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Headwaters Inc. (HW - Snapshot Report) reported income from continuing operations of $9.3 million or 13 cents per share in the third quarter of 2013, up from $2 million or 3 cents in the prior-year quarter. The results, however, missed the Zacks Consensus Estimate of 18 cents.

Operational Update

Total revenue was $197 million in the reported quarter, up 12% year over year but below the Zacks Consensus Estimate of $198 million.

Cost of sales increased 12% to $138.5 million from $123 million in the year-ago quarter. Gross profit improved 12% year over year to $58.5 million. However, gross margin expanded 10 basis points (bps) to 29.7% in the quarter. Adjusted EBIDTA improved 32% year over year to $37.9 million.
 
Selling, general and administrative expenses decreased 3.4% year over year to $28 million. Adjusted operating profit was $23 million, compared with $15.9 million in the year-ago quarter. Consequently, operating margin expanded 270 bps year over year to 11.8%.
 
Segmental Performance

Light Building Products: Revenues increased 21% year over year to $118 million driven by a strong Texas market and strength in new residential construction. The rise was partly offset by challenging weather conditions. Operating income rose 29% year over year to $15.5 million.

Heavy Construction Materials: Segment revenues in the quarter were $75.1 million, up 1% from $74.7 million in the prior-year quarter. The improvement was mainly backed by new service contracts and price increase, partly offset by reduced shipments of high quality fly ash, the loss of a service contract and adverse weather conditions in the Midwest and Northeast. The segment’s operating income improved 8% year over year to $12.8 million.
 
Energy Technology: Reported sales were $3.9 million, up 5% from the year-ago quarter. The segment reported an operating loss of $0.3 million, compared with a loss of $1.2 million in the year-ago quarter.
 
Financial Update

As of Jun 30, 2013, cash and cash equivalents amounted to $40.5 million versus $53.7 million as of Sep 30, 2012. Long-term debt was $449.4 million as of Jun 30, 2013, compared with $500.5 million as of Sep 30, 2012.

Outlook

For full-year 2013, Headwaters reaffirmed the adjusted EBITDA range of $110 million to $125 million. The company is optimistic that revenues will improve in the remaining year once growth in new housing starts. Headwaters expects weakness in repair and remodel end markets but growth from the renewal of school construction. The company will also continue to pursue opportunities to repay the debt maturing in 2014 before its due date. However, cost inflation will be a headwind in the future.

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 uptick 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 the psychology of customers will likely 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, Utah-based Headwaters is a diversified company providing building products, technologies and services to the heavy construction materials, light building products, and energy technology industries.

Headwaters currently carries a Zacks Rank #3 (Hold). However, the stocks of James Hardie Industries plc (JHX - Snapshot Report), Masco Corporation (MAS - Analyst Report) and Aegion Corporation (AEGN - Snapshot Report) with a Zacks Rank #2 (Buy) are good investment options in the sector.
 

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