Headwaters : Announces Results for 3rd Quarter of Fiscal 2016 (PDF)

FROM:

RE: Headwaters Incorporated 10701 S. River Front Parkway, Suite 300

South Jordan, UT 84095 Phone: (801) 984-9400 NYSE: HW

FOR FURTHER INFORMATION

AT THE COMPANY:

Sharon Madden

Vice President of Investor Relations (801) 984-9400

ANALYST CONTACT:

Tricia Ross Financial Profiles (310) 622-8226

FOR IMMEDIATE RELEASE

• Revenue Increased 8% to $262 Million

• Redeemed $47 Million of Unsecured Senior Debt

• Announcing the Acquisition of Krestmark Industries for $240 Million

  • 2016 Adjusted EBITDA Guidance Reaffirmed

• Revenue increased 8% to $262 million, despite adverse weather impact

• Income from continuing operations before income taxes increased from $25 million to $27 million

• Adjusted EBITDA increased 11% to $54 million and Adjusted EBITDA margin expanded by 50 basis points

• Building products Adjusted EBITDA margin expanded to 22.4%

• Construction materials Adjusted EBITDA margin expanded to 26.2%

• Repriced term loan debt, reducing the interest rate by 50 basis points to Libor plus 300 bps

• On July 1, redeemed $47 million of our unsecured senior debt, reducing the outstanding principal amount to $99 million

• On August 1, entered into a definitive agreement to acquire the assets of Krestmark Industries, LP, a high-growth, high-margin manufacturer of vinyl windows in South Central U.S.

"We are pleased with our growth and continued margin strength during the third quarter, despite being impacted by adverse weather conditions in a number of our markets, including heavy rain in the Texas and Gulf regions," said Kirk A. Benson, Chairman and Chief Executive Officer of Headwaters. "Overall, Headwaters' third quarter performance was substantially in line with our expectations, allowing us to reaffirm our 2016 Adjusted EBITDA guidance of $185 million to

$200 million.

"We are extremely pleased with the acquisition of Krestmark, and our entry into the windows market with this best-in-class company. Krestmark enjoys leading positions in several attractive markets, serving primarily the new residential construction market in the South Central region of the U.S. Krestmark has experienced a double digit compounded revenue growth rate for the last eight years, while generating attractive EBITDA margins. We anticipate that Krestmark's Adjusted EBITDA margins will be accretive to Headwaters 19.1% margins, making it a niche window business that fits well with us.

"Revenue in our building products segment grew 10% in the quarter and Adjusted EBITDA margins expanded over 30 bps. We enjoyed very strong double digit top line growth in our trim product line during the quarter. The growth in our trim product reflects the implementation of our strategy to extend the geographic reach of our newly introduced or acquired products to our existing two step distribution customers.

"Construction materials' Adjusted EBITDA margin exceeded 26%, up almost 200 basis points over last year. Fly ash supplies began to normalize very late in the quarter, so the increase in revenue and corresponding margin improvement was primarily the result of increased fly ash pricing and our bolt-on gypsum acquisition."

Headwaters' third quarter 2016 consolidated revenue increased by 8% to $262.5 million from

$243.3 million for the third quarter of 2015, and gross profit increased by 9% to $83.5 million, compared to $76.8 million in 2015. Operating income improved from $33.3 million in 2015 to

$36.1 million in 2016, and Adjusted EBITDA increased by $5.2 million to $54.0 million, or 11% over 2015.

Income from continuing operations was $17.5 million, or $0.23 per diluted share, for the third quarter of 2016, compared to $23.1 million, or $0.30 per diluted share, for the third quarter of 2015, with the decrease primarily due to increases in GAAP tax expense following the release of deferred tax asset valuation allowances in the fourth quarter of fiscal 2015. Third quarter adjusted income from continuing operations was $22.7 million, or $0.30 per diluted share in 2016, compared to $19.1 million, or $0.25 per diluted share in 2015, representing increases of approximately 20% year-over-year. Discontinued operations were immaterial in both 2015 and 2016.

Our total revenue for the nine months ended June 30, 2016 was $683.2 million, up 10% from

$622.6 million for 2015. Gross profit increased 13%, from $179.6 million in 2015 to $202.7 million in 2016. Operating income of $60.7 million in 2015 improved by 20%, to $73.1 million in 2016. Income from continuing operations in 2015 of $5.3 million, or diluted income per share of

$0.06, improved to $33.1 million, or $0.43 per diluted share, in 2016. The 2015 results include

$24.8 million of incremental interest expense related to early debt repayments. The 2016 results include additional non-cash tax expense resulting from the release of deferred tax asset valuation allowances in the fourth quarter of fiscal 2015. Discontinued operations were immaterial in both 2015 and 2016.

Adjusted EBITDA increased by $16.6 million or 16%, from $106.7 million to $123.3 million for the nine months ended June 30, 2016 as compared to 2015, and Adjusted EPS increased by 50%, from $0.40 in 2015 to $0.60 in 2016.

Headwaters' building products segment is a national brand leader in innovative building products through superior design, manufacturing and channel distribution. The segment markets a wide variety of niche building products, including siding accessories, manufactured architectural stone, concrete block, and specialty roofing products.

Building products revenue increased 10%, from $147.8 million in the third quarter of 2015 to

$162.6 million in the third quarter of 2016. In 2016, gross profit increased 9% to $51.2 million from $47.0 million in 2015, and operating income increased 8% to $24.6 million from $22.8

million. Adjusted EBITDA in the third quarter of 2016 increased 12% from $32.7 million in 2015 to $36.5 million.

All major product groups experienced sales growth despite adverse weather conditions in the third quarter and the likely pull forward of sales into the second quarter due to unseasonably mild winter temperatures. Heavy rain in Texas negatively impacted revenue in our block group. Siding products, which predominantly sells into the repair and remodel market, experienced solid revenue growth, led by our trim product where we have experienced double digit top line growth.

Adjusted EBITDA margins for the quarter were 22.4%, reflecting effective cost controls and the continued benefit from lower raw material, transportation, and energy costs. We should complete the consolidation of our stone-coated metal roofing manufacturing plants in the September quarter, resulting in anticipated margin improvement. Additional integration activities will continue well into next year and should result in 2017 margin expansion.

We recently entered into a definitive agreement, subject to certain closing conditions, to acquire the assets of Krestmark Industries and its affiliates for $240 million. Headquartered in Dallas, Texas, Krestmark is one of the top-performing manufacturers of high quality vinyl windows in the U.S. Krestmark has developed a best-in-class business model offering an optimal line of branded window products to a diverse customer base of homebuilders, lumber yards, and distributors. The acquisition is a natural extension of Headwaters' focus on supplying our customers and homeowners with attractive products for the exterior of the home.

We believe Krestmark fits well into Headwaters' strategy of increasing sales to core customers, having a strong focus on customer service, and niche positioning that results in high margins relative to peers. Krestmark has established a track record of robust growth through existing and new customers. Its organic compounded annual growth rate for revenue over the past eight years was greater than 15%. We anticipate strong double digit revenue growth for Krestmark in 2017, meeting or exceeding $125 million in revenue. It is anticipated that Krestmark's margins will be accretive to Headwaters' 19.1% Adjusted EBITDA margins.

We intend to finance the acquisition by borrowing under our term loan credit facility. It is estimated that at closing our net debt to Adjusted EBITDA ratio will be approximately 3.5 times on a pro forma basis, but the ratio will be closer to 3.1 to 3.2 times on a pro forma basis at the end of fiscal 2016. We anticipate that by the end of fiscal 2017, the net debt ratio will be in the range of 2.5x, or lower.

Headwaters is the largest domestic manager and marketer of coal combustion products (CCPs), including fly ash. Utilization of these materials improves performance of concrete and concrete construction products while creating significant environmental benefits.

Third quarter 2016 revenue increased by 6% to $97.7 million, compared to $91.9 million in 2015. The increase in revenue is primarily attributable to positive pricing for high-value CCPs and the previously announced acquisition of SynMat. Net price increases for the June 2016 quarter