Acquisition of Kleer Lumber

6 Months Ended

Mar. 31, 2013

Acquisition of Kleer Lumber

Acquisition of Kleer Lumber

11. Acquisition of Kleer Lumber

On December 31, 2012, a subsidiary of Headwaters acquired certain assets and assumed certain liabilities of Kleer Lumber, Inc., a privately-held Massachusetts-based company in the light building products industry. Kleer Lumber’s results of operations have been included with Headwaters’ consolidated results beginning January 1, 2013.

Kleer Lumber is a manufacturer of high quality cellular PVC products, primarily trim boards, but also millwork, sheet stock, railing, paneling, and moulding. Headwaters believes the demand for cellular PVC building products is growing due to the ability to cut, mill, shape, and install in the same manner as wood products, but with the added benefit of cellular PVC requiring significantly less maintenance than wood. Kleer Lumber primarily distributes its products into independent lumber yards located in the Northeast and Mid-Atlantic states. Headwaters’ access to Kleer Lumber’s distribution channel may expand the light building products distribution network for existing Headwaters products.

Total consideration paid for Kleer Lumber, all of which was cash, was approximately $43.3 million. Direct acquisition costs, consisting primarily of fees for advisory, legal and other professional services, totaled approximately $0.9 million and were included in selling, general and administrative expense in the statement of operations for the six months ended March 31, 2013.

The Kleer Lumber acquisition has been accounted for as a business combination in accordance with the requirements of ASC 805 Business Combinations. The following table sets forth the estimated fair values of assets acquired and liabilities assumed as of the acquisition date, using available information and assumptions Headwaters deems to be reasonable at the current time. Headwaters is in the process of finalizing the estimated amounts shown below for acquired intangible assets; therefore, the provisional measurements shown in the table are subject to change.

	(in thousands)
Current assets	$	5,818
Current liabilities	(3,093		)
Property, plant and equipment	4,098
Intangible assets:
Customer relationships (15 year life)	12,149
Trade names (5 - 20 year lives)	8,073
Other (5 year life)	700
Goodwill	15,505
Net assets acquired	$	43,250

The current estimated useful lives of the identified intangible assets as reflected in the table above range from five to twenty years, with a combined weighted-average life of approximately 16 years. Kleer Lumber’s future growth attributable to new customers, geographic market presence and assembled workforce are additional assets that are not separable and which contributed to recorded goodwill, all of which is tax deductible over 15 years. All of Headwaters’ goodwill is tested for impairment annually, and both acquired goodwill and intangible assets are subject to review for impairment if indicators of impairment develop in the future.

The actual revenue and earnings (loss) of Kleer Lumber included in Headwaters’ statements of operations (for both the three- and six-month periods ended March 31, 2013) was approximately $8.1 million of revenue and $(0.2) million of loss. The following represents the pro forma consolidated revenue and net loss for Headwaters for the periods indicated as if Kleer Lumber had been included in Headwaters’ consolidated results of operations beginning October 1, 2011.

	Three months ended March 31,						Six months ended March 31,
(in thousands)	2012			2013			2012			2013
Revenue	$	138,715		$	140,988		$	283,843		$	297,967
Net loss	(20,237		)	(7,835		)	(45,861		)	(13,011		)

The above pro forma results have been calculated by combining the historical results of Headwaters and Kleer Lumber as if the acquisition had occurred on October 1, 2011, and adjusting the income tax provision as if it had been calculated on the resulting, combined results. The pro forma results include provisional amortization expense for the acquired intangible assets for all periods, and reflects $0.9 million of direct acquisition costs and $0.5 million of nonrecurring expense related to the fair value adjustment to acquisition-date inventory in fiscal 2012 instead of fiscal 2013. No other material pro forma adjustments were deemed necessary, either to conform Kleer Lumber to Headwaters’ accounting policies or for any other situation. The above pro forma results could change if the provisional measurements for identified intangible assets, or the periods over which such amounts are amortized, change. The pro forma information is not necessarily indicative of the results that would have been achieved had the transaction occurred on October 1, 2011 or that may be achieved in the future.