15. Condensed Consolidating Financial Information

Headwaters’ borrowings under the Term Loan Facility (and the 7¼% senior notes until they were fully repaid in September 2016) are jointly and severally, fully and unconditionally guaranteed by Headwaters Incorporated and by substantially all of Headwaters’ 100%‑owned domestic subsidiaries. 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. Non-guaranteeing entities include subsidiaries that are not 100% owned, foreign subsidiaries and joint ventures in which Headwaters has a non-controlling ownership interest.

CONDENSED CONSOLIDATING BALANCE SHEET—September 30, 2015


			Non-				Eliminations
	Guarantor		guarantor		Parent		and		Headwaters
(in thousands)	Subsidiaries		Subsidiaries		Company		Reclassifications		Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	25,819	$	3,577	$	113,201	$	—	$	142,597
Trade receivables, net		129,095		5,289		—		—		134,384
Inventories		52,699		2,375		—		—		55,074
Current income taxes		—		—		143,305		(142,976)		329
Other		10,666		144		1,017		—		11,827
Total current assets		218,279		11,385		257,523		(142,976)		344,211
Property, plant and equipment, net		164,413		9,978		11,327		—		185,718
Other assets:
Goodwill		147,330		30,869		—		—		178,199
Intangible assets, net		116,479		27,239		—		—		143,718
Investments in subsidiaries		55,844		—		372,864		(428,708)		—
Intercompany accounts and notes		57,793		—		637,046		(694,839)		—
Deferred income taxes		—		25,204		79,763		(12,115)		92,852
Other		11,243		2,291		20,787		—		34,321
Total other assets		388,689		85,603		1,110,460		(1,135,662)		449,090
Total assets	$	771,381	$	106,966	$	1,379,310	$	(1,278,638)	$	979,019

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	23,619	$	1,114	$	573	$	—	$	25,306
Accrued personnel costs		14,542		501		37,501		—		52,544
Current income taxes		137,502		5,474		—		(142,976)		—
Other accrued liabilities		39,604		6,380		5,797		—		51,781
Current portion of long-term debt		—		—		4,250		—		4,250
Total current liabilities		215,267		13,469		48,121		(142,976)		133,881
Long-term liabilities:
Long-term debt, net		—		—		558,080		—		558,080
Intercompany accounts and notes		—		178,179		516,660		(694,839)		—
Other		16,572		13,897		18,422		(12,115)		36,776
Total long-term liabilities		16,572		192,076		1,093,162		(706,954)		594,856
Total liabilities		231,839		205,545		1,141,283		(849,930)		728,737
Redeemable non-controlling interest in consolidated subsidiary		—		12,431		—		—		12,431
Stockholders’ equity:
Common stock		—		—		74		—		74
Capital in excess of par value		486,069		54,470		728,843		(540,715)		728,667
Retained earnings (accumulated deficit)		53,473		(165,480)		(489,889)		112,007		(489,889)
Treasury stock		—		—		(1,001)		—		(1,001)
Total stockholders’ equity		539,542		(111,010)		238,027		(428,708)		237,851
Total liabilities and stockholders’ equity	$	771,381	$	106,966	$	1,379,310	$	(1,278,638)	$	979,019

CONDENSED CONSOLIDATING BALANCE SHEET—September 30, 2016


			Non-				Eliminations
	Guarantor		guarantor		Parent		and		Headwaters
(in thousands)	Subsidiaries		Subsidiaries		Company		Reclassifications		Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	27,012	$	5,304	$	32,982	$	—	$	65,298
Trade receivables, net		145,443		6,641		—		—		152,084
Inventories		67,549		5,119		—		—		72,668
Current income taxes		—		—		59,989		(58,802)		1,187
Other		11,975		1,481		61		—		13,517
Total current assets		251,979		18,545		93,032		(58,802)		304,754
Property, plant and equipment, net		179,758		9,852		17,182		—		206,792
Other assets:
Goodwill		248,016		42,487		—		—		290,503
Intangible assets, net		282,239		36,923		—		—		319,162
Investments in subsidiaries		—		—		721,760		(721,760)		—
Intercompany accounts and notes		26,707		—		701,040		(727,747)		—
Deferred income taxes		—		23,083		57,053		(12,077)		68,059
Other		13,293		10,922		24,958		—		49,173
Total other assets		570,255		113,415		1,504,811		(1,461,584)		726,897
Total assets	$	1,001,992	$	141,812	$	1,615,025	$	(1,520,386)	$	1,238,443

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	27,659	$	1,301	$	1,251	$	—	$	30,211
Accrued personnel costs		14,945		519		29,902		—		45,366
Current income taxes		56,553		2,249		—		(58,802)		—
Other accrued liabilities		55,942		5,002		2,841		—		63,785
Current portion of long-term debt		—		—		7,785		—		7,785
Total current liabilities		155,099		9,071		41,779		(58,802)		147,147
Long-term liabilities:
Long-term debt, net		—		—		746,716		—		746,716
Income taxes		12,077		—		—		(12,077)		—
Intercompany accounts and notes		—		211,087		516,660		(727,747)		—
Other		4,581		16,941		19,708		—		41,230
Total long-term liabilities		16,658		228,028		1,283,084		(739,824)		787,946
Total liabilities		171,757		237,099		1,324,863		(798,626)		935,093
Redeemable non-controlling interest in consolidated subsidiary		—		13,363		—		—		13,363
Stockholders’ equity:
Common stock		—		—		74		—		74
Capital in excess of par value		711,755		52,429		733,292		(764,359)		733,117
Retained earnings (accumulated deficit)		118,480		(161,079)		(441,793)		42,599		(441,793)
Treasury stock		—		—		(1,411)		—		(1,411)
Total stockholders’ equity		830,235		(108,650)		290,162		(721,760)		289,987
Total liabilities and stockholders’ equity	$	1,001,992	$	141,812	$	1,615,025	$	(1,520,386)	$	1,238,443

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Year Ended September 30, 2014


			Non-
	Guarantor		guarantor		Parent				Headwaters
(in thousands)	Subsidiaries		Subsidiaries		Company		Eliminations		Consolidated
Revenue:
Building products	$	438,473	$	33,961	$	—	$	—	$	472,434
Construction materials		309,337		—		—		—		309,337
Energy technology		9,676		—		—		—		9,676
Total revenue		757,486		33,961		—		—		791,447
Cost of revenue:
Building products		312,220		24,063		—		—		336,283
Construction materials		224,888		—		—		—		224,888
Energy technology		4,583		—		—		—		4,583
Total cost of revenue		541,691		24,063		—		—		565,754
Gross profit		215,795		9,898		—		—		225,693
Operating expenses:
Selling, general and administrative		108,602		4,209		24,839		—		137,650
Amortization		20,231		1,088		—		—		21,319
Total operating expenses		128,833		5,297		24,839		—		158,969
Operating income (loss)		86,962		4,601		(24,839)		—		66,724
Other income (expense):
Net interest expense		(349)		(2)		(45,978)		—		(46,329)
Intercompany interest income (expense)		(22,737)		—		22,737		—		—
Equity in earnings of subsidiaries		—		—		62,719		(62,719)		—
Other, net		(24)		(324)		—		—		(348)
Total other income (expense), net		(23,110)		(326)		39,478		(62,719)		(46,677)
Income from continuing operations before income taxes		63,852		4,275		14,639		(62,719)		20,047
Income tax benefit (provision)		(3,296)		(923)		645		—		(3,574)
Income from continuing operations		60,556		3,352		15,284		(62,719)		16,473
Loss from discontinued operations, net of income taxes		(415)		—		—		—		(415)
Net income		60,141		3,352		15,284		(62,719)		16,058
Net income attributable to non-controlling interest		—		(774)		—		—		(774)
Net income attributable to Headwaters Incorporated	$	60,141	$	2,578	$	15,284	$	(62,719)	$	15,284

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Year Ended September 30, 2015


			Non-
	Guarantor		guarantor		Parent				Headwaters
(in thousands)	Subsidiaries		Subsidiaries		Company		Eliminations		Consolidated
Revenue:
Building products	$	479,338	$	44,305	$	—	$	—	$	523,643
Construction materials		352,263		—		—		—		352,263
Energy technology		19,427		—		—		—		19,427
Total revenue		851,028		44,305		—		—		895,333
Cost of revenue:
Building products		335,516		31,647		—		—		367,163
Construction materials		249,077		—		—		—		249,077
Energy technology		9,202		—		—		—		9,202
Total cost of revenue		593,795		31,647		—		—		625,442
Gross profit		257,233		12,658		—		—		269,891
Operating expenses:
Selling, general and administrative		115,423		6,174		28,026		—		149,623
Amortization		16,688		1,473		—		—		18,161
Total operating expenses		132,111		7,647		28,026		—		167,784
Operating income (loss)		125,122		5,011		(28,026)		—		102,107
Other income (expense):
Net interest expense		(205)		—		(64,014)		—		(64,219)
Intercompany interest income (expense)		(23,782)		(280)		24,062		—		—
Equity in earnings of subsidiaries		—		—		54,350		(54,350)		—
Other, net		(56)		(162)		—		—		(218)
Total other income (expense), net		(24,043)		(442)		14,398		(54,350)		(64,437)
Income (loss) from continuing operations before income taxes		101,079		4,569		(13,628)		(54,350)		37,670
Income tax benefit (provision)		(48,213)		(1,756)		144,427		—		94,458
Income from continuing operations		52,866		2,813		130,799		(54,350)		132,128
Loss from discontinued operations, net of income taxes		(67)		(393)		—		—		(460)
Net income		52,799		2,420		130,799		(54,350)		131,668
Net income attributable to non-controlling interest		—		(869)		—		—		(869)
Net income attributable to Headwaters Incorporated	$	52,799	$	1,551	$	130,799	$	(54,350)	$	130,799

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Year Ended September 30, 2016


			Non-
	Guarantor		guarantor		Parent				Headwaters
(in thousands)	Subsidiaries		Subsidiaries		Company		Eliminations		Consolidated
Revenue:
Building products	$	538,210	$	56,071	$	—	$	—	$	594,281
Construction materials		370,439		—		—		—		370,439
Energy technology		10,087		—		—		—		10,087
Total revenue		918,736		56,071		—		—		974,807
Cost of revenue:
Building products		381,998		41,912		—		—		423,910
Construction materials		258,478		—		—		—		258,478
Energy technology		4,218		—		—		—		4,218
Total cost of revenue		644,694		41,912		—		—		686,606
Gross profit		274,042		14,159		—		—		288,201
Operating expenses:
Selling, general and administrative		119,702		8,956		28,240		—		156,898
Amortization		19,120		1,473		—		—		20,593
Total operating expenses		138,822		10,429		28,240		—		177,491
Operating income (loss)		135,220		3,730		(28,240)		—		110,710
Other income (expense):
Net interest expense		(306)		(35)		(42,083)		—		(42,424)
Intercompany interest income (expense)		(27,998)		—		27,998		—		—
Equity in earnings of subsidiaries		—		—		69,408		(69,408)		—
Other, net		(434)		4,583		—		—		4,149
Total other income (expense), net		(28,738)		4,548		55,323		(69,408)		(38,275)
Income from continuing operations before income taxes		106,482		8,278		27,083		(69,408)		72,435
Income tax benefit (provision)		(41,371)		(2,398)		21,013		—		(22,756)
Income from continuing operations		65,111		5,880		48,096		(69,408)		49,679
Income from discontinued operations, net of income taxes		—		84		—		—		84
Net income		65,111		5,964		48,096		(69,408)		49,763
Net income attributable to non-controlling interest		—		(1,667)		—		—		(1,667)
Net income attributable to Headwaters Incorporated	$	65,111	$	4,297	$	48,096	$	(69,408)	$	48,096

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended September 30, 2014


				Non-
	Guarantor		Guarantor		Parent				Headwaters
(in thousands)	Subsidiaries		Subsidiaries		Company		Eliminations		Consolidated
Cash flows from operating activities:
Net income	$	60,141	$	3,352	$	15,284	$	(62,719)	$	16,058
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		52,716		2,146		272		—		55,134
Interest expense related to amortization of debt issue costs and debt discount		—		—		2,175		—		2,175
Stock-based compensation		843		—		1,322		—		2,165
Deferred income taxes		1,062		604		—		—		1,666
Net loss on disposition of property, plant and equipment		44		6		45		—		95
Asset impairments		1,815		—		—		—		1,815
Net loss of unconsolidated joint ventures		—		529		—		—		529
Equity in earnings of subsidiaries		—		—		(62,719)		62,719		0
Decrease (increase) in trade receivables		(90)		607		—		—		517
Decrease (increase) in inventories		(3,927)		1,580		—		—		(2,347)
Increase (decrease) in accounts payable and accrued liabilities		(16,725)		828		3,311		—		(12,586)
Other changes in operating assets and liabilities, net		34,649		129		(34,956)		—		(178)
Net cash provided by (used in) operating activities		130,528		9,781		(75,266)		—		65,043
Cash flows from investing activities:
Business acquisitions		(10,500)		—		(85,104)		—		(95,604)
Investments in unconsolidated joint ventures		—		(1,875)		—		—		(1,875)
Purchase of property, plant and equipment		(30,672)		(829)		(4,298)		—		(35,799)
Proceeds from disposition of property, plant and equipment		905		—		—		—		905
Net decrease in long-term receivables and deposits		7,145		—		300		—		7,445
Net change in other assets		(2,275)		—		719		—		(1,556)
Net cash used in investing activities		(35,397)		(2,704)		(88,383)		—		(126,484)
Cash flows from financing activities:
Net proceeds from issuance of long-term debt		—		—		146,650		—		146,650
Payments on long-term debt		—		—		(7,792)		—		(7,792)
Dividends paid to non-controlling interest in consolidated subsidiary		—		(950)		—		—		(950)
Employee stock purchases		580		—		179		—		759
Intercompany transfers		(132,872)		(397)		133,269		—		0
Net cash provided by (used in) financing activities		(132,292)		(1,347)		272,306		—		138,667
Net increase (decrease) in cash and cash equivalents		(37,161)		5,730		108,657		—		77,226
Cash and cash equivalents, beginning of year		70,713		34		4,569		—		75,316
Cash and cash equivalents, end of year	$	33,552	$	5,764	$	113,226	$	—	$	152,542

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended September 30, 2015


			Non-
	Guarantor		guarantor		Parent				Headwaters
(in thousands)	Subsidiaries		Subsidiaries		Company		Eliminations		Consolidated
Cash flows from operating activities:
Net income	$	52,799	$	2,420	$	130,799	$	(54,350)	$	131,668
Adjustments to reconcile net income to net cash provided by (used in) operating activities:										—
Depreciation and amortization		50,538		2,922		513		—		53,973
Interest expense related to amortization of debt issue costs and debt discount		—		—		6,180		—		6,180
Debt pre-payment premiums		—		—		18,320		—		18,320
Stock-based compensation		1,014		—		1,812		—		2,826
Deferred income taxes		7,850		(25,808)		(78,784)		—		(96,742)
Tax benefit from exercise of stock appreciation rights and vesting of restricted stock		—		(965)		(578)		—		(1,543)
Net loss (gain) on disposition of property, plant and equipment		(70)		119		—		—		49
Net loss of unconsolidated joint ventures		—		262		—		—		262
Equity in earnings of subsidiaries		—		—		(54,350)		54,350		0
Decrease (increase) in trade receivables		(14,295)		101		—		—		(14,194)
Increase in inventories		(783)		(224)		—		—		(1,007)
Increase (decrease) in accounts payable and accrued liabilities		(2,147)		3,519		(12,929)		—		(11,557)
Other changes in operating assets and liabilities, net		41,952		18,016		(66,495)		—		(6,527)
Net cash provided by (used in) operating activities		136,858		362		(55,512)		—		81,708
Cash flows from investing activities:
Business acquisition		(5,650)		—		—		—		(5,650)
Investments in unconsolidated joint venture		(125)		—		—		—		(125)
Purchase of property, plant and equipment		(30,972)		(662)		(5,225)		—		(36,859)
Proceeds from disposition of property, plant and equipment		906		9		—		—		915
Net decrease in long-term receivables and deposits		2,382		—		1,068		—		3,450
Net change in other assets		(718)		—		121		—		(597)
Net cash used in investing activities		(34,177)		(653)		(4,036)		—		(38,866)
Cash flows from financing activities:
Net proceeds from issuance of long-term debt		—		—		414,675		—		414,675
Payments on long-term debt		—		—		(449,799)		—		(449,799)
Debt pre-payment premiums		—		—		(18,320)		—		(18,320)
Dividends paid to non-controlling interest in consolidated subsidiary		—		(1,690)		—		—		(1,690)
Employee stock purchases		583		45		176		—		804
Tax benefit from exercise of stock appreciation rights and vesting of restricted stock		—		965		578		—		1,543
Intercompany transfers		(110,997)		(1,216)		112,213		—		0
Net cash provided by (used in) financing activities		(110,414)		(1,896)		59,523		—		(52,787)
Net decrease in cash and cash equivalents		(7,733)		(2,187)		(25)		—		(9,945)
Cash and cash equivalents, beginning of year		33,552		5,764		113,226		—		152,542
Cash and cash equivalents, end of year	$	25,819	$	3,577	$	113,201	$	—	$	142,597

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended September 30, 2016


			Non-
	Guarantor		guarantor		Parent				Headwaters
(in thousands)	Subsidiaries		Subsidiaries		Company		Eliminations		Consolidated
Cash flows from operating activities:
Net income	$	65,111	$	5,964	$	48,096	$	(69,408)	$	49,763
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		57,972		3,042		1,504		—		62,518
Interest expense related to amortization of debt issue costs and debt discount		—		—		3,973		—		3,973
Debt pre-payment premiums		—		—		5,395		—		5,395
Stock-based compensation		1,075		7		2,099		—		3,181
Deferred income taxes		(40)		121		22,698		—		22,779
Tax benefit from exercise of stock appreciation rights and vesting of restricted stock		(367)		—		(356)		—		(723)
Net loss (gain) on disposition of property, plant and equipment		(1,543)		67		—		—		(1,476)
Gain on acquired assets held for sale		—		(4,450)		—		—		(4,450)
Change in fair value of contingent consideration		(800)		—		—		—		(800)
Net loss of unconsolidated joint ventures		—		43		—		—		43
Equity in earnings of subsidiaries		—		—		(69,408)		69,408		0
Increase in trade receivables		(1,068)		(34)		—		—		(1,102)
Increase in inventories		(68)		(364)		—		—		(432)
Increase (decrease) in accounts payable and accrued liabilities		1,046		(2,578)		(9,921)		—		(11,453)
Other changes in operating assets and liabilities, net		9,046		(2,370)		(13,589)		—		(6,913)
Net cash provided by (used in) operating activities		130,364		(552)		(9,509)		—		120,303
Cash flows from investing activities:
Business acquisitions, net of cash acquired		(309,279)		(33,083)		—		—		(342,362)
Purchase of property, plant and equipment		(44,871)		(871)		(7,357)		—		(53,099)
Proceeds from disposition of property, plant and equipment		9,425		20		—		—		9,445
Proceeds from sale of acquired assets held for sale		—		6,200		—		—		6,200
Net decrease (increase) in long-term receivables and deposits		534		(76)		(185)		—		273
Net change in other assets		(1,348)		(140)		(355)		—		(1,843)
Net cash used in investing activities		(345,539)		(27,950)		(7,897)		—		(381,386)
Cash flows from financing activities:
Net proceeds from issuance of long-term debt		—		—		343,453		—		343,453
Payments on long-term debt		—		—		(155,135)		—		(155,135)
Debt pre-payment premiums		—		—		(5,395)		—		(5,395)
Dividends paid to non-controlling interest in consolidated subsidiary		(775)		40		—		—		(735)
Employee stock purchases		1,394		(735)		214		—		873
Tax benefit from exercise of stock appreciation rights and vesting of restricted stock		367		—		356		—		723
Intercompany transfers		215,382		30,924		(246,306)		—		0
Net cash provided by (used in) financing activities		216,368		30,229		(62,813)		—		183,784
Net increase (decrease) in cash and cash equivalents		1,193		1,727		(80,219)		—		(77,299)
Cash and cash equivalents, beginning of year		25,819		3,577		113,201		—		142,597
Cash and cash equivalents, end of year	$	27,012	$	5,304	$	32,982	$	—	$	65,298