Headwaters : Announces 4th Qtr & Fiscal 2016 Results (PDF)

N E W S B U L L E T I N

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

• FY 2016 Revenue Increased 9% to $975 Million

• FY 2016 Income From Continuing Operations Before Income Taxes

  Increased 92% to $72 Million

  • FY 2016 Adjusted EBITDA Increased 14% to $190 Million

• Revenue increased 7% to $291.6 million

• Income from continuing operations before income taxes of $25.2 million and Adjusted EBITDA of $66.3 million

• Building products Adjusted EBITDA margin of 21.5%

• Construction materials Adjusted EBITDA margin of 28.5%

• Completed the acquisition of Krestmark Industries, LP, a leading manufacturer of vinyl windows in South Central U.S.

• Redeemed the remaining balance of our unsecured 7¼% senior debt

"We are pleased with our fiscal year performance, increasing Adjusted EBITDA by over 14%, and finishing well into our guidance range," said Kirk A. Benson, Chairman and Chief Executive Officer of Headwaters. "In addition, our fiscal year Adjusted EBITDA margin expanded by 100 basis points to 19.5%, exceeding our 2006 peak by 160 basis points. Anticipating both top line growth and further margin expansion in 2017, we expect Adjusted EBITDA growth to be between 24% and 32%, resulting in 2017 guidance in the range of $235 million to $250 million.

"The newly-acquired Krestmark windows product group represents approximately half of our total projected growth in 2017 and requires only a modest expansion of its existing operations to reach its 2017 objectives. Accordingly, the full year effect of the revenue and Adjusted EBITDA contribution from Krestmark significantly reduces the risk related to Headwaters' projected 2017 growth. In addition, we believe the incremental windows Adjusted EBITDA should lead to overall consolidated margin expansion.

"We anticipate a range of mid-single to double digit top-line growth in our legacy product groups, primarily through sales of increased volumes of fly ash and building products. Combined with our continuous improvement efficiency gains, our top-line growth should drive overall Adjusted EBITDA margin expansion in 2017."

Headwaters' fourth quarter 2016 consolidated revenue increased by 7% to $291.6 million from

$272.7 million for the fourth quarter of 2015. Gross profit was $85.5 million, including $7.2 million in non-routine costs, compared to $90.3 million in 2015, and operating income was $37.6 million, including $9.4 million in non-routine costs, compared to $41.4 million in 2015. The non-routine costs included in gross profit and operating income were due primarily to acquisition-related costs, including the consolidation of acquired businesses, and business line adjustments. The integration of our 2016 acquisitions is nearly complete, and in 2017 we do not anticipate further material acquisition or integration related costs. Adjusted EBITDA increased by

$7.4 million to $66.3 million, or 13% over 2015.

Income from continuing operations was $16.6 million, or $0.21 per diluted share, for the fourth quarter of 2016, compared to $126.9 million, or $1.68 per diluted share, for the fourth quarter of 2015, with the decrease primarily due to a normalized income tax expense in 2016 and the release of deferred tax asset valuation allowances in the fourth quarter of fiscal 2015. Fourth quarter adjusted income from continuing operations was $28.7 million, or $0.38 per diluted share in 2016, compared to $24.6 million, or $0.33 per diluted share in 2015, representing increases of approximately 15% year-over-year. Discontinued operations were immaterial in both 2015 and 2016.

Our total revenue for the year ended September 30, 2016 was $974.8 million, up 9% from $895.3 million for 2015. Gross profit increased 7%, from $269.9 million in 2015 to $288.2 million in

2016. Operating income of $102.1 million in 2015 improved by 8%, to $110.7 million in 2016. Income from continuing operations was $49.6 million, or $0.64 per diluted share, for 2016, compared to $132.1 million, or $1.74 per diluted share, for 2015, with the decrease primarily due to a normalized income tax expense in 2016 compared to a significant income tax benefit in 2015 due to the release of deferred tax asset valuation allowances.

Net interest expense decreased from $64.2 million in 2015 to $42.4 million in 2016. Net interest expense included approximately $24.8 million of incremental interest expense related to early debt repayments in 2015, and approximately $10.1 million of non-routine expense related to early debt repayments and other debt transactions in 2016. Other income in 2016 includes gains on certain assets acquired in 2016 transactions. Discontinued operations were immaterial in both 2015 and 2016.

Adjusted EBITDA increased by $24.0 million or 14%, from $165.6 million to $189.6 million for the year ended September 30, 2016 as compared to 2015, and Adjusted EPS increased by 38%, from $0.72 in 2015 to $0.99 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, specialty roofing products, and windows.

Building products revenue increased 12%, from $151.9 million in the fourth quarter of 2015 to

$170.6 million in the fourth quarter of 2016. Gross profit was $44.4 million, including $7.2

million in non-routine costs, compared to $49.2 million in 2015, and operating income was $14.9 million, including $8.9 million in non-routine costs, compared to $25.0 million in 2015. Adjusted EBITDA in the fourth quarter of 2016 increased 4% from $35.1 million in 2015 to $36.6 million.

In August 2016, we acquired the assets of Krestmark Industries, headquartered in Dallas, Texas. 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 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' 19.5% Adjusted EBITDA margins.

Our siding accessories product group experienced nearly 20% Adjusted EBITDA growth in 2016, realizing market gains and end product strength in repair and remodel. Roofing was impacted by the consolidation of three stone coated metal manufacturing sites into one, and resulting integration inefficiencies. As we near completion of the integration project, we anticipate greater than 30% improvement in efficiency and capacity, which we believe may result in more than 500 basis point operating margin expansion in 2017. We also continue to move forward with our composite and concrete tile roofing product integrations. Beginning in the December 2016 quarter, we will combine the block group with our construction materials segment, reducing 2017 building products segment revenue by approximately $125 million, but the reduction will be offset by the increase in building products segment revenue from Krestmark.

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.

Fourth quarter 2016 revenue increased by 3% to $114.9 million, compared to $111.5 million in 2015. The increase in revenue is primarily attributable to the acquisition of SynMat and a continued favorable pricing environment. Including services provided by SynMat, service revenue represented approximately 21% of total segment revenue for the fourth quarter of 2016 compared to 18% for the same period in fiscal 2015. Service revenue was 21% for all of fiscal 2015 and 22% for all of fiscal 2016.

Commencing in the December 2016 quarter, our construction materials segment will include our block product group, to reflect a change in management and operations. We have begun to integrate certain operations of our fly ash and block product group, which should result in up to

$1 million in annual cost savings. The primary overlap between the two product groups is in transportation related activities and the cost savings will be generated from repair and maintenance, back hauling product, etc. In addition, we are initiating fly ash storage at our block production sites to facilitate substitution of fly ash for portland cement and other raw material substitutions.