Wider- Than- Expected Loss at Headwaters

Zacks

Headwaters Incorporated (HW) reported a loss from continuing operations of $10.3 million or 14 cents per share in the second-quarter of 2013 compared to the prior-year loss of $18.2 million or 30 cents a share. The loss per share was wider than the Zacks Consensus Estimate of a loss per share of 10 cents.

Operational Update

Total revenues were $141 million in the reported quarter, up 9% year over year, exceeding the Zacks Consensus Estimate of $138 million.

Cost of sales increased 10.7% to $108.6 million in the second quarter from $98 million in the year-ago quarter. Gross profit improved 3% year over year to $32.4 million. However, gross margin contracted 130 basis points (bps) to 23% in the quarter.

Selling, general and administrative expenses went up 2.8% year over year to $26.4 million. Adjusted operating loss in the reported quarter was $1.1 million in the reported quarter compared to $1 million in the year-ago quarter.

Segmental Performance

Light Building Products: Revenues in the Light Building Products segment increased 14% year over year to $84.8 million in the reported quarter, driven by a strong Texas market and strength in new residential construction. The segment revenues were also benefited by the Kleer acquisition. The rise was partly offset by a decline in revenue in siding product group and challenging winter conditions. Operating income declined 38% year over year to $1.3 million in the quarter.

Heavy Construction Materials: Heavy Construction Materials segment revenues in the quarter were 54 million, up 5% compared to $51.2 million in the prior-year quarter. The improvement was mainly due to new service contracts and price increase on fly ash sales, partly offset by adverse weather conditions in the Midwest and Northeast. The segment’s operating income improved 27.6% year over year to $3.7 million in the second quarter.

Energy Technology: The Energy Technology segment reported sales of $2.2 million, a decline of 42% from the year-ago quarter. The segment reported an operating loss of $1.2 million compared to $0.7 million in the year-ago quarter.

Financial Update

As of Mar 31, 2013, cash and cash equivalents amounted to $63.6 million versus $53.7 million as of Sep 30, 2012. Long-term debt was $449 million as of Mar 31, 2013, compared with $500.5 million as of Sep 30, 2012.

Outlook

For full-year 2013, Headwaters expects adjusted EBITDA range of $110 to $125 million. The company is optimistic that revenue will improve in the remaining year led by a positive demand in the repair and remodel markets. It will also continue to pursue opportunities to repay the debt maturing in 2014 even before its due date.

Our view

Headwaters is well positioned to benefit from its strong presence in light building products and heavy construction materials. A significant contribution from margins together with the up-cycle in demand will help the company generate adequate cash, facilitating debt reduction and promising capital return to investors.

Macro drivers comprising population growth, household formation, inventory trends and psychology of customers bolster the company’s long-term growth. Headwaters will be successful in achieving its goal largely due a to multi-year appreciation cycle and positive remodel trends in the housing market, which will provide significant opportunities to serve the residential real estate end markets.

South Jordan, UT-based Headwaters is a diversified growth company providing building products, technologies and services to the heavy construction materials, light building products, and energy technology industries.

Headwaters currently retains a Zacks Rank #3 (Hold). Other companies in the building and construction industry are James Hardie Industries plc (JHX), Masco Corporation (MAS) and Armstrong World Industries, Inc. (AWI).
 

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