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Shares of Headwaters Incorporated (HW - Snapshot Report) gained around 20% and closed at $12.71 after the company reported upbeat first-quarter fiscal 2014 (ended Dec 31, 2013) results on Feb 4. Adjusted earnings improved 40% to 7 cents per share from 5 cents in the prior-year quarter. The results were also favorable when compared to the Zacks Consensus Estimate of a loss of one cent per share.

Including adjustments, Headwaters reported a loss per share of 3 cents, which was narrower than the prior-year quarter loss of 6 cents.

Operational Update

Total revenue was $165.6 million in the quarter, up 11% year over year. Revenues also surpassed the Zacks Consensus Estimate of $159 million. The 11% overall rise in revenues included 7% organic growth from core Building Products and construction materials segments. Additionally, growth was driven by the core product line and benefits from the Roof Tile acquisition.

Cost of sales increased 11% to $124.7 million from $112 million in the year-ago quarter. Gross profit rose 10% year over year to $40.9 million. However, gross margin contracted 20 bps (basis points) year over year to 24.7%. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) recorded 11% year-over-year improvement to $24 million.
 
Selling, general and administrative expenses increased 5% to $25.9 million from the year-earlier quarter. Operating profit rose 27% to $7.6 million while operating margin expanded 50 bps to 4.5%, both on a year-over-year basis.
 
Segmental Performance

Light Building Products: Revenues increased 21% year over year to $93 million including organic growth of 9%. The year-over-year rise was driven by success in distribution of the new trim board product line. This was however, partly offset by the soft repair and remodel market. Operating income grew 65% year over year to $5.1 million.

Heavy Construction Materials: Segment revenues in the quarter were $71.5 million, up 5% from $68.2 million in the prior-year quarter. The improvement was primarily due to increases in the price of fly ash and incremental services provided to utilities. The segment’s operating income improved 30% year over year to $9.9 million.
 
Energy Technology: Reported sales were $1.1 million compared with $4.7 million in the year-ago quarter. The segment reported an operating loss of $2.3 million against a loss of $0.08 million in the prior-year quarter.

Financial Update

As of Dec 31, 2013, cash and cash equivalents amounted to $175.3 million versus $75.3 million as of Sep 30, 2013. Long-term debt was $607 million as of Dec 31, 2013, compared with $456.9 million as of Sep 30, 2013.

EPA Update

After five years of working with the Environmental Protection Agency (EPA), Headwaters finally got a commitment to modify its disposal regulations under Subtitle D of RCRA. The uncertainty around the classification of fly ash for disposal will now likely be finally resolved.  

Outlook

Headwaters modified its adjusted EBITDA range of $125–$140 million to $130–$145 million for fiscal 2014. The company 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 on the back of organic revenue growth and ongoing improvements in manufacturing efficiencies. However, cost inflation could be a headwind, going forward.
 
Our View

Headwaters is well positioned to benefit from the strong performance of its light building products and heavy construction materials segments. A significant contribution from margins, together with the growing demand will help the company generate adequate cash, thereby facilitating debt reduction and enhanced returns to investors.

In addition, Headwaters acquired 80% equity interest in the business of Roof Tile and is set to acquire 40% equity interest in the joint venture (JV) to market Tag & Stick. The acquisitions will be accretive in 2014 and will help in increasing sales and distribution networks in the building products market in Florida. They will also likely stimulate sales growth on a geographical basis.

Macroeconomic factors like population growth, household formation, inventory trends and psychology of customers play key roles in the company’s long-term growth. Headwaters expects to meet its targets owing 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 as well as technologies and services to the heavy construction materials, light building products, and energy technology industries.

Currently, Headwaters carries a Zacks Rank #3 (Hold). Other stocks performing well in the same industry include USG Corporation (USG - Snapshot Report), United Rentals, Inc. (URI - Snapshot Report) and Chicago Bridge & Iron Company N.V. (CBI - Analyst Report). All these have a Zacks Rank #2 (Buy).

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