fifteen minutes early to register, download, and install any necessary audio software. For those who cannot listen to the live broadcast, an online replay will be available for 90 days on www.headwaters.com, or a phone replay will be available through November 14, 2006 by dialing 800-405-2236 or 303-590-3000 and entering the passcode 11075200. About Headwaters Incorporated Headwaters Incorporated is a world leader in creating value through innovative advancements in the utilization of natural resources. Headwaters is a diversified growth company providing products, technologies and services to the energy, construction and home improvement industries. Through its alternative energy, coal combustion products, and building materials businesses, the Company earns a growing revenue stream that provides the capital needed to expand and acquire synergistic synergistic /syn·er·gis·tic/ (sin?er-jis´tik) 1. acting together. 2. enhancing the effect of another force or agent. syn·er·gis·tic adj. 1. new business opportunities. Forward-Looking Statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. Certain statements contained in this report are forward-looking statements within the meaning of federal securities laws and Headwaters intends that such forward-looking statements be subject to the safe-harbor created thereby. Forward-looking statements include Headwaters' expectations as to the managing and marketing of coal combustion products, the production and marketing of building materials and products, the licensing of technology and chemical sales to alternative fuel facilities, the receipt of product sales, license fees and royalty revenues, which are subject to tax credit phase out risks, the development, commercialization, and financing of new technologies and other strategic business opportunities and acquisitions, and other information about Headwaters. Such statements that are not purely historical by nature, including those statements regarding Headwaters' future business plans, the operation of facilities, the availability of tax credits in an environment of high oil prices and potential tax credit phase out, the availability of feedstocks, and the marketability of the coal combustion products, building products, and synthetic fuel Synthetic fuel or synfuel is any liquid fuel obtained from coal, natural gas, or biomass. It can sometimes refer to fuels derived from other solids such as oil shale, tar sand, waste plastics, or from the fermentation of biomatter. , are forward-looking statements within the meaning of the Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995 regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Actual results may vary materially from such expectations. Words such as "expects," "anticipates," "targets," "goals," "projects," "believes," "seeks," "estimates," variations of such words, and similar expressions are intended to identify such forward-looking statements. Any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances, are forward-looking. In addition to matters affecting the coal combustion product, alternative fuel, and building products industries or the economy generally, factors which could cause actual results to differ from expectations stated in forward-looking statements include, among others, the factors described in the captions entitled en·ti·tle tr.v. en·ti·tled, en·ti·tling, en·ti·tles 1. To give a name or title to. 2. To furnish with a right or claim to something: "Forward-looking Statements" and "Risk Factors" in Item 7 in Headwaters' Annual Report on Form 10-K Form 10-K A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information. Form 10-K See 10-K. for the fiscal year ended September 30, 2005, Quarterly Reports on Form 10-Q Form 10-Q See 10-Q. , and other periodic filings and prospectuses. Although Headwaters believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that our results of operations will not be adversely affected by such factors. Unless legally required, we undertake no obligation to revise or update any forward-looking statements for any reason. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Our Internet address There are two kinds of addresses that are widely used on the Internet. One is a person's e-mail address, and the other is the address of a Web site, which is known as a URL. Following is an explanation of Internet e-mail addresses only. For more on URLs, see URL and Internet domain name. 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 Form 8-K The form required by the SEC when a publicly held company incurs any event that might affect its financial situation or the share value of its stock. Form 8-K See 8-K. and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish fur·nish tr.v. fur·nished, fur·nish·ing, fur·nish·es 1. To equip with what is needed, especially to provide furniture for. 2. it to, the SEC. Our reports can be accessed through the investor relations section of our web site. 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