Headwaters Inc. Reports Operating Results (10-Q)

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Feb 02, 2012
Headwaters Inc. (HW, Financial) filed Quarterly Report for the period ended 2011-12-31.

Headwaters Inc. has a market cap of $167.6 million; its shares were traded at around $2.75 with and P/S ratio of 0.2.

Highlight of Business Operations:

The calculation of tax liabilities involves uncertainties in the application of complex tax regulations in multiple jurisdictions. In fiscal 2011, Headwaters 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 various taxing authorities for the years 2006 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 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.

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 complemented 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 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 distribution channels we developed over many years.

Summary. Our total revenue for 2011 was $137.4 million, up 1% from $135.8 million for 2010. Gross profit increased 8%, from $31.8 million in 2010 to $34.4 million in 2011. Our 2011 operating income was $4.4 million compared to an operating loss of $(1.0) million in 2010, and the loss from continuing operations decreased to $(13.3) million, or $(0.22) per diluted share, from $(18.8) million, or $(0.31) per diluted share, in 2010. Our net loss including discontinued operations increased from $(20.7) million, or a diluted loss per share of $(0.34), in 2010, to a net loss of $(23.7) million, or $(0.39) per diluted share, in 2011.

Heavy Construction Materials Segment. Heavy construction materials revenues for 2011 were $63.1 million with a corresponding gross profit of $16.0 million. Heavy construction materials revenues for 2010 were $63.2 million with a corresponding gross profit of $14.9 million. Product revenues improved by 6% in 2011 compared to 2010, reflecting an increase in tons sold, primarily in our Central and Western regions. However, service revenue declined primarily because of the delayed start-up of one facility and the 2011 bankruptcy of another service customer. The improvement in gross margin was primarily the result of improved product sales and our continuous improvement efforts which have resulted in lower costs.

Working Capital. As of December 31, 2011, our working capital was $54.8 million (including $41.7 million of cash and cash equivalents) compared to $69.6 million as of September 30, 2011. The decrease in working capital resulted primarily from cash used for capital expenditures 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 in 2012 and in future years. We currently believe working capital will be sufficient for our operating needs in 2012, and that it will not be necessary to utilize borrowing capacity under the ABL Revolver for our seasonal operational cash needs during 2012.

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