14. Condensed Consolidating Financial Information

Headwaters’ 7-5/8% senior secured notes are jointly and severally, fully and unconditionally guaranteed by Headwaters Incorporated and by all of Headwaters’ wholly-owned domestic subsidiaries. The non-guaranteeing entities include primarily joint ventures in which Headwaters has a non-controlling ownership interest. Separate stand-alone financial statements and disclosures for Headwaters Incorporated and each of the guarantor subsidiaries are not presented because the guarantees are full and unconditional and the guarantor subsidiaries have joint and several liability.

There are no significant restrictions on the ability of Headwaters Incorporated to obtain funds from the guarantor subsidiaries nor on the ability of the guarantor subsidiaries to obtain funds from Headwaters Incorporated or other guarantor subsidiaries. The non-guaranteeing entities represent less than 3% of consolidated assets, stockholders’ equity, revenues, income from continuing operations before taxes and cash flows from operating activities. Accordingly, the following condensed consolidating financial information does not present separately the non-guarantor entities’ information.

CONDENSED CONSOLIDATING BALANCE SHEET — September 30, 2012

	Guarantor			Parent			Eliminations and			Headwaters
(in thousands)	Subsidiaries			Company			Reclassifications			Consolidated

ASSETS

Current assets:
Cash and cash equivalents	$	44,111		$	9,671		$	—		$	53,782
Trade receivables, net	102,006									102,006
Inventories	31,588									31,588
Current and deferred income taxes	16,168			17,827			(23,122		)	10,873
Assets held for sale	5,864									5,864
Other	10,426			157						10,583
Total current assets	210,163			27,655			(23,122		)	214,696

Property, plant and equipment, net	157,477			2,229						159,706

Other assets:
Intangible assets, net	143,911									143,911
Goodwill	116,671									116,671
Assets held for sale	7,807									7,807
Investments in subsidiaries and intercompany accounts	362,569			95,929			(458,498		)	—
Intercompany notes				637,046			(637,046		)	—
Deferred income taxes	70,285			18,309			(88,594		)	—
Other	15,645			22,501						38,146
Total other assets	716,888			773,785			(1,184,138		)	306,535

Total assets	$	1,084,528		$	803,669		$	(1,207,260	)	$	680,937

LIABILITIES AND STOCKHOLDERS’ EQUITY (NET CAPITAL DEFICIENCY)

Current liabilities:
Accounts payable	$	17,389		$	88		$	—		$	17,477
Accrued personnel costs	14,678			32,370						47,048
Accrued interest				16,267						16,267
Current and deferred income taxes	19,232			4,680			(23,122		)	790
Liabilities associated with assets held for sale	8,640									8,640
Other accrued liabilities	48,760			2,186						50,946
Total current liabilities	108,699			55,591			(23,122		)	141,168

Long-term liabilities:
Long-term debt				500,539						500,539
Income taxes	89,025			21,648			(88,594		)	22,079
Liabilities associated with assets held for sale	9,966									9,966
Intercompany notes	637,046						(637,046		)	—
Other	4,100			6,214						10,314
Total long-term liabilities	740,137			528,401			(725,640		)	542,898
Total liabilities	848,836			583,992			(748,762		)	684,066

Stockholders’ equity (net capital deficiency):
Common stock				61						61
Capital in excess of par value	458,498			640,047			(458,498		)	640,047
Retained earnings (accumulated deficit)	(222,806		)	(420,303		)				(643,109		)
Treasury stock				(128		)				(128		)
Total stockholders’ equity (net capital deficiency)	235,692			219,677			(458,498		)	(3,129		)

Total liabilities and stockholders’ equity (net capital deficiency)	$	1,084,528		$	803,669		$	(1,207,260	)	$	680,937

CONDENSED CONSOLIDATING BALANCE SHEET — June 30, 2013

	Guarantor			Parent			Eliminations and			Headwaters
(in thousands)	Subsidiaries			Company			Reclassifications			Consolidated

ASSETS

Current assets:
Cash and cash equivalents	$	31,511		$	8,979		$	—		$	40,490
Trade receivables, net	103,767									103,767
Inventories	42,448									42,448
Current and deferred income taxes	22,389			36,885			(46,544		)	12,730
Other	11,433			908						12,341
Total current assets	211,548			46,772			(46,544		)	211,776

Property, plant and equipment, net	156,711			3,636						160,347

Other assets:
Intangible assets, net	149,390									149,390
Goodwill	132,176									132,176
Investments in subsidiaries and intercompany accounts	376,437			82,061			(458,498		)	—
Intercompany notes				637,046			(637,046		)	—
Deferred income taxes	65,228			22,302			(87,530		)	—
Other	17,343			21,579						38,922
Total other assets	740,574			762,988			(1,183,074		)	320,488

Total assets	$	1,108,833		$	813,396		$	(1,229,618	)	$	692,611

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	18,436		$	485		$	—		$	18,921
Accrued personnel costs	10,545			27,309						37,854
Accrued interest				9,672						9,672
Current and deferred income taxes	25,955			20,589			(46,544		)	0
Other accrued liabilities	48,370			2,340						50,710
Current portion of long-term debt				15,090						15,090
Total current liabilities	103,306			75,485			(46,544		)	132,247

Long-term liabilities:
Long-term debt				449,380						449,380
Income taxes	88,924			19,898			(87,530		)	21,292
Intercompany notes	637,046						(637,046		)	—
Other	8,529			7,575						16,104
Total long-term liabilities	734,499			476,853			(724,576		)	486,776
Total liabilities	837,805			552,338			(771,120		)	619,023

Stockholders’ equity:
Common stock				73						73
Capital in excess of par value	458,498			720,161			(458,498		)	720,161
Retained earnings (accumulated deficit)	(187,470		)	(458,755		)				(646,225		)
Treasury stock				(421		)				(421		)
Total stockholders’ equity	271,028			261,058			(458,498		)	73,588

Total liabilities and stockholders’ equity	$	1,108,833		$	813,396		$	(1,229,618	)	$	692,611

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2012

	Guarantor			Parent			Headwaters
(in thousands)	Subsidiaries			Company			Consolidated

Revenue:
Light building products	$	97,164		$	—		$	97,164
Heavy construction materials	74,728						74,728
Energy technology	3,729						3,729
Total revenue	175,621			—			175,621

Cost of revenue:
Light building products	66,558						66,558
Heavy construction materials	54,863						54,863
Energy technology	1,842						1,842
Total cost of revenue	123,263			—			123,263

Gross profit	52,358			—			52,358

Operating expenses:
Amortization	4,936						4,936
Research and development	2,280						2,280
Selling, general and administrative	22,539			6,673			29,212
Total operating expenses	29,755			6,673			36,428

Operating income (loss)	22,603			(6,673		)	15,930

Other income (expense):
Net interest expense	(25		)	(15,950		)	(15,975		)
Other, net	(268		)	325			57
Total other income (expense), net	(293		)	(15,625		)	(15,918		)

Income (loss) from continuing operations before income taxes	22,310			(22,298		)	12

Income tax benefit (provision)	2,461			(431		)	2,030

Income (loss) from continuing operations	24,771			(22,729		)	2,042

Loss from discontinued operations, net of income taxes	(15,078		)				(15,078		)

Net income (loss)	$	9,693		$	(22,729	)	$	(13,036	)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2013

	Guarantor			Parent			Headwaters
(in thousands)	Subsidiaries			Company			Consolidated

Revenue:
Light building products	$	118,035		$	—		$	118,035
Heavy construction materials	75,114						75,114
Energy technology	3,881						3,881
Total revenue	197,030			—			197,030

Cost of revenue:
Light building products	82,096						82,096
Heavy construction materials	54,642						54,642
Energy technology	1,787						1,787
Total cost of revenue	138,525			—			138,525

Gross profit	58,505			—			58,505

Operating expenses:
Amortization	5,319						5,319
Research and development	1,786						1,786
Selling, general and administrative	23,407			4,808			28,215
Total operating expenses	30,512			4,808			35,320

Operating income (loss)	27,993			(4,808		)	23,185

Other income (expense):
Net interest income (expense)	9			(11,120		)	(11,111		)
Other, net	24						24
Total other income (expense), net	33			(11,120		)	(11,087		)

Income (loss) from continuing operations before income taxes	28,026			(15,928		)	12,098

Income tax benefit (provision)	(7,170		)	4,320			(2,850		)

Income (loss) from continuing operations	20,856			(11,608		)	9,248

Income from discontinued operations, net of income taxes	1,768						1,768

Net income (loss)	$	22,624		$	(11,608	)	$	11,016

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended June 30, 2012

	Guarantor			Parent			Headwaters
(in thousands)	Subsidiaries			Company			Consolidated

Revenue:
Light building products	$	244,809		$	—		$	244,809
Heavy construction materials	189,105						189,105
Energy technology	8,766						8,766
Total revenue	442,680			—			442,680

Cost of revenue:
Light building products	176,501						176,501
Heavy construction materials	143,341						143,341
Energy technology	4,473						4,473
Total cost of revenue	324,315			—			324,315

Gross profit	118,365			—			118,365

Operating expenses:
Amortization	15,739						15,739
Research and development	5,750						5,750
Selling, general and administrative	60,330			15,856			76,186
Restructuring costs	2,145						2,145
Total operating expenses	83,964			15,856			99,820

Operating income (loss)	34,401			(15,856		)	18,545

Other income (expense):
Net interest expense	(62		)	(41,896		)	(41,958		)
Other, net	(6,603		)	2,350			(4,253		)
Total other income (expense), net	(6,665		)	(39,546		)	(46,211		)

Income (loss) from continuing operations before income taxes	27,736			(55,402		)	(27,666		)

Income tax benefit (provision)	3,328			(5,128		)	(1,800		)

Income (loss) from continuing operations	31,064			(60,530		)	(29,466		)

Loss from discontinued operations, net of income taxes	(27,876		)				(27,876		)

Net income (loss)	$	3,188		$	(60,530	)	$	(57,342	)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended June 30, 2013

	Guarantor			Parent			Headwaters
(in thousands)	Subsidiaries			Company			Consolidated

Revenue:
Light building products	$	279,501		$	—		$	279,501
Heavy construction materials	197,286						197,286
Energy technology	10,804						10,804
Total revenue	487,591			—			487,591

Cost of revenue:
Light building products	202,723						202,723
Heavy construction materials	151,622						151,622
Energy technology	5,085						5,085
Total cost of revenue	359,430			—			359,430

Gross profit	128,161			—			128,161

Operating expenses:
Amortization	15,543						15,543
Research and development	5,209						5,209
Selling, general and administrative	64,804			14,504			79,308
Total operating expenses	85,556			14,504			100,060

Operating income (loss)	42,605			(14,504		)	28,101

Other income (expense):
Net interest expense	(49		)	(32,673		)	(32,722		)
Other, net	227			35			262
Total other income (expense), net	178			(32,638		)	(32,460		)

Income (loss) from continuing operations before income taxes	42,783			(47,142		)	(4,359		)

Income tax benefit (provision)	(9,240		)	8,690			(550		)

Income (loss) from continuing operations	33,543			(38,452		)	(4,909		)

Income from discontinued operations, net of income taxes	1,793						1,793

Net income (loss)	$	35,336		$	(38,452	)	$	(3,116	)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended June 30, 2012

	Guarantor			Parent			Headwaters
(in thousands)	Subsidiaries			Company			Consolidated

Cash flows from operating activities:
Net income (loss)	$	3,188		$	(60,530	)	$	(57,342	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	38,661			103			38,764
Interest expense related to amortization of debt issue costs and debt discount				12,687			12,687
Stock-based compensation	572			807			1,379
Deferred income taxes	82						82
Net gain on disposition of property, plant and equipment	(635		)				(635		)
Gain on sale of discontinued operations, net of income taxes	(267		)				(267		)
Gain on convertible debt repayments				(2,350		)	(2,350		)
Asset impairments and non-cash restructuring costs	13,602						13,602
Net loss of unconsolidated joint ventures	6,069						6,069
Increase in trade receivables	(1,190		)				(1,190		)
Decrease in inventories	2,983						2,983
Decrease in accounts payable and accrued liabilities	(4,739		)	(919		)	(5,658		)
Other changes in operating assets and liabilities, net	(76,675		)	78,525			1,850
Net cash provided by (used in) operating activities	(18,349		)	28,323			9,974

Cash flows from investing activities:
Payment for acquisition	(900		)				(900		)
Purchase of property, plant and equipment	(17,450		)	(855		)	(18,305		)
Proceeds from disposition of property, plant and equipment	1,336						1,336
Proceeds from sale of discontinued operations	2,000						2,000
Proceeds from sale of interests in joint ventures	18,522						18,522
Net change in other assets	(2,346		)	1,372			(974		)
Net cash provided by (used in) investing activities	1,162			517			1,679

Cash flows from financing activities:
Payments on long-term debt				(32,931		)	(32,931		)
Debt issue costs				(1,040		)	(1,040		)
Employee stock purchases	349			135			484
Net cash provided by (used in) financing activities	349			(33,836		)	(33,487		)

Net decrease in cash and cash equivalents	(16,838		)	(4,996		)	(21,834		)

Cash and cash equivalents, beginning of period	36,122			14,688			50,810

Cash and cash equivalents, end of period	$	19,284		$	9,692		$	28,976

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended June 30, 2013

	Guarantor			Parent			Headwaters
(in thousands)	Subsidiaries			Company			Consolidated

Cash flows from operating activities:
Net income (loss)	$	35,336		$	(38,452	)	$	(3,116	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	39,222			210			39,432
Interest expense related to amortization of debt issue costs and debt discount				4,999			4,999
Stock-based compensation	588			679			1,267
Deferred income taxes	223						223
Net gain on disposition of property, plant and equipment	(726		)				(726		)
Gain on sale of discontinued operations, net of income taxes	(2,158		)				(2,158		)
Gain on convertible debt repayment				(35		)	(35		)
Decrease in trade receivables	1,066						1,066
Increase in inventories	(2,931		)				(2,931		)
Decrease in accounts payable and accrued liabilities	(14,642		)	(11,106		)	(25,748		)
Other changes in operating assets and liabilities, net	(9,694		)	5,291			(4,403		)
Net cash provided by (used in) operating activities	46,284			(38,414		)	7,870

Cash flows from investing activities:
Payment for acquisition	(43,250		)				(43,250		)
Purchase of property, plant and equipment	(19,942		)	(1,604		)	(21,546		)
Proceeds from disposition of property, plant and equipment	855						855
Proceeds from sale of discontinued operations	4,813						4,813
Net change in other assets	(1,798		)	674			(1,124		)
Net cash used in investing activities	(59,322		)	(930		)	(60,252		)

Cash flows from financing activities:
Net proceeds from issuance of common stock				77,957			77,957
Payments on long-term debt				(39,476		)	(39,476		)
Employee stock purchases	438			171			609
Net cash provided by financing activities	438			38,652			39,090

Net decrease in cash and cash equivalents	(12,600		)	(692		)	(13,292		)

Cash and cash equivalents, beginning of period	44,111			9,671			53,782

Cash and cash equivalents, end of period	$	31,511		$	8,979		$	40,490