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Headwaters Incorporated’s (HW - Snapshot Report) adjusted earnings in fourth-quarter fiscal 2013 (ended Sep 30, 2013), improved 16% to 29 cents per share from 25 cents in the prior-year quarter. The results were ahead of the Zacks Consensus Estimate of 23 cents. Including adjustments, Headwaters’ income from continuing operations including special items, surged around four-fold to 18 cents per share from 5 cents in the prior-year quarter.

Operational Update

Total revenue was $215 million in the reported quarter, up 13% year over year but below the Zacks Consensus Estimate of $218 million.

Cost of sales increased 13% to $150.6 million from $133 million in the year-ago quarter. Gross profit rose 13% year over year to $64.3 million. However, gross margin remained flat at 29.0% from the year-ago quarter. Adjusted EBIDTA recorded a 15% year-over-year improvement to $35.6 million.
Selling, general and administrative expenses decreased 7.3% year over year to $31 million. Operating profit rose 65% year over year to $26.3 million. Consequently, operating margin expanded 380 bps (basis points) year over year to 12.2%.
Segmental Performance

Light Building Products: Revenues increased 21% year over year to $114.8 million driven by a strong Texas market, rebound in residential housing and new product introductions. The rise was partly offset by soft repair and remodel market. Operating income in the quarter grew 33% this quarter from $14.2 million in the prior-year quarter.

Heavy Construction Materials: Segment revenues in the quarter were $95.7 million, up 3% from $92.6 million in the prior-year quarter. The improvement was primarily due to higher fly ash shipments and price increases. The segment’s operating income improved 15% year over year to $19 million.
Energy Technology:
Reported sales were $4.4 million, rising 63% from the year-ago quarter. The segment reported an operating loss of $0.5 million against a loss of $2 million in the prior-year quarter.

Fiscal 2013 Performance

Headwaters posted adjusted earnings of 54 cents per share for full-year 2013 compared to 41 cents in 2012. Earnings were way ahead of the Zacks Consensus Estimate of 16 cents. Including special items, Headwaters posted earnings of 12 cents per share for full-year 2013 compared to a loss per share of 43 cents in 2012.

Revenues for the full-year increased 11% year over year to roughly $703 million from $633 million in 2012. Revenues managed to surpass the Zacks Consensus Estimate of $706 million.

Financial Update

As of Sep 30, 2013, cash and cash equivalents amounted to $75.3 million versus $53.7 million as of Sep 30, 2012. As of Sep 30, 2013 long-term debt declined to $449 million compared with $500.5 million as of Sep 30, 2012.


Headwaters anticipates adjusted EBITDA range of $125 million to $140 million for fiscal 2014. The company is optimistic that revenues will improve in the remaining year riding on growth in new housing markets. Headwaters will also continue to pursue opportunities to ensure timely repayment of the debt due in 2014.

Headwater also projected expansion of adjusted EBITDA margins in both light building products and heavy construction materials segment due to higher stone sales. Organic growth is expected to be in the mid to high single digits. In addition, the company will introduce new roofing, siding and stone products during the year. However, cost inflation may prove headwinds in future.

Our view

Headwaters is well positioned to benefit from its strong presence in the light building products and heavy construction materials segments. 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 such as population growth, household formation, inventory trends and psychology of customers bolster the company’s long-term growth. Headwaters anticipates success in achieving its goal largely due to a 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 growth 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). Other stocks performing well in the same industry include Masco Corp. (MAS - Analyst Report), Quanex Building Products Corp. (NX - Snapshot Report) and Trex Co. Inc. (TREX - Snapshot Report). All these hold a Zacks Rank #2 (Buy).

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