10-K 1 hw-20160930x10k.htm 10-K hw_Current_Folio_10K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2016,

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                    

Commission file number 1‑32459

HEADWATERS INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)

87‑0547337
(I.R.S. Employer
Identification No.)

10701 South River Front Parkway, Suite 300
South Jordan, Utah
(Address of principal executive offices)

84095
(Zip Code)

(801) 984‑9400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒  No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company.

 

 

 

 

Large accelerated filer ☒

Accelerated filer ☐

Non‑accelerated filer ☐

Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes ☐  No ☒

The aggregate market value of the common stock held by non‑affiliates of the registrant as of March 31, 2016 was $1,426,230,580, based upon the closing price on the New York Stock Exchange reported for such date. This calculation does not reflect a determination that persons whose shares are excluded from the computation are affiliates for any other purpose.

The number of shares outstanding of the registrant’s common stock as of October 31, 2016 was 74,154,101.


DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be issued in connection with registrant’s annual meeting of stockholders to be held in 2017 are incorporated by reference into Part III of this Report on Form 10‑ K.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I 

 

ITEM 1. 

BUSINESS

ITEM 1A. 

RISK FACTORS

19 

ITEM 1B. 

UNRESOLVED STAFF COMMENTS

30 

ITEM 2. 

PROPERTIES

30 

ITEM 3. 

LEGAL PROCEEDINGS

31 

ITEM 4. 

MINE SAFETY DISCLOSURES

31 

PART II 

 

ITEM 5. 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

31 

ITEM 6. 

SELECTED FINANCIAL DATA

33 

ITEM 7. 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

34 

ITEM 7A. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

51 

ITEM 8. 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

52 

ITEM 9. 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

52 

ITEM 9A. 

CONTROLS AND PROCEDURES

52 

ITEM 9B. 

OTHER INFORMATION

56 

PART III 

 

ITEM 10. 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

56 

ITEM 11. 

EXECUTIVE COMPENSATION

56 

ITEM 12. 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

56 

ITEM 13. 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

56 

ITEM 14. 

PRINCIPAL ACCOUNTING FEES AND SERVICES

56 

PART IV 

 

ITEM 15. 

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

57 

SIGNATURES 

62 

 

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Forward‑looking Statements

This Annual Report on Form 10‑K contains forward‑looking statements relating to Headwaters’ operations that are based on management’s current expectations, estimates and projections about the industries in which Headwaters operates. Words such as “may,” “should,” “anticipates,” “expects,” “intends,” “plans,” “targets,” “forecasts,” “projects,” “believes,” “seeks,” “schedules,” “estimates,” “budgets,” “goals,” “outlook” and similar expressions are intended to help identify such forward‑looking statements. Forward‑looking statements include Headwaters’ expectations as to the managing and marketing of coal combustion products and other construction materials, the production and marketing of building products, the sales to oil refineries of residue hydrocracking catalysts, the development, commercialization, and financing of new products and other strategic business opportunities and acquisitions, and other information about Headwaters which are not purely historical by nature, including those statements regarding Headwaters’ future business plans, the operation of facilities, the availability of feedstocks, and the marketability of coal combustion products, construction materials, building products and catalysts. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, many of which are beyond the Company’s control and are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward‑looking statements. The reader should not place undue reliance on these forward‑looking statements, which speak only as of the date of this report. Unless legally required, Headwaters undertakes no obligation to update publicly any forward‑looking statements, whether as a result of new information, future events or otherwise. Among the important factors that could cause actual results to differ materially from those in the forward‑looking statements are: changing feedstock and energy prices; actions of competitors or regulators; technological developments; potential disruption of the Company’s production facilities, transportation networks and information technology systems due to war, terrorism, malicious attack, civil accidents, political events, civil unrest or severe weather; potential environmental liability or product liability under existing or future laws and litigation; potential liability resulting from other pending or future litigation; changed accounting rules under generally accepted accounting principles promulgated by rule‑setting bodies; and the factors set forth under the heading “Risk Factors” in the Company’s Annual Report on Form 10‑K, quarterly reports on Form 10‑Q and other periodic reports. In addition, such results could be affected by general domestic and international economic and political conditions and other unpredictable or unknown factors not discussed in this report which could have material adverse effects on forward‑looking statements.

Our internet address is www.headwaters.com. There we make available, free of charge, our annual report on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our reports can be accessed through the investor relations section of our web site. The information found on our web site is not part of this or any report we file with or furnish to the SEC.

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PART I

ITEM 1.  BUSINESS

General Development of Business

Headwaters Incorporated (“Headwaters”®) is a building materials company operating in the building products and construction materials sectors. Our vision is to improve lives through innovative advancements in building products and materials. We sell building products such as manufactured architectural stone, siding accessory products, roof products, concrete blocks, and windows. We also sell construction materials such as coal combustion products (“CCPs”) and synthetic gypsum.  CCPs include fly ash, which is primarily used as a partial replacement for portland cement in concrete.

We conduct our business through the following three reporting segments: building products, construction materials and energy technology. We have limited involvement in the energy sector where we sell catalytic materials to certain refineries engaged in heavy oil upgrading. We sold our other energy related businesses, including the business of reclaiming waste coal, which is presented as a discontinued operation.

Historically, and for all of 2016, the block product business has been a part of the building products segment. However, commencing in the December 2016 quarter, the construction materials segment will include the block product business. This change is being made because of the following changes, as well as others, in management and operations, all of which became operative effective as of October 1, 2016:

·

The chief operating decision maker will make operating and resource allocation decisions considering the combined financial information for construction materials and the block group, which have similar economic characteristics;

·

The block group management and accounting personnel will report to the construction materials segment’s management;

·

Certain operational activities for the construction materials and block group will be closely coordinated to capture synergies and improve efficiencies. For example, the transportation groups are being brought together to promote backhauling, reduce repair and maintenance costs, and minimize down time. Construction materials management will provide oversight for certain other operational activities; and

·

Fly ash storage is being initiated at block production sites to facilitate substitution of fly ash for portland cement used in manufacturing block products.

 

For purposes of this “Business” section of the Form 10-K, as well as in Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8: “Financial Statements and Supplementary Data” we have portrayed our block business as part of the building products segment. However, for Item 1A: “Risk Factors” which tend to be more forward-looking than historical, we have included the block business with the construction materials segment.

Building Products.    This segment has established leading positions in several product categories in the building products sector, and is currently our largest reporting segment based on revenue.

We are a leading designer, manufacturer and marketer of siding accessories used in residential repair and remodeling and new residential construction applications. Our siding accessories include decorative window shutters, gable vents, mounting blocks, and window and door trim products. We also market functional shutters, specialty siding products and window wells. Our siding accessory sales are primarily driven by residential repair and remodeling and, to a lesser extent, by new residential construction.

We are a leading producer of manufactured architectural stone. Eldorado Stone®, our largest stone brand by revenue, is designed and manufactured to be one of the most realistic manufactured architectural stone products in the world. Our two additional brands are marketed at different price points for manufactured architectural stone, allowing us to compete across a broad spectrum of customer profiles. Our manufactured stone sales primarily are driven by new residential construction, but we also sell product for repair and remodel and commercial construction.

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We have three product categories in specialty roofing. We manufacture and market resin‑based roofing tiles. In December 2013, we acquired an 80% equity interest in the business of a leading Florida manufacturer of concrete roof tiles sold primarily in Florida and in April 2016, acquired a complimentary concrete roof tile business. In May 2014, we acquired the assets of a leading U.S. manufacturer of stone-coated metal roofing materials and in November 2015, we acquired the interests of another stone-coated metal roofing business. 

We believe we are the largest manufacturer of concrete block in the Texas market, offering a variety of concrete-based masonry products through regional branding and distribution. A large portion of our concrete block sales is generated in the Texas institutional construction market, but we also serve the commercial and new residential construction markets.

In August 2016, we acquired the assets of the Krestmark™ windows business, which manufactures and sells primarily vinyl windows for new residential construction in the south central region of the U.S. 

Our building products segment has a large customer base, including one-step and two-step wholesale distributors, retailers such as The Home Depot and lumber yards. We also sell certain products directly to contractors. As a result, sales are broadly diversified across the country geographically as well as by distribution channel. We believe we attract a large base of customers because we have a wide assortment of high quality products with strong brand recognition. 

Construction Materials.    We are a leader in the management and marketing of fly ash and synthetic gypsum. Construction materials is our second largest reporting segment based on revenue.

We procure fly ash from coal-fueled electric generating utilities and supply it to our customers as a partial replacement for portland cement in the production of concrete. CCPs, such as fly ash and bottom ash, are the non-carbon components of coal that remain after coal is burned.

Fly ash is most valuable when used as a mineral admixture to replace a portion of the portland cement used in concrete. Concrete made with fly ash has better performance characteristics than concrete made only from portland cement, including improved durability, decreased permeability and enhanced corrosion resistance. Further, concrete made with CCPs typically is easier to work with than concrete made only with portland cement, due in part to its better pumping and forming properties. Because fly ash can be substituted for a portion of the portland cement used in concrete and is generally less expensive per ton than portland cement, the total per cubic yard cost of concrete made with fly ash can be lower than the cost of concrete made exclusively with portland cement. According to a 2011 report sponsored by us from the American Road and Transportation Builders Association, the recycling of fly ash into concrete saves federal and state governments more than $5 billion annually in infrastructure costs, based on the initial price savings of fly ash relative to portland cement and the longer durability of concrete made with fly ash.

In order to ensure a steady and reliable supply of CCPs, we enter into long-term, exclusive supply agreements with coal-fueled electric generating utilities. Our supply chain includes stand‑alone CCP distribution terminals strategically located to provide customer access to CCPs, as well as direct customer service at plant sites. Our extensive distribution network allows us to transport CCPs significant distances to meet customer demand when supplies in local areas are unavailable.

A substantial majority of our CCP revenue comes from sales to an extensive customer base that uses fly ash for the partial replacement for portland cement in concrete. These customers are primarily ready mix concrete producers, but also include paving contractors and other manufacturers of concrete products. Our customers typically operate in limited geographical areas because of the high cost of transporting concrete and concrete products, but we sell fly ash in multiple regions across the country utilizing our broad sources of supply and our efficient distribution system.

In addition to our focus on long-term contracts with utilities and bolt-on acquisitions to increase supply of CCPs, we plan to grow our construction materials business by increasing the percentage of fly ash used as a mineral admixture for the partial replacement of portland cement and expanding the use of CCPs through customer recognition of the performance, economic and environmental benefits of CCPs. Based on Portland Cement Association and American Coal Ash Association data, we estimate that for calendar 2014, fly ash replaced approximately 17% of the portland cement that otherwise would have been used in concrete produced in the United States.

In March 2016, we acquired the interests of Synthetic Materials LLC, a U.S. leader in the synthetic gypsum processing and management industry.  Like CCPs, synthetic gypsum is a by-product of electricity generation and most

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often used as a replacement for mined gypsum in wallboard manufacturing, cement production and agricultural soil amendments.

Energy Technology.     We are involved in heavy oil upgrading processes through the sale of our HCAT® catalyst material. The HCAT technology is a proprietary process that uses a liquid catalyst precursor to facilitate hydrogen transfer within the most difficult to upgrade, bottom‑of‑the‑barrel feedstocks, enabling refiners to increase conversion or throughput with less fouling. Our HCAT technology is recognized in the industry as a commercially proven technology, based on operations for more than four years at our initial customer location.

We formerly owned and operated 11 coal cleaning facilities capable of separating ash from waste coal to provide a refined coal product that is higher in Btu value and lower in impurities than the feedstock coal and which can generate refined coal tax credits under Internal Revenue Code Section 45. In September 2011 we committed to a plan to sell all of our coal cleaning facilities. During 2012 we sold one facility, and in 2013, we sold the remaining ten facilities.

Headwaters was incorporated in Delaware in 1995. Our stock trades under the New York Stock Exchange symbol “HW.”

As used herein, “Headwaters,” “combined company,” “we,” “our” and “us” refer to Headwaters Incorporated and its consolidated subsidiaries, including Tapco International Corporation and its subsidiary, Entegra Holdings, LLC and its subsidiaries, Gerard Roof Products, LLC and its subsidiaries, Headwaters Building Products, Inc. and its subsidiaries, Eldorado Stone LLC and its subsidiaries and affiliates, and Headwaters Windows, LLC (operating in our building products segment); Headwaters CM Holdings, LLC and its subsidiaries, including Headwaters Construction Materials, LLC, Headwaters Plant Services, LLC, Headwaters Resources, LLC, and Synthetic Materials, LLC (operating in our construction materials segment); Headwaters Heavy Oil, LLC and Headwaters Technology Innovation Group, Inc. (“HTI,” operating in our energy technology segment); and Headwaters Energy Services Corp. and its subsidiaries (formerly operating in our energy technology segment); unless the context otherwise requires.  As used in this report: Headwaters Building Products or “HBP” refers to Tapco International Corporation and its subsidiary, Entegra Holdings, LLC and its subsidiaries, Gerard Roof Products, LLC and its subsidiaries, Headwaters Building Products, Inc. and its subsidiaries, Eldorado Stone LLC and its subsidiaries and affiliates, and Headwaters Windows, LLC. “HCM” refers to Headwaters CM Holdings, LLC and its subsidiaries, including Headwaters Construction Materials, LLC, Headwaters Resources, LLC and its subsidiaries (“HRI”), and Headwaters Plant Services, LLC (“HPS”). “HTI” refers to Headwaters Heavy Oil, LLC and Headwaters Technology Innovation Group, Inc.  “HES” refers to Headwaters Energy Services Corp., together with its consolidated subsidiaries and affiliates; unless the context otherwise requires.

 

_____________________________________

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Building Products

Principal Products and their Markets

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We have leading product groups in siding accessories, manufactured architectural stone, concrete block, specialty roofing, and windows. We manufacture and distribute nationally siding accessories (such as window shutters, gable vents, mounting blocks, trim, moulding, and simulated wood shake siding) and professional tools used in exterior residential remodeling and new residential construction. Our manufactured architectural stone has a national presence in commercial, residential and remodeling. We manufacture and sell concrete roof tiles in Florida and distribute nationally resin-based composite roof shingles and stone-coated metal roofing products. We also are a leading supplier of concrete blocks and specialty blocks and vinyl windows for new residential construction in Texas. We believe our traditional building products and new product offerings position us for significant growth as residential remodeling and new residential construction activity continue to improve.

Exterior Siding and Siding Accessories.  We are a leading designer, manufacturer and marketer of resin‑based siding accessories and professional tools used in exterior residential home improvement and construction under multiple brands. These products, which are either injection‑molded or extruded, enhance the appearance of homes and include decorative window shutters, gable vents, and mounting blocks for exterior fixtures, roof ventilation, trim board and moulding products, specialty siding products and window well systems. Professional tools include portable cutting and shaping tools used by contractors, on-site, to fabricate customized aluminum shapes that complement the installation of exterior siding.

We market nationally our injection‑molded building product accessories primarily to one-step distributors, and also market to big-box stores and manufactured housing. In addition, we market tools, functional shutters, specialty siding products, window wells, and cellular PVC trim board and moulding.

These building products principally serve applicator needs for siding and siding accessories. Our injection‑molded products are designed to enhance the exterior appearance of the home while delivering durability at a lower cost compared to similar aluminum, wood and slate products.

Manufactured Architectural Stone.  Under the Eldorado Stone®, Dutch Quality Stone® and StoneCraft™ brands, we offer a wide variety of high-quality manufactured architectural stone products to meet a variety of design needs and price points. Our manufactured architectural stone siding incorporates several key features, including high aesthetic quality, ease of installation, durability, low maintenance, attractive cost relative to other siding materials and

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widespread availability. Our largest brand by revenue, the Eldorado Stone brand is designed and manufactured to be one of the most realistic manufactured architectural stone products available.

Our manufactured architectural stone siding is a lightweight, adhered siding product recommended or used by national, regional and local architectural firms, real estate developers, contractors, builders and homeowners. Our stone products are used in construction projects ranging from large‑scale residential housing developments and commercial projects to do-it-yourself home improvement jobs. In addition, our manufactured stone product lines are used in a variety of external and internal home applications such as walls, archways, fireplaces, patio kitchens, and landscaping. We continually introduce new products in order to improve our offering, such as outdoor fire bowls, and fireplace surrounds.

We believe that our focus on product quality, breadth and innovation, combined with a geographically diversified manufacturing platform, provides us with significant marketing advantages over traditional materials such as natural stone, brick or stucco. Our stone group has implemented a home builder marketing effort, enabling national home builders to have ready access to bundled packages of the full line of Headwaters stone division products, including stone and brick veneer from Eldorado Stone®, Dutch Quality Stone® and StoneCraft™, as well as Eldorado fireplace surrounds, Eldorado outdoor signature kitchens and artisan fire bowls.

Specialty Roofing Products.  We have three product categories in specialty roofing, including resin-based composite, concrete, and stone-coated metal roofing products. We manufacture and market resin‑based roofing tiles and in December 2015 we acquired the assets of another resin-based composite roofing business. We market resin-based composite roof tiles in North America through the InSpire,® Aledora® and Enviroshake® brands.

In December 2013, we acquired an 80% equity interest in the business of a leading Florida manufacturer of high quality concrete roof tiles and accessories sold under the Entegra® brand primarily in Florida. In April 2016, Entegra acquired the interests of another concrete roof tile business. Many Entegra one-step distribution customers are already customers of other Headwaters products. Entegra provides us with additional sales and distribution opportunities for building products in a large and growing state in the U.S. We believe that the centralized location of Entegra’s manufacturing plant in Florida, the quality of its contractor and customer relationships, and the scope of its products and services provide a strong competitive advantage.

In May 2014, we acquired the assets of a leading U.S. manufacturer of stone-coated metal roofing materials and in November 2015 we acquired the interests of another stone-coated metal roofing business. We market stone-coated metal roofing in the United States under the Gerard,® Allmet® and Metrotile® brands.  With the durability of metal but the appearance of more traditional shingles or tiles, the stone-coated metal roofing product complements our resin-based composite and concrete-based specialty roofing products, broadening our products as well as our geographic footprint in the specialty roofing category. Our roofing product sales are heavily dependent on residential repairs, often necessitated by certain extreme weather events, such as strong winds or hail, and to a lesser extent on new residential construction.

Windows.  In August 2016, we acquired the assets of the Krestmark™ window business based in Texas. We believe we are one of the leading suppliers of vinyl windows to builders of new homes in the Dallas, Texas area, one of the fastest growing residential real estate regions in the U.S. In addition to vinyl windows for replacement and new construction, we manufacture aluminum windows and patio doors which are sold throughout the south central U.S. 

Concrete Block.  We believe we are the largest manufacturer and seller of concrete block in the Texas market, which is one of the largest markets for block products in the U.S. We offer a variety of concrete‑based masonry products including standard grey block, split faced block, ground face block, polished block and textured block. Our product offerings allow us to meet a range of architectural specifications for concrete block and other products. We employ a regional branding and distribution strategy. A large portion of our concrete block sales are generated from institutional construction markets in Texas, including school construction. In September 2015, we purchased the assets of a central Texas-based distributor of block and other masonry products to increase our sales and distribution in that area.

Manufacturing

We conduct manufacturing, distribution and sales operations for resin‑based siding accessories and ancillary products at four facilities. Manufacturing assets include injection molding presses, many of which are automated through robotics or conveyor systems which have reduced cycle times and have helped to reduce waste. Nonconforming output is reused as raw material, further minimizing waste.

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Our manufactured architectural stone brands are currently manufactured through a network of five plants and two distribution facilities. We continually focus on safety, quality and service, while also focusing on reducing the cost of our manufactured architectural stone.

Our three specialty roofing products are produced in five manufacturing facilities. While resin and stone coated metal roofing products are manufactured from three locations for national distribution, concrete tile is manufactured locally for Florida.

We manufacture our window products at three facilities, all located in the Dallas, Texas area. We purchase glass panels and vinyl and aluminum trim or lineals from third parties and cut to size and assemble at our plants. We are focused on building affordable, quality window products with on-time shipments.

We operate six modern concrete block manufacturing facilities. Our block operations are located to provide coverage of all the key metropolitan areas in Texas and Baton Rouge, Louisiana, and to lower transportation costs and gain efficiencies by concentrating the manufacturing of specific products in fewer facilities.

Sales and Marketing

Our resin‑based siding products’ sales and marketing organization supports one-step and two-step distribution and retail channels through an extensive sales network that includes independent sales representatives and a group of business development managers, regional sales managers and sales executives.

Our manufactured architectural stone products sales force works directly with one-step and two-step masonry distributors as well as architects and contractors to provide information concerning the aesthetic, physical and installation attributes of our manufactured stone product. Manufactured architectural stone products are marketed through a direct sales force and a network of independent sales representatives through one-step and two-step distribution.

Our block sales personnel work directly with contractors and participate in the bidding process for large institutional and commercial projects. Often, the sales process starts with architects having our products specified on construction projects.

Roofing products are primarily sold through one-step distributors, although we also supplement sales directly to roofing contractors in certain circumstances. In addition to our five manufacturing sites, we have multiple distribution centers to facilitate customer service.

Our windows sales are primarily direct to home builders and contractors in Texas, Oklahoma, Arkansas, Louisiana, Alabama, New Mexico, Kansas, Mississippi, and the Florida Panhandle. We strive to develop customer loyalty with timely, complete order delivery and strong customer service.

We maintain relationships with local contractors, professional builders, and other end-users by participating each year in many local and national shows. Local shows, sponsored by local distributors, enable us to promote our products through hands-on comparisons to competing products. These shows enable us to receive useful feedback from local contractors, which may lead to new product ideas as well as significant goodwill within the trade.

Distribution

Resin‑based siding accessories and our ancillary products are distributed throughout the United States and Canada through five primary distribution channels: one-step distributors that sell directly to contractors, two-step distributors that sell our products to lumber yards and one-step distributors, retail home centers/mass merchandisers, direct sales to lumber yards, and manufactured housing.

Manufactured architectural stone is distributed throughout North America, Europe and Asia primarily on a wholesale basis through a network of one-step and two-step masonry distributors, including masonry and stone suppliers, roofing and siding materials distributors, fireplace suppliers and other contractor specialty stores. We also distribute some brands through national retail home centers.

Resin-based roofing products are distributed in North America and Europe, primarily through one-step distribution. Stone-coated metal roofing is distributed in North America, Europe, Asia and Africa through one-step distribution, specialty roofing supply yards, and direct sales to roofing and home improvement contractors. Concrete roof tiles are distributed in Florida through one-step distribution, specialty roofing supply yards and direct sales to roofing contractors. 

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Window products are distributed directly from our manufacturing plants throughout the south central United States through one-step distribution, and directly to lumber yards and home builders.

We distribute our concrete block products directly to masonry and general contractors as well as through national and regional retail home centers.

Major Customers

We have a large customer base for our building products in residential home improvement and new home construction that include many retail customers, wholesalers, lumber yards and contractors across North America and to a lesser extent, in Europe and Asia. Sales are diversified across customers and ship-to locations, mitigating the impact of regional economic circumstances.

Sources of Available Raw Materials

The primary raw materials purchased for resin‑based siding and roofing products are polypropylene, polyethylene and PVC, which are available for purchase from multiple suppliers. We also use comparatively small amounts of styrene. From time to time, prices for some of the raw materials used in production and assembly processes fluctuate significantly. Although we do not have any long-term contracts with suppliers and we purchase supplies on a purchase order basis, we occasionally make volume purchases of materials at fixed prices.

We purchase cement, sand and aggregates as primary raw materials for our concrete-based products. We do not have long-term contracts for the supply of these materials and demand for these materials can be volatile while supplies are constrained to local sources because of transportation costs. Our costs to purchase raw materials have risen in some regions for certain materials. However, we have not suffered from any long-term shortages and believe that supplies will be adequate in the future.

The primary feedstocks for our stone-coated metal roofing products are rolled steel, stone chips and coatings. We do not purchase these materials under long term supply contracts, but benefit from long term supplier relationships. We have not suffered any shortages and believe that feedstock supplies will be adequate in the future. Our raw stone-coated metal roofing feedstock costs have risen gradually in recent years.

Our window products are made primarily from glass, vinyl and aluminum. We purchase from multiple long term suppliers, although we generally do not have long term window materials supply contracts.

Competition

We are a sales leader in our legacy siding accessory products because of our strong ability to manufacture and distribute a broad range of products economically and rapidly. We believe that we have increased sales faster than sector growth in some of our newer accessory products like trimboard. We have developed a recognized name in the manufactured architectural stone industry because of service, excellent authenticity and broad selection. Our architectural stone products use a multi‑channel distribution network, but we face strong competition from other stone producers in the one-step channel and with products sold directly to contractors. Our specialty roofing products primarily compete against high-end roofing alternatives such as upper end asphalt, concrete, metal and other niche roofing products.  Although our block business is not national in breadth, it enjoys a strong regional position in Texas and Louisiana, but faces competition from other Texas and Louisiana block manufacturers.

Our primary competition for resin‑based siding products includes Ply Gem, Royal, and Alpha in siding accessories, Azek in trimboard, and CertainTeed in specialty siding. Notwithstanding our national position as a leading producer of manufactured architectural stone, we face significant competition from many other national, regional and local producers of similar products. Our specialty roofing products also compete against national and regional manufacturers of similar products, such as Davinci, Decra, Owens Corning, GAF, and Eagle, as well as other types of roofing materials. Our windows business also competes against numerous national and regional producers of window products. Many of our competitors have significant financial and other resources and may be able to take advantage of acquisitions and other opportunities more readily than we can.

Construction Materials

We are the nation’s largest manager and marketer of CCPs, including fly ash, a mineral admixture that may be used as a partial replacement for portland cement in concrete, and synthetic gypsum, another byproduct of coal-fueled electric generating facilities. In order to ensure our supply of CCPs, we have formed numerous long-term exclusive

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supply and service agreements with coal-fueled electric generating utilities throughout the United States and maintain stand‑alone CCP distribution terminals across North America, as well as plant-site supply facilities. With our extensive distribution network, we can transport CCPs significant distances to states that have limited coal-fueled electric utilities producing CCPs, yet historically have been high volume CCP consumers.

Principal Products and their Markets

CCPs consist of several major classifications of inorganic residuals collected after coal is consumed in coal-fired power plants. Whereas a significant amount of CCPs are disposed by utilities without being used beneficially, when properly managed, CCPs can be valuable products. We sell high value fly ash for the partial replacement for portland cement in a wide variety of concrete applications, including infrastructure, commercial, and residential construction. We deliver fly ash to ready mix customers in most regions of the United States. We have a number of long-term, exclusive management contracts with coal-fueled utilities throughout the United States and provide CCP management services at plant-site locations.

Utilities produce CCPs year-round. In comparison, sales of CCPs are impacted by seasonality, following construction demands, peaking in the summer months and declining in the winter. If CCPs are not used in the winter months, they must be disposed of or stored.

CCPs are produced at power plant sites and must be transported to the point of consumption, including thousands of ready mix locations across the country. Due to transportation costs, CCP consumption is generally regional. Product transportation to areas that have few coal-fueled electric utilities producing high quality CCPs adds significantly to the cost, but creates a competitive advantage for us due to our robust distribution system.

We benefit from contractual supplies and our broad distribution system. We maintain stand‑alone CCP distribution terminals across North America, as well as plant-site supply facilities. In addition, we have area managers and technical sales representatives nationwide to provide customer support.

We provide services as an integrated component of our work with coal-fueled utilities and their production of CCPs. We focus on providing industrial services to utilities that include constructing and managing landfill operations, operating and maintaining material handling systems and equipment maintenance. These are services that enhance our reputation in the marketing of fly ash and strategically position us as an integrated manager of CCPs. We have more than three decades of experience designing, permitting, constructing, operating and closing solid waste disposal operations for utilities and other industrial clients. We currently provide such services to some of the largest utilities in the United States.

The complexity of CCP disposal operations is expected to increase as new environmental regulations are adopted. Many utilities may be forced to upgrade disposal practices or convert to new types of disposal. As new disposal regulations are adopted, we plan to use our experience with landfill operations, pond cleanouts, converting disposal operations from wet to dry handling, designing and managing systems for handling flue gas desulphurization materials, and deploying systems for improving fly ash quality to expand our business. By providing such services to utilities, we expect to improve our position as the leading manager and marketer of fly ash in the United States.

The benefits of CCP use in construction applications include improved product performance, cost savings and positive environmental effects. Fly ash improves the performance of concrete, decreasing permeability and enhancing durability while providing environmental benefits. Fly ash utilization conserves landfill space and energy, and reduces greenhouse gas emissions. According to the U.S. Environmental Protection Agency (“EPA”), one ton of fly ash used as a mineral admixture in the partial replacement of portland cement eliminates approximately one ton of carbon dioxide emissions associated with cement production. The value of utilizing fly ash in concrete has been recognized by a number of federal agencies, including the U.S. Department of Energy, the U.S. Department of Transportation, and the EPA. Today almost all states specify or recommend the use of fly ash in state and federal transportation projects. See “Business—Regulation” and “Risk Factors” for a description of regulatory actions that may affect the supply, management, and disposition of CCPs.

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Higher‑quality fly ash and other high-caliber CCPs possess greater value than low quality CCPs because of their diverse, higher‑margin commercial uses. The quality of fly ash produced by the combustion process at coal-fueled facilities varies widely and is affected by the type of coal feedstock used and the boiler operations of the utilities. We assist our utility clients in their efforts to improve the production of high-value CCPs at their facilities. Our quality control system ensures customers receive their specified quality of CCPs while our relationships with utilities, transportation equipment and terminal facilities provide stable and reliable supply. We use our proprietary technology to address one of the more prominent reasons for poor ash quality, i.e., high levels of native or activated carbon in the ash. In many cases, higher carbon ash treated with our additive results in ash that meets specifications for the replacement of portland cement.

Synthetic gypsum is another product of coal-fueled electric generation plants. In March 2016, we acquired a leading business that develops and manages flue gas desulfurization (“FGD”) sources of synthetic gypsum, including dewatering processes, in order to market FGD products.  Synthetic gypsum is most often used as a replacement for mined gypsum in wallboard manufacturing, cement production and agriculture soil amendments. Our synthetic gypsum business operates at multiple utility sites in the eastern United States.

Sales and Marketing

Expansion of Market Awareness of CCPs’ Benefits.  Customer demands for quality and reliability drive our CCP marketing and sales program. Our marketing efforts emphasize availability, performance and environmental benefits of CCP usage. We participate in a variety of marketing activities to increase fly ash sales, including professional outreach, technical publications, relationships with industry organizations, and involvement in legislative and regulatory initiatives planned to lead to greater use of CCPs.

New Technologies for CCP Utilization.  Our research and development activities focus on expanding the use of CCPs and decreasing landfill disposal. For example, although generally unsuitable for use in traditional concrete applications, we developed and offer for sale two products that utilize the type of fly ash generated at fluidized bed combustion (“FBC”) power plants. Stabil-Mix®, a mixture of fly ash and lime used for roadbed stabilization, may be custom blended for optimum results in varying soil conditions. Pozzalime takes advantage of the lower SO3 and free lime content of some sources of FBC ash to create a product suited for use as a partial cement replacement in the manufacture of concrete masonry units.

Technologies to Improve Fly Ash Quality.  We developed technologies that maintain and improve the quality of CCPs, further enhancing their marketability. Today, many utilities are switching fuel sources, changing boiler operations and introducing activated carbon and ammonia into the exhaust gas stream in an effort to meet increasingly stringent emissions control regulations. While these factors may negatively affect fly ash quality, we are addressing these challenges with the development and commercialization of two technologies. RestoreAir® treats unburned carbon and activated carbon in fly ash to minimize carbon’s adverse effects on concrete’s freeze-thaw characteristics. We also have technology that, in many instances, mitigates the impact of ammonia contaminants in fly ash.

Major Customers

Most of our construction materials customers purchase CCPs for beneficial use. A substantial majority of our CCP revenue comes from sales to customers who use fly ash as a mineral admixture for the partial replacement of portland cement in concrete. These customers are primarily ready mix concrete producers, but also include paving contractors and manufacturers of concrete products. CCPs are also used by some customers for soil stabilization, road base and other applications. Although our customers typically operate in limited regions because of the high cost of transporting concrete and concrete products, we sell CCPs in most regions of the country by utilizing our extensive distribution system. No customer represents more than 10% of our construction materials segment revenue.

Sources of Available Raw Materials

Coal is the largest indigenous fossil fuel resource in the United States. The U.S. Energy Information Administration estimates that in 2015 coal was used to produce approximately 33% of the electricity generated in the United States. The combustion of coal results in a high percentage of residual materials which serve as the “raw material” for the CCP industry. According to the American Coal Ash Association, in 2015 about 61 million tons of the approximately 117 million tons of U.S. CCPs generated were efficiently utilized. As long as a significant amount of electricity is created using coal-fueled generation, we believe there will be significant supplies of CCP raw materials. However, as the Clean Air Act, the Resource Conservation and Recovery Act (“RCRA”) and other environmental rules

12


 

are implemented, the efforts of coal-fueled electric power producers to comply with tighter regulatory requirements may have a serious adverse effect on the supply of CCPs. Increasingly strict requirements make coal burning less attractive for utilities. Faced with the prospect of more stringent regulations, litigation by environmental groups and a decrease in the cost of natural gas, some electric utilities are reducing their portfolio of coal powered energy facilities. In recent years, multiple companies have announced plans to close coal-fired power plant units, or dropped plans to open new plants. While the current level of reduced use of coal in power generation has not materially impacted our fly ash supply, significant diminished use of coal in the future could reduce our supply of CCP raw materials. (See “Business—Regulation” and “Risk Factors.”)

Competition

Marketing CCPs, and particularly fly ash, competes vigorously with portland cement in the production of concrete. Based on Portland Cement Association and American Coal Ash Association data, we estimate that for calendar 2014, fly ash replaced approximately 17% of the portland cement that otherwise would have been used in concrete produced in the United States. There is also competition among fly ash suppliers. Our nationwide CCP distribution system, not enjoyed by our competition, allows us to effectively compete for long-term exclusive supply contracts with utilities. Our CCP business has a presence in every region in the United States but, because the costs of transportation are high, most of the competition is regional. There are many local, regional and national companies that compete for sales with portland cement or similar CCP products and with numerous other substitute products. Although we have a number of long-term CCP management contracts with our clients, some of these contracts allow for the termination of the contract at the convenience of the utility company upon a specified notice. Our major competitors include Lafarge North America Inc., Eagle Materials, Boral Material Technologies Inc. and Cemex. Many of our competitors have greater financial, management and other resources and may be able to take advantage of potential acquisitions and other opportunities more readily than we can.

 

Energy Technology

 

Business Opportunities

 

Heavy Oil Upgrading Technology.  In our energy technology segment, we are focused on increasing the value of low value oil through a technology that improves conversion of petroleum refinery vacuum residuals into higher-value products, and we continue to develop for commercialization our heavy oil upgrading business and technology. We own patents and know-how related to the HCAT® technology. Our HCAT technology is a unique heavy oil upgrading process for the addition of hydrogen to heavy residual oils such as petroleum vacuum residue (so-called “bottom of the barrel”) and tar sand bitumen which may result in lighter, more valuable petroleum materials. The proprietary HCAT process uses a highly active, molecular‑scale catalyst to more efficiently convert heavy oils, including the asphaltenic components, into more valuable products, such as diesel fuel. We now supply our catalyst precursor to the heavy oil upgrading units at three refineries. We will continue to develop the long sale cycle opportunities for the HCAT technology with additional refineries through the efforts of our own small group of sales executives and through marketing cooperation with established industry participants.

 

Discontinued Coal Cleaning Operations

In September 2011, we decided to focus on our core building products and construction materials businesses and therefore committed to a plan to sell our coal cleaning business comprised primarily of 11 coal cleaning facilities and associated assets.  In a series of transactions in 2012 and 2013, we sold our coal cleaning business. The financial results of our former coal cleaning business are presented in our statements of income as a discontinued operation.

Competition

 

Our heavy oil upgrading business experiences competition from many of the world’s major petroleum, chemical and energy companies. Those companies are actively engaged in research and development activities that could result in a competitive slurry catalyst system. For example, Chevron has begun marketing a catalyst system that could be competitive with the HCAT® technology. Many of our competitors have greater financial and other resources and may be able to take advantage of acquisitions and other opportunities more readily.

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Segments and Major Customers

We operate in three business segments: building products, construction materials and energy technology. Additional information about segments is presented in Note 3 to the consolidated financial statements included herein. No customer accounted for more than 10% of total revenue from 2014 through 2016.

Seasonality

Our building products and construction materials segments experience seasonal changes in revenue. Construction of new homes, repair and remodeling, and commercial and infrastructure projects slow during winter conditions and increase during temperate seasons. Because our products are used in construction projects, our revenues increase in the spring, are strong in the summer and fall, and drop significantly in the winter months, typically making our second fiscal quarter our lowest revenue quarter.

Intellectual Property

As of September 30, 2016, we had approximately 230 U.S. and foreign counterpart patents and approximately 65 U.S. and foreign counterpart patents pending. Additionally, we have approximately 430 U.S. and foreign trademarks and approximately 69 U.S. and foreign trademark applications pending. The following table lists the number of patents and trademarks, U.S. and foreign, by segment:

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

Trademarks

 

 

    

Issued

    

Pending

    

Issued

    

Pending

 

Building Products

 

89

 

13

 

380

 

39

 

Construction Materials

 

13

 

4

 

21

 

10

 

Energy Technology and Corporate

 

128

 

48

 

29

 

20

 

 

Collectively, the intellectual property is important to us, but except in energy technology, there is no single patent or trademark that is itself material to us at the present time. In our energy segment, we have patents protecting our heavy oil upgrading technology that are material to that business.

There can be no assurance as to the scope of protection afforded by the patents. In addition, there are other technologies in use and others may subsequently be developed, which do not, or will not, utilize processes covered by the patents. There can be no assurance that our patents will not be infringed or challenged by other parties or that we will not infringe on patents held by other parties. Because some of these patents represent new technology, the importance of the patents to our business will depend on our ability to commercialize these technologies successfully, as well as our ability to protect our technology from infringement or challenge by other parties. Patents may expire before they are a commercial success.

In addition to patent protection, we also rely on trade secrets, know-how and confidentiality agreements to protect technologies. Despite these safeguards, such methods may not afford complete protection and there can be no assurance that others will not either independently develop such know-how or obtain access to our know-how, concepts, ideas, and documentation. Since our proprietary information is important to our business, failure to protect ownership of our proprietary information would likely have a material adverse effect on us.

Regulation

Environmental.   Our operations and those of our suppliers and customers involved in coal-based energy generation, primarily utilities, are subject to federal, state and local environmental regulations. Our coal-based operations and those of our customers, including our sold coal cleaning operations, are subject to regulations that impose limits on the discharge of air and water pollutants and establish standards for the treatment, storage and disposal of solid and hazardous waste materials and the reclamation of land. Compliance with the applicable regulations adds to the cost of doing business and may expose us to potential fines for non-compliance or may require us to spend money to investigate or remediate contaminated facilities or reclaim disturbed land. Moreover, in order to establish and operate power plants, our operations to collect and transport CCPs and our former coal cleaning facilities, we and our customers have obtained various federal, state and local permits and must comply with processes and procedures that have been approved by regulatory authorities. Compliance with permits, regulations and approved processes and procedures helps protect the environment and is critical to our business. Any failure to comply could result in the issuance of substantial fines and penalties and may cause us to incur environmental or reclamation liabilities or subject us to third party claims.

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We believe that all required permits to construct and operate facilities have been or will be obtained and believe all of our current facilities are in substantial compliance with, and our former facilities during our period of ownership or operations were in substantial compliance with, all applicable environmental laws and regulations governing our operations.

In spite of safeguards, our operations entail risks of regulatory noncompliance or accidental discharge that could create an environmental liability, because regulated materials are used or stored during normal business operations, including in our CCP and former coal cleaning operations. Moreover, we use regulated chemicals in operations involving distillation to purify products, analysis, packaging of chemicals and the selling, warehousing and manufacturing of organic chemicals in small research volumes. We also use facilities to perform research and development activities involving coal, oil, chemicals and industrial gases, such as hydrogen. As a result, petroleum and other hazardous materials have been and are present in and on our properties. We generally hire independent contractors to transport and dispose of any wastes generated during such activities and send the wastes to approved facilities for disposal.

Our construction materials business is dependent upon managing CCPs acquired from our suppliers, typically coal-burning power plants. Coal-burning power plants and the coal industry are generally highly regulated under federal and state law. Environmental regulation affecting this industry is ever-evolving, including the following:

The federal Clean Air Act of 1970 and subsequent amendments, particularly the Clean Air Act Amendments of 1990. Regulation by the EPA and corresponding state laws and regulations, limit the emission of air pollutants such as SOx, NOx and particulate matter (“PM”). The EPA finalized more stringent ambient air quality standards for fine PM in January 2013 and for ozone in October 2015. Following litigation by environmental groups seeking to hold the EPA to the statutorily required timeline for reviewing ambient air quality standards for NOx and SOx, in September 2016, the EPA initiated the review of the NOx standards by issuing a draft policy assessment, but the timeline for when those standards will be finalized remains unknown. The EPA has taken no additional steps in revisiting the SOx standards. To meet emissions limits, utilities have been required to make changes such as changing fuel sources, installing expensive pollution control equipment and, in some cases, shutting down plants.

In July 2011, the EPA adopted the Cross-State Air Pollution Rule (“CSAPR”), a cap-and-trade type program requiring utilities to make substantial reductions in SOx and NOx and emissions that contribute to ozone and in fine PM emissions in order to reduce interstate transport of such pollution. CSAPR was challenged and vacated by the D.C. Circuit in August 2012, but that decision was reversed by the Supreme Court in April 2014. The D.C. Circuit has since lifted its stay on CSAPR and ruled in favor of the EPA on the remaining significant issues. In January 2016, the EPA filed a brief with the D.C. Circuit addressing the remaining legal challenges left undecided by the Supreme Court’s 2014 decision. Conforming with a court-ordered schedule, the EPA implemented the first phase of CSAPR in 2015 and 2016 and will implement the second phase in 2017. In November 2014, the EPA issued a notice of data availability (“NODA”) outlining emission allowance allocations for existing generating units that began operating before 2010. In January 2015, the EPA issued a second NODA detailing emission allowance allocations for existing generating units that began operating after 2010.  In September 2016, the EPA finalized a rule updating CSAPR in order to maintain 2008 ozone emission limitations in downwind states by addressing summertime (May-September) transport of ozone pollution. The update, which commences in May 2017, sets stricter NOx season emission budgets in 22 states and could affect up to 886 coal-fired facilities. These emission control requirements can impact the quantity and quality of CCPs produced at a power plant, can add to the costs of operating a power plant and could make coal a less attractive fuel alternative in the planning and building of utility power plants.

Certain environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and similar state laws, impose strict, joint and several liability on responsible parties for investigation and remediation of regulated materials at contaminated sites. CCPs may contain materials such as metals that are regulated materials under these laws. Land application of CCPs as a beneficial use is regulated by a variety of federal and state statutes, which impose testing and management requirements to ensure environmental protection. However, mismanagement of CCPs can give rise to liability under CERCLA and similar laws.

Under its Mercury and Air Toxics Standards for Power Plants rule, in February 2012 the EPA promulgated final limits on mercury and other toxic chemicals from new and modified power plants.  In June 2015, the

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Supreme Court ordered the EPA to undertake cost-benefit analysis when promulgating mercury and air toxics standards. In April 2016, the EPA published a supplemental finding pursuant to the Supreme Court’s directive, which is currently being challenged at the D.C. Circuit. If upheld, requirements to control mercury emissions could result in implementation of additional technologies at power plants that could negatively affect fly ash quality.

•  Some states have adopted legislation and regulatory programs to reduce greenhouse gas (“GHG”) emissions, either directly or through mechanisms such as renewable portfolio standards for electric utilities. These programs require electric utilities to increase their use of renewable energy such as solar and wind power. Federal GHG legislation appears unlikely in the near term. However, in the absence of federal GHG legislation, the EPA has taken several recent steps to regulate GHG emissions using existing Clean Air Act authorities, including setting GHG emission thresholds for determining when new and existing power plants must obtain certain construction or operating permits. The Supreme Court ruled on a challenge to the EPA’s actions in June 2014, upholding the EPA’s ability to regulate GHG emissions from sources already required to have these permits for conventional pollutants but finding that GHGs alone could not trigger the challenged permitting requirements. In August 2015, the EPA finalized New Source Performance Standards for GHG emissions from new and existing fossil-fuel fired electric power plants that anticipate partial use of carbon capture and storage technology. Also in August 2015, the EPA finalized a rule for existing sources, known as the Clean Power Plan, which establishes state-specific, rate-based reduction goals for carbon emissions from the power sector. The Clean Power Plan calls on the power sector to reduce carbon emissions to 32% below 2005 levels by 2030, with the first incremental decreases beginning in 2022. After affected states and industry groups challenged the new regulations, in February 2016 the Supreme Court stayed implementation of the Clean Power Plan pending judicial review at the D.C. Circuit. In September 2016, the D.C. Circuit heard oral arguments en banc to determine whether the EPA had authority under the Clean Air Act to regulate carbon emissions under the existing hazardous pollutant program. A decision is expected in early to mid-2017, but litigation on the merits could continue to the Supreme Court. If the Clean Power Plan is upheld, various states’ utility companies would be encouraged to substitute generation from low-emitting coal plants and zero-emitting renewable sources for generation from higher-emitting coal plants. Such changes in the energy market could impact the quantity of CCPs produced by HCM’s suppliers, add to the cost of operating power plants and make coal powered plants a less attractive option in the planning and commissioning of new energy generating facilities.

The EPA is addressing water quality impacts from coal-burning power plants and coal mining operations. In September 2015, the EPA finalized new effluent limitations for steam electric power generating facilities. The final rule requires operators of coal plants with a generating capacity over 50 megawatts to store fly ash and bottom ash in dry landfills, rather than containment ponds. Approximately 12% of coal plants will be affected, and some marginal operations may shut down rather than face the expense of complying with the new effluent discharge requirements. Multiple challenges to the effluent limitation guidelines have been consolidated and are pending before the Court of Appeals for the Fifth Circuit. In addition, the EPA finalized new regulations to minimize adverse environmental impacts to aquatic life from cooling water intake structures at existing electric generating plants, which are being challenged by environmental and industry groups at the Fifth and Second Circuit Courts of Appeals. More stringent regulation of coal-burning power plants and coal mining operations could increase the cost for utilities and thus indirectly impact the availability and cost of fly ash for HCM’s CCP activities.

Although our business managing CCPs for utility customers may benefit from opportunities to manage compliance with certain of the new regulatory requirements, increasingly strict requirements such as those described above generally will increase the cost of doing business and may make coal burning less attractive for utilities. Faced with more stringent regulations, litigation by environmental groups, and a decrease in the cost of natural gas, some electric utilities are reducing their portfolio of coal powered energy facilities. For example, in recent years, multiple companies announced plans to close coal-fired power plant units, or dropped plans to open new plants, citing the cost of compliance with pending or new environmental regulations. The potential negative impact on job prospects in the utility and mining industries has prompted considerable concern in Congress, leading to calls to restrict the EPA’s regulatory authority. The outcome of these developments cannot be predicted. To date, our business has not had a significant impact from plant closures because our national footprint allows us to move fly ash to satisfy demand; however, if the rate of coal-powered plant closures increases, we may be adversely affected in the future. Nevertheless, we believe that reliance

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on coal for a substantial amount of electric power generation in the United States is likely to continue for the foreseeable future.

New regulations not only affect our suppliers and customers, but may also directly impact HCM’s operations. HCM manages, stores, transports and sells fly ash, and some products manufactured and sold by HCM contain fly ash. As a CCP, fly ash previously had largely been exempted from the provisions of the RCRA. However, after several lawsuits from environmental organizations, the EPA issued the first regulation governing the disposal of CCPs. The final rule published in April 2015 regulates CCPs as non-hazardous waste under Subtitle D of the RCRA, avoiding some of the complications involved with a hazardous waste designation. Under the new rule, states retain primary authority to regulate the handling, storage, and disposal of CCPs as non-hazardous solid waste, subject to EPA oversight and approval. The new rule also preserves an exemption for CCPs when used for beneficial purposes.

Though the EPA’s decision to regulate CCPs as solid waste under RCRA Subtitle D avoided the regulatory burdens and stigma that would have accompanied a hazardous waste designation, the new regulations still may require adjustments to our operations, and the complexity and cost of managing and disposing of CCPs could increase. HCM manages a number of landfill and pond operations that are subject to the 2015 rule. The rule establishes national minimum criteria for landfills and impoundments containing CCPs, and includes restrictions on their location, design and operation, as well as groundwater monitoring, recordkeeping, reporting and closure requirements. The new rule also requires closure of units unable to comply with the location requirements, units where groundwater contamination is detected, and units where the impoundment fails to meet minimum safety factors. A noncomplying impoundment must be shut down or retrofit within five years or seven years if granted an extension; impoundments over 40 acres may be eligible for up to five two-year extensions. Citizens and states now have the right to bring lawsuits to enforce the new rule against owners and operators. Since the rule was finalized, citizens and environmental organizations have brought several suits against the owners and operators of CCP impoundments.

The new rule affirms that beneficial uses of CCPs remain exempt from federal hazardous waste regulation under RCRA’s “Bevill exclusion” and are not regulated under either RCRA Subtitle C or Subtitle D. Beneficial use is defined by the regulation to cover uses where CCPs provide a functional benefit, substitute for the use of a virgin material, meet the product specifications, and do not result in excess contamination,  In February 2014, the EPA released a report determining that the use of fly ash in concrete constitutes a beneficial use, and the 2015 final rule specifically notes that the incorporation of fly ash in concrete, as a replacement for Portland cement, is one of “the most widely recognized beneficial applications” of CCPs. However, the EPA did not determine whether CCPs destined for disposal should continue to qualify for the Bevill exclusion and did not fully resolve uncertainties about whether certain CCP applications should be treated as beneficial use or disposal. Some environmental groups have urged the EPA to restrict other uses of CCPs, such as in road base, claiming that contaminants may leach into the environment. The final rule indicates that the use of CCPs in applications such as road base generally would qualify as beneficial use, so long as relevant regulations and guidelines are followed. The EPA has not stated whether or when it will reconsider the eligibility of CCPs intended for disposal for the Bevill exclusion. Eligibility depends on a complicated factual analysis, requiring information gathering that would likely take several years. If the EPA ultimately determines to regulate CCPs intended for disposal as hazardous waste under RCRA Subtitle C, those CCPs would become subject to a variety of regulations governing the handling, transporting, storing and disposing of hazardous waste. This could reduce the demand for fly ash and other CCPs and increase the regulatory burden and costs of fly ash management for the utility industry and for HCM, with a potential material adverse impact on our operations and financial condition.

Both industry and environmental organizations challenged the 2015 rule. The EPA voluntarily remanded certain provisions of the rule for further proceedings. The most significant of these were an exemption from certain post-closure requirements for inactive surface impoundments, a regulation describing the type and magnitude of non-groundwater releases triggering corrective action procedures, and the provisions regarding the applicability of new Alternative Closure procedures. The EPA extended the compliance deadline for inactive surface impoundments in a direct final rule in August 2016, and the agency anticipates releasing a proposed rule on the remaining remanded issues by late 2017. In September 2016, the United States Commission on Civil Rights issued a report which determined that CCP disposal facilities can negatively impact environmental justice communities. While the Commission cannot require changes to EPA regulations, environmental organizations may seek to use the Commission’s report to spur the EPA to make regulatory changes. 

In addition to spurring litigation, the 2015 rule also drew attention from Congress. In response to the 2015 coal ash rule, Congress initiated several legislative proposals to address CCP disposal. The two most prominent of these are

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H.R. 1734, which passed the House in July 2015, and S. 2848, which passed the Senate in September 2016. Both bills would create a national permit program for CCPs that states may elect to administer in accordance with the federal guidelines. No action has been taken on H.R. 1734 in the Senate and the outcome is similarly uncertain for S. 2848.

HCM manages a number of landfill and pond operations that may be affected by new Clean Water Act requirements. In September 2015, the EPA issued a final rule for Clean Water Act effluent limitation guidelines for steam electric power generating facilities which requires discharges from waste streams and surface impoundments to meet certain limits. This rule will directly affect landfill and pond operations managed by HCM and may expose HCM to increased liability. The requirements will phase in between 2018 and 2023, and will require project owners and HCM to implement pollution control measures to reduce or eliminate discharges of various materials from waste streams and surface impoundments.

At HTI, we have worked at the molecular level in the use of nanocatalysts. A number of agencies are studying the potential implications of nanotechnology and manufactured nanomaterials on human health and the environment, including the National Toxicology Program, the National Institute for Safety and Health, the National Science Foundation and the EPA. Under the Toxic Substances and Control Act (“TSCA”), the EPA can determine that a use of a chemical substance consists of a “significant new use.”  In September 2010, the EPA adopted its first rule regulating carbon nanomaterials under TSCA and has since issued final significant new use rulings for five other carbon nanomaterials. The significant new use rulings require persons intending to manufacture, import, or process one of the covered materials to notify the EPA at least 90 days before commencing that activity and also place certain restrictions on their use and manufacture. In July 2016, the Frank R. Lautenberg Chemical Safety for the 21st Century Act considerably amended TSCA’s risk assessment and testing mechanisms for new and existing chemicals. Under the amended TSCA, the EPA is mandated by strict, enforceable deadlines to prioritize existing chemicals as either high or low priority substances and to conduct risk assessments for high priority substances.  In addition, under the TSCA amendments, the EPA can no longer consider costs when conducting risk assessments and must consider susceptible subpopulations (e.g., infants, elderly, and pregnant women). To fund this new initiative, the EPA is authorized to collect up to $25 million annually from chemical manufacturers and processers. It is not known whether future risk assessments will cover chemicals used in HTI products or the processes of HTI’s suppliers.

In July 2016, the EPA proposed to change significant new use rules to align with revisions to the Occupational Safety and Health Administration (“OSHA”) Hazard Communications Standard, the United Nations’ Globally Harmonized System of Classification and Labelling of Chemicals, and OSHA’s Respiratory Protection Standard concerning respiratory protection from exposure to chemicals. Manufacturers and processors of petroleum and coal products may potentially be affected, but the EPA estimates that increased costs of compliance will be minor. On October 7, 2016, the EPA submitted finalized a rule that requires the reporting and recordkeeping of information on certain chemical substances manufactured or processed as nanoscale materials. This rule would require persons that manufacture or process certain chemical substances on the nanoscale level to report information electronically to the EPA, including the chemical identity, production volume, exposure and release information, and existing data regarding environmental and health effects. While these developments demonstrate increasing interest in this area, at this time it is not certain what further nanotechnology regulations may be adopted and how they may affect our business. 

Employees

As of September 30, 2016, we employed approximately 3,687 full-time employees, including approximately 45 who work under collective bargaining agreements.

The following table lists the approximate number of employees by business segment as of September 30, 2014, 2015, and 2016:

 

 

 

 

 

 

 

 

 

    

2014

    

2015

    

2016

 

Building Products

 

1,670

 

1,795

 

2,515

 

Construction Materials

 

920

 

952

 

1,091

 

Discontinued Operations

 

0

 

1

 

1

 

Energy Technology

 

35

 

36

 

34

 

Corporate

 

40

 

47

 

46

 

Total

 

2,665

 

2,831

 

3,687

 

 

 

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ITEM 1A.    RISK FACTORS

Risks Relating to Our Business

The building products industry is experiencing modest growth and recent improvements in some of our end markets may not continue. Because our building products and to a lesser extent, our construction materials business, are dependent on residential construction and remodeling, our revenues could flatten or decrease as a result of events outside our control that impact home construction and home improvement activity, including economic factors specific to the building products industry and severe weather.

Our residential building products business and to a lesser extent, our construction materials business, rely upon home repair and remodeling as well as new construction. Between 2007 and 2011, there was a severe slowing of new housing and remodeling and we experienced a significant slowdown in sales activity during these years. Although residential construction and remodeling activity has somewhat improved in recent years in certain regions of the United States, the homebuilding industry continues to experience activity at moderate levels. Modest consumer confidence, unsteady employment growth, limits on credit availability, rising building costs and other factors may adversely affect new construction or remodeling, resulting in continued slow improvement or a slowdown in new construction and repair and remodeling activities.

We, like many others in the building products industry, experienced a large drop in orders and a reduction in our margins in 2007 through 2011. In 2007‑2009, we recorded significant goodwill impairments associated with our building products business. While some increased product demand has occurred in 2012 through 2016, we can provide no assurances that demand for building products will further improve in the near future. Downturns in United States and Canadian home improvement and remodeling and new construction or in specific regions of the North American economy where we have significant sales could adversely impact our end users and lower the demand for our products, which in turn could cause our net sales and net income to decrease.

Construction is seasonal and generally dependent on temperate weather conditions. The majority of our building products sales and a portion of our construction materials sales are in residential construction, which tends to slow down in the winter months. If there are severe weather events such as hurricanes or flooding, or other events outside of our control, construction activities will slow and there may be a negative effect on our revenues. For the winter months of late 2016 and early 2017, our decreased seasonal revenues from our building products and construction materials businesses may result in negative cash flow.

Reference is made to the discussion of the October 1, 2016 change in segment reporting as it pertains to our block product business, included in Item 1: “Business” in this Form 10-K.

Tight credit markets could negatively affect our business, results of operations, and financial condition. Construction lending has increased slowly since its low in early 2013, which continues to adversely affect liquidity for builders, home purchasers and remodelers in 2016 and 2017.

The financial crisis of the banking system and financial markets beginning in 2008 and the going concern threats to banks, governments, and other financial institutions resulted in tight credit markets, including home construction lending, mortgages and home equity loans. Low liquidity for builders, homebuyers and remodelers or a tightening of construction or mortgage lending requirements could adversely affect the availability of capital for purchasers of our products and thereby reduce our sales.

There could be a number of follow‑on effects on our business from limited credit and low liquidity of builders, prospective homebuyers or remodelers, including reduced ability to purchase our building products. These and other similar factors could:

cause delay or decisions to not undertake new home construction or improvement projects;

cause our customers to delay or decide not to purchase our building products; and

lead to a decline in customer transactions and our financial performance.

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Our building products and construction materials businesses have been strengthened by the sales growth of new products. If we are unable to offer new products and expand our new product sales, our revenue growth may be adversely affected.

Part of our building products and construction materials revenues have come from sales in new product categories. New products require innovation, research, capital for development, manufacturing, and acquisition activities. If we are unable to sustain new product sales growth, whether for lack of new product development, access to adequate capital or for other reasons, sales will follow any future general industry slowdown in construction, which will negatively affect our revenue and growth.

Demand for our building products and construction materials may decrease because of changes in customer or designer preferences or because competing products gain price advantages. If demand for our products declines, our revenues will decrease.

Our building products and construction materials are subject to reductions in customer demand for reasons such as changes in preferred home and other building sizes, materials, colors and styles. Many of our resin‑based siding accessory products are complementary to an owner’s choice of vinyl as a siding material. If sales of vinyl siding decrease, sale of our accessories may also decrease. Sales of our manufactured architectural stone and concrete block products are dependent on the continuing popularity of stone and block finishes. Similarly, we rely upon architects and other designers to specify block and other building products that we produce.

Demand for our building products can also decline if competing products become relatively less expensive. For example, if costs of petroleum‑based resins that are used to make vinyl siding and accessories increase faster than the costs of stucco, then stucco products, which we do not sell, will become more attractive from a price standpoint, and our vinyl siding and accessory sales may decrease. Manufactured architectural stone and specialty roofing materials could lose price competitiveness compared to other finishes. If demand for our building products and construction materials decline because of changes in the popularity or price advantages of our products, our revenues will be adversely affected.

A significant increase in the price of materials used in the production of our building products and construction materials that cannot be passed on to customers could have a significant adverse effect on our operating income. Furthermore, we depend upon limited sources for certain key production materials, the interruption of which would materially disrupt our ability to manufacture and supply products, resulting in lost revenues and the potential loss of customers.

Our manufactured architectural stone, concrete block and concrete roof products manufacturing processes require key production materials including cement, sand, manmade, natural, lightweight and other aggregates, oxides, rolled steel, packaging materials, and certain types of rubber‑based products. The suppliers of these materials may experience shortages and capacity or supply constraints in meeting market demand that limit our ability to obtain needed production materials on a timely basis or at expected prices. We do not have long‑term contracts with such suppliers. We do not maintain large inventories of production materials and alternative sources meeting our requirements could be difficult to arrange in the short term. A significant increase in the price of these materials that cannot be passed on to customers could have a significant adverse effect on our cost of sales and operating income. Additionally, our manufacturing and ability to provide products to our customers could be materially disrupted if this supply of materials was interrupted for any reason. Such an interruption and the resulting inability to supply our customers with manufactured stone, block and roof products could adversely impact our revenues and our relationships with our customers.

Certain of our resin-based siding, accessory, trim, composite roof, vinyl window and other products are manufactured from polypropylene, PVC and polyethylene, a large portion of which material is sold to us by a limited number of suppliers. The prices of polypropylene, PVC and polyethylene are primarily a function of manufacturing capacity, demand, and the prices of petrochemical feedstocks, crude oil and natural gas liquids. To a lesser extent, supply also depends upon the availability of recycled materials. Historically, the market prices of polypropylene, PVC, and polyethylene have fluctuated, with material price increases as recently as 2014. A significant increase in the price of polypropylene, polyethylene or PVC that cannot be passed on to customers could have a significant adverse effect on our cost of sales and operating income. We do not have long‑term contracts with our polypropylene, polyethylene or PVC suppliers. We do not maintain large inventories of polypropylene, polyethylene or PVC and alternative sources could be difficult to arrange in the short term. Therefore, our manufacturing and ability to provide products to our customers could be materially disrupted if our supply of polypropylene, polyethylene or PVC were interrupted for any reason. Such an

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interruption and the resulting inability to supply our customers with resin-based products could adversely impact our revenues and potentially our relationships with our customers.

Interruption of our ability to manufacture and timely ship product orders could harm our reputation and result in lost revenues if customers turn to other sources for products.

We produce most of our building products and some of our construction materials in a small number of key manufacturing plants primarily located in the United States and Mexico. Our manufacturing plants or our systems that track customer orders and production could be disrupted because of natural or manmade disasters, accidents, political unrest, terrorism, crime or other problems. Our building products and construction materials businesses are dependent upon rapid shipments to contractors and distributors of individual orders, a large portion of which orders are manufactured upon demand to meet customer specifications. If there is significant interruption of our order fulfillment for any reason, we are at risk of harming our reputation for speed and reliability with customers and losing short‑term and long‑term revenues if customers turn to alternative building product and construction material sources.

Our construction materials business is dependent upon governmental infrastructure spending.

Our fly ash and concrete block products, and to a much lesser extent, our other building products, are used in public infrastructure projects, which include the construction, maintenance, and improvement of highways, bridges, schools, prisons and similar projects. Our business is dependent on the level of federal, state, and local spending on these projects. We cannot be assured of the existence, amount, and timing of appropriations for government spending on these projects.

Federal and state budget deficits may continue to limit the funding available for infrastructure spending. The availability of credit affects the ability of states and other governmental entities such as cities and school districts to issue bonds to finance construction projects. In addition, infrastructure spending is adversely affected by regions where sluggish economies exist, leading to lower tax revenues and state government budgets. Shortages in state tax revenues can reduce the amounts spent on state infrastructure projects, even below amounts appropriated by the legislatures. Delays in state infrastructure spending can hurt our business. Further, rising construction and material prices constrain infrastructure construction budgets.

Similarly, we rely upon architects and other designers to specify the type of concrete block that we produce in certain commercial and institutional building projects. Our concrete block business faces competition from alternative building materials.

If HCM’s coal‑fueled electric utility industry suppliers fail to provide HCM with high‑value CCPs due to environmental regulations or otherwise, HCM’s costs could increase and supply could fail to meet customer needs, potentially negatively impacting our profitability or hindering growth.

HCM relies on the production of CCPs by coal‑fueled electric utilities. HCM occasionally experiences delays and other problems, such as planned and unplanned outages, in obtaining high‑value CCPs from its suppliers and may in the future be unable to obtain high‑value CCPs on the scale and within the time frames required by HCM to meet customers’ needs. The coal‑burning electric utility and coal mining industries are facing a number of new and pending initiatives by regulatory authorities seeking to address air and water pollution, greenhouse gas emissions and management and disposal of CCPs, as described below. Although our business managing CCPs for utility customers may benefit from opportunities to manage compliance with some new regulatory requirements, increasingly strict requirements generally will increase the cost of doing business and may make coal burning less attractive for utilities. In recent years, multiple companies have announced plans to close coal‑fired power plant units, or dropped plans to open new plants, citing the cost of compliance with pending or new environmental regulations and the relatively low cost of natural gas. A reduction in the use of coal as fuel causes a decline in the production and availability of fly ash, the key product in our construction materials business. The outcome of these developments cannot be predicted. To date, our business has not had a significant impact from plant closures because our national footprint allows us to move fly ash to satisfy demand; however, if closure of coal‑powered plants continues, we may be adversely affected in the future.

Environmental regulation affecting the coal industry is ever‑evolving, and federal and state regulation in recent years has imposed more stringent requirements regarding emission of air pollutants and other toxic chemicals, reduction of greenhouse gas emissions and water quality impacts from coal mining operations. See “Business—Regulation.” To meet emissions levels, utilities have been required to make changes such as changing their fuel sources, installing expensive pollution control equipment and, in some cases, shutting down plant units. Adoption of more stringent

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regulations governing coal combustion, water discharges and air emissions, or coal mining would likely have an adverse effect on the cost, quality, beneficial use and sales of CCPs. Faced with the prospect of more stringent regulations, litigation by environmental groups, and the relatively low cost of natural gas, an increasing number of electric utilities are reducing their portfolio of coal powered energy facilities.  This reduction could increase if the Clean Power Plan is upheld, which urges states to substitute electricity generation from higher-emitting coal plants to low-emitting coal plants and zero-emitting renewable sources.  See “Business—Regulation.”  If HCM is unable to obtain CCPs or experiences a delay in the delivery of high‑value or quality CCPs, HCM will have a reduced supply of CCPs to sell or may be forced to incur significant unanticipated expenses to secure alternative sources or to otherwise maintain supply to customers. Moreover, revenues could be adversely affected if CCP sales volumes cannot be maintained or if customers choose to find alternatives to HCM’s products.  

The EPA rule under RCRA to regulate the disposal of CCPs is likely to have an adverse effect on the cost of managing and disposing of CCPs. The heightened regulatory scrutiny of CCPs on the federal and potentially state level may have an adverse effect on the uses and demand for CCPs, and on HCM’s relationships with utilities.

In April 2015, the EPA published a final rule to regulate the disposal of coal combustion residuals as solid (non-hazardous) waste under subtitle D of RCRA that became effective in October 2015.  The rule established national minimum criteria for CCP landfills and impoundments consisting of location restrictions, design and operating criteria, groundwater monitoring and corrective action, closure requirements, post closure care, recordkeeping and reporting, and other requirements. The rule requires closure of facilities unable to comply with the new rule’s criteria within five to seven years. The new regulation has increased the complexity and cost of managing and disposing of CCPs. In response to the 2015 rule, Congress has considered several proposals to institute state-permitting programs for CCPs, subject to EPA oversight. While the passage of one of these laws may have a significant effect on the regulatory landscape, the outcome of these legislative attempts is not certain.

The EPA remains under significant pressure from environmental organizations, several of which have challenged the 2015 rule. Some environmental groups continue to urge the EPA to restrict certain beneficial uses of CCPs, such as in concrete, road base and soil stabilization, alleging contaminants may leach into the environment. The 2015 regulation created a definition of “beneficial use” that includes uses in concrete and road base, but changes in the definition could reduce the demand for fly ash and other CCPs which would have an adverse effect on HCM’s revenues. The EPA’s increased regulation of CCPs will likely cause utilities and power producers to impose greater restrictions on the use of CCPs by HCM and its customers. Restrictions imposed by utilities may narrow the types of potential customers to which HCM can market CCPs and limit their uses of CCPs, reducing HCM’s sales opportunities. Utilities are also likely to negotiate to shift actual or perceived liabilities associated with CCPs and their use to HCM through more onerous contract and indemnity obligations. This could harm HCM’s business by reducing the number of CCP management contracts or by increasing HCM’s exposure to the contingent risks associated with any new regulation of CCPs.

HCM has managed numerous large scale CCP disposal projects, primarily for coal fueled utilities and power producers. In addition, CCPs have beneficial use for road base, soil stabilization, and as large scale fill in contact with the ground. If the EPA decides to regulate CCPs as hazardous waste, HCM, together with CCP generators, could be subject to very expensive environmental cleanup, personal injury and other possible claims and liabilities.

HCM primarily sells fly ash for use in concrete; if use of fly ash does not increase, HCM may not grow.

HCM’s revenues primarily are derived from the sale of fly ash as a mineral admixture used as a partial replacement for portland cement in concrete products. HCM’s growth has been and continues to be dependent upon the increased use of fly ash in the production of concrete. HCM’s marketing initiatives emphasize the environmental, cost and performance advantages of partially replacing portland cement with fly ash in the production of concrete. HCM’s business is affected by the availability and cost of competing products in the regions where it conducts business. If portland cement or other competing replacement products are available at lower prices than fly ash because of transportation advantages or some other advantage, our sales of fly ash as a replacement for portland cement in concrete products could suffer, and HCM may not be able to grow or may experience a decline in revenue.

Further, utilities are switching fuel sources, changing boiler operations and introducing activated carbon and ammonia into the exhaust gas stream in an effort to decrease costs and to meet increasingly stringent emissions control regulations. All of these factors can have a negative effect on fly ash quantity and quality, including an increase in the amount of unburned carbon in fly ash and the presence of ammonia slip. We are attempting to address these challenges

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with the development and/or commercialization of two technologies: RestoreAir™, which pre‑treats unburned carbon particles and activated carbon in fly ash in order to minimize the particles’ adverse effects, and ammonia slip mitigation, which counteracts the impact of ammonia contaminants in fly ash. Decreased quantity and quality of fly ash may impede the use of fly ash in the production of concrete, which would adversely affect HCM’s revenue.

If the EPA decides to regulate the beneficial uses of CCPs, there would likely be an adverse effect on use and sales of CCPs and HCM’s relationship with utilities. Some environmental groups continue to urge the EPA to restrict some beneficial uses of CCPs, such as in concrete, road base, and soil stabilization, alleging contaminants may leach into the environment. This could reduce the demand for fly ash and other CCPs which would have an adverse effect on our CCP revenues.

Because demand for CCPs sold by HCM is affected by fluctuations in weather and construction cycles, HCM’s revenues and net income could decrease significantly as a result of unexpected or severe weather.

HCM manages and markets CCPs and uses CCPs to produce building products. Utilities produce CCPs year‑round. In comparison, sales of CCPs are generally keyed to construction market demands that tend to follow national trends in construction with predictable increases during temperate seasons and decreases during periods of severe weather. HCM’s CCP sales have historically reflected these seasonal trends, with the largest percentage of total annual revenues being realized in the quarters ended June 30 and September 30. Low seasonal demand normally results in reduced shipments and revenues in the quarters ended December 31 and March 31. The seasonal impact on HCM’s revenue, together with the seasonal impact on building products revenues may result in negative cash flows for the winter months of late 2016 and early 2017.

HES remains contingently responsible for certain covenants to the purchasers and for third‑party liabilities transferred to the purchasers of our coal cleaning business.

In September 2011, we adopted a plan to sell our coal cleaning business. In a series of three transactions during 2012 and 2013, we sold our 11 coal cleaning facilities and associated assets and liabilities which are presented as a discontinued operation. HES may have significant contingent liabilities to the purchasers, if our tax and other representations and warranties prove to be untrue, and to third parties, including land owners and regulatory authorities for site reclamation of disturbed mine lands, where purchasers fail to fulfill their assumed obligations, including the transfer of mining permits and associated reclamation and bonding obligations.

Our information technology consolidation and continuous improvement initiatives may not result in the intended benefits and could harm our business.

We strive to continuously take steps to restructure and achieve improvements in our business, including reorganization and reduction of some management and other employees, and changes in manufacturing, marketing, distribution, pricing and sales of products. In addition, we are in the process of consolidating our accounting, product order and fulfillment, and other information technology platforms. We may not realize the expected improvements to our business if we have made erroneous assumptions about our ability to successfully implement these changes, the demand for our products, and our ability to service that demand. If we are not successful, our information technology consolidation and restructuring efforts may be detrimental to our financial reporting, controls, service to customers and revenues which would have a material adverse effect on our business.

Our business strategy to grow through acquisitions may result in integration costs and poor performance.

An aspect of our business strategy continues to be the pursuit of growth through acquisitions of products or complementary businesses.  While our ABL Revolver and our senior secured Term Loan Facility limit our ability to engage in acquisitions, to the extent we engage in acquisitions, our ability to successfully implement the transactions is subject to a number of risks, including difficulties in identifying acceptable acquisition candidates, consummating acquisitions on favorable terms and obtaining adequate financing, which may adversely affect our ability to develop new products and services and to compete in our markets.

During 2013-2016, we acquired multiple businesses, and if we do not successfully integrate newly acquired businesses with our existing businesses, we may not realize the expected benefits of the acquisitions, and the resources and attention required for successful integration may interrupt the business activities of acquired businesses and our existing businesses. Successful management and integration of acquisitions are subject to a number of risks, including difficulties in assimilating acquired operations, loss of key employees, diversion of management’s attention from core business operations, assumption of contingent liabilities, incurrence of potentially significant write‑offs, and various

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employee issues, such as issues related to human resource benefit plans, and an increase in employment and discrimination claims and claims for workers’ compensation. Each business acquisition also requires us to expand our operational and financial systems, which increases the complexity of our information technology systems. Implementation of controls, systems and procedures may be costly and time‑consuming and may not be effective.

Our new products and technologies may not be successfully developed, operated and marketed, which could affect our future profitability.

Although we have developed or acquired new products and technologies, and plan to continue to do so, successful commercialization of these products and technologies and their associated businesses in many cases are in early stages. Commercial success will depend on our ability to fully develop the products and technologies and their businesses, including generating demand from customers. We may not be able to profitably operate our new businesses or market our products or technologies produced from them. For example, the sale of our heavy oil upgrading products is dependent on refineries operating under conditions suitable to the performance of our catalyst precursor products, which conditions may not be available.

Our growth requires continued investment of capital. If we cannot invest additional capital into new and existing businesses, we may not be able to sustain or increase our growth.

Our operations require both maintenance and growth capital. A key part of our business strategy has been to expand through complementary acquisitions, which has required significant capital. In addition, commercialization of new products and technologies has required and will require significant financial commitments. Our utility services business will require financial commitments such as performance bonds in order to grow and we have limited bonding capacity. Our building products and construction materials businesses also require significant capital expenditures. We estimate that our capital expenditure needs for 2017 will be approximately $45-$65 million. If we do not have sufficient capital to make equity investments in new projects or are limited by financial covenants from doing so, our growth may suffer. Many of our competitors, including large businesses in the building products, construction materials and heavy oil upgrading industries, have greater financial strength than us and may be able to enter our markets, make acquisitions and take advantage of other potential growth opportunities before we can.

We could face additional potential liability claims relating to our products.

We face an inherent business risk of exposure to product liability claims, including class actions, in the event that the use of any of our products results in personal injury or property damage. For example, we face personal injury, property damage, and environmental cleanup claims related to coal combustion products. In the event that any of our products proves to be defective, among other things, we may be responsible for damages related to any defective products and we may be required to recall or redesign such products. Because of the long useful life of our products, it is possible that latent defects might not appear for years. We often do not control the installation or use of our products. Improper use or installation can result in claims of defective products against our businesses. Product liability claims can be difficult and expensive to defend. Our insurance does not cover all liability claims relating to our products.  Any insurance we maintain may not continue to be available on terms acceptable to us or such coverage may not be adequate for liabilities actually incurred. Insurance for product liability claims could become much more expensive or more difficult to obtain or might not be available at all. Further, any claim or product recall could result in adverse publicity against us, which could cause our sales to decline or increase our costs.

Significant increases in energy and transportation costs that cannot be passed on to customers could have a significant adverse effect on operating income.

We purchase a significant amount of energy from various sources to conduct our operations, including fossil fuels and electricity for production of building products and construction materials, and diesel fuel for distribution of our products and for production‑related vehicles. In past years, fuel and other cost increases have increased truck and rail carrier transportation costs for our products and may do so again in the future. At times, severe weather, including flooding, earthquakes, and other traffic and transportation impairments and failures have reduced or eliminated access to roads and railways, leaving us with more expensive transportation alternatives. Transportation difficulties and cost increases have in the past and may in the future adversely affect service to customers, the results of our operations and our financial condition. Transportation prices and availability of all petroleum products are subject to political, economic and market factors that are generally outside of our control.

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We operate in industries subject to significant environmental regulation, and compliance with and changes in regulation could add significantly to the costs of conducting business.

Our CCP operations and our customers and licensees are subject to federal, state, local and international environmental regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of waste products, and impose liability for the costs of remediating contaminated sites, which add to the costs of doing business and expose us to potential damage claims and fines for non‑compliance. If the costs of environmental compliance increase for any reason, we may not be able to pass on these costs to customers. In order to establish and operate heavy oil upgrading facilities and power plants and operations to collect and transport CCPs, we and our customers have obtained various state and local permits and must comply with processes and procedures that have been approved by regulatory authorities. These environmental requirements and any failure to comply could give rise to substantial environmental liabilities and damage claims and to substantial fines and penalties.

Our building products and construction materials manufacturing operations also are subject to environmental regulations and permit requirements governing activities such as the creation of dust, disposal of waste, discharge of water, and the transportation, storage and use of fuel and materials. If we cannot obtain or maintain required environmental permits for our existing and planned manufacturing facilities in a timely manner or at all, we may be subject to additional costs and fines.

Some of our research and development activities involve coal, oil, chemicals and energy technologies, including petroleum refining. As a result, petroleum and other regulated materials have been and are present in and on our properties. Regulatory noncompliance or accidental discharges, fires, or explosions, in spite of safeguards, could create environmental or safety liabilities. Therefore, our operations entail risk of environmental damage and injury to people, and we could incur liabilities in the future arising from the discharge of pollutants into the environment, waste disposal practices, or accidents, as well as changes in enforcement policies or newly discovered conditions.

We are involved in litigation and claims for which we incur significant costs and are exposed to significant liability.

We are a party to some significant legal proceedings and are subject to potential claims regarding operation of our business. These proceedings will require that we incur substantial costs, including attorneys’ fees, managerial time and other personnel resources and costs in pursuing resolution, and adverse resolution of these proceedings could result in our payment of damages, materially adversely affect our income and reserves and damage our reputation. See “Business—Litigation.”

We have significant competition in our industries which may cause demand for our products and services to decrease.

We experience significant competition in all of our segments and geographic regions. A failure to compete effectively or increased competition could lead to price cuts, reduced gross margins and loss of market share, which could decrease our profitability. Many of our competitors have greater financial, management and other resources than we have and may be able to take advantage of acquisitions and other opportunities more readily. In certain instances, we must compete on the basis of superior products and services, thereby increasing the costs of marketing our services to remain competitive. See “Business—Competition” for more information on the competition faced by us in each of our segments.

If our internal controls over financial reporting are not adequate, our business and reputation could be harmed and we could be subject to regulatory scrutiny, civil or criminal penalties or stockholder litigation.

Maintaining effective internal controls is necessary for us to produce reliable financial reports and is important in helping to prevent fraud and otherwise protect our business.  Section 404 of the Sarbanes‑Oxley Act of 2002 (the “Sarbanes‑Oxley Act”) requires that we evaluate and report on our system of internal controls. If we fail to maintain the adequacy of our internal controls, our ability to rely on reported operating results to manage and protect our business could be harmed and we could be subject to regulatory scrutiny, civil or criminal penalties or stockholder litigation. Section 404 of the Sarbanes‑Oxley Act also requires that our independent auditors report on our system of internal controls. We have documented and tested our system of internal controls to provide the basis for our reports in our relevant filings with the SEC. The growth and diversification of our business through acquisitions complicates the process of developing, documenting, maintaining and testing internal controls. Failure to remediate deficiencies in

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existing controls or to implement required new or improved controls could harm our business or cause us to fail to meet our reporting obligations. No assurance can be given that in the future there may not be significant deficiencies or material weaknesses that would be required to be reported.

Information technology vulnerabilities and cyberattacks on our networks could have a material adverse impact on our business and results of operations.

We rely upon information technology to manage and conduct business, both internally and with our customers, suppliers and other third parties.  Internet transactions involve the transmission and storage of data, including in certain instances customer and supplier business and personal information. Thus, maintaining the security of computers, computer networks and data storage resources is a critical issue for us and our customers and suppliers. Information technology system failures that cannot be promptly resolved are likely to result in lost revenues and harm to our business relationships. 

Security breaches could result in reduced or lost ability to carry on our business and loss of and unauthorized access to confidential information. We have limited personnel and other resources to address information technology reliability and security of our computer networks and respond to known security incidents to minimize potential adverse impact. Experienced hackers, cybercriminals and perpetrators of threats may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. These perpetrators of cyberattacks also may be able to develop and deploy viruses, worms, malware and other malicious software programs that attack our information and networks or otherwise exploit any security vulnerabilities of our information and networks. Techniques used to obtain unauthorized access to or sabotage systems change frequently and often are not recognized until long after being launched against a target so that we may be unable to anticipate these techniques or to implement adequate preventative measures. A breach of our IT systems and security measures as a result of third-party action, malware, employee error, malfeasance or otherwise could materially adversely impact our business and results of operations and expose us to customer, supplier, and other third party liabilities.

Unauthorized use of or infringement claims regarding our proprietary intellectual property could adversely affect our ability to conduct our business.

We rely primarily on a combination of trade secrets, patents, copyright and trademark laws and confidentiality procedures to protect our intellectual property. Despite these precautions, unauthorized third parties may misappropriate, infringe upon, copy or reverse engineer portions of our technology or products. Identification of unauthorized users of our intellectual property can be very difficult and enforcement and defense of rights can be costly. Manufactured architectural stone competitors, heavy oil upgrading competitors and other competitors operate in foreign countries where we may not detect unauthorized use of our intellectual property or where enforcement may be difficult. We do not know if current or future patent applications will be issued within the scope of the claims sought, if at all, or whether any patents issued will be challenged or invalidated. Our business could be harmed if we infringe upon the intellectual property rights of others. We have been, and may be in the future, notified that we may be infringing intellectual property rights possessed by third parties. If any such claims are asserted against us, we may seek to enter into royalty or licensing arrangements. There is a risk in these situations that no license will be available or that a license will not be available on reasonable terms, precluding our use of the applicable technology. Alternatively, we may decide to litigate such claims or attempt to design around the patented technology. In addition, patents may expire before they are a commercial success. To date, while no single patent or trademark is material to our business, except in HTI’s heavy oil upgrading business which relies upon a limited number of material patents, the issues described in this paragraph have not resulted in significant cost or had an adverse impact on our business. Nevertheless, future actions could be costly and would divert the efforts and attention of our management and technical personnel.

We are conducting business in foreign countries where intellectual property and other laws, as well as business conditions, may leave our intellectual property, products and technologies vulnerable to duplication by competitors and create uncertainties as to our legal rights against such competitors’ actions.

We have and expect to continue to use, license or otherwise make our products and technologies, available to persons and entities in foreign countries. There is a risk that foreign intellectual property laws will not protect our intellectual property to the same extent as under United States laws, leaving us vulnerable to competitors who may attempt to copy our products, processes or technologies. Our limited familiarity with, and the interpretation and enforcement of foreign laws, regulations and legal requirements involve some uncertainty. These uncertainties could limit the legal protection or recourse available to us. In addition, dependence on foreign licenses and conducting foreign

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operations may subject us to increased risk from political change, ownership issues or repatriation or currency exchange concerns.

Fluctuations in the value of currency may negatively affect our revenue and earnings.

Doing business internationally exposes us to risks related to the value of one currency compared to another. For example, some of our revenues are generated by sales of goods produced in the U.S. to buyers in foreign countries. If the U.S. dollar strengthens relative to the currency of foreign purchasers, the relative cost of our goods to such purchasers may go up, and the demand for our products may decrease, reducing our revenues. Also, in cases where our debt or other obligations are in currencies different than the currency in which we earn revenue, we may lose money as a result of fluctuations in the exchange rates, decreasing our earnings.

We are dependent on certain key personnel, the loss of whom could materially affect our financial performance and prospects.

Our continued success depends to a large extent upon the continued services of our senior management and certain key employees. Each member of our senior management team has substantial experience and expertise in our industry and has made significant contributions to our growth and success. We do face the risk, however, that members of our senior management may not continue in their current positions and the loss of the services of any of these individuals could cause us to lose customers and reduce our net sales, lead to employee morale problems and the loss of key employees, or cause disruptions to our production. Also, we may be unable to find qualified individuals to replace any of the senior executive officers who leave our company.

Risks Relating to our Common Stock

The price of our common stock historically has been volatile. This volatility may affect the price at which you could sell your common stock, and the sale of substantial amounts of our common stock could adversely affect the price of our common stock.

The market price for our common stock has varied between a high of $21.25 in April 2016 and a low of $13.62 in January 2016 during the twelve‑month period ended September 30, 2016. This volatility may affect the price at which you could sell your common stock, and the sale of substantial amounts of our common stock could adversely affect the price of our common stock. Our stock price is likely to continue to be volatile and subject to significant price and volume fluctuations in response to market and other factors, including the other factors discussed in “Risks Relating to Our Business;” variations in our quarterly operating results from our expectations or those of securities analysts or investors; downward revisions in securities analysts’ estimates; and announcement by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments.

In the past, following periods of volatility in the market price of their stock, many companies have been the subject of securities class action litigation. If we become involved in securities class action litigation in the future, it could result in substantial costs and diversion of our management’s attention and resources and could harm our stock price, business, prospects, results of operations and financial condition.

The broader stock market has experienced significant price and volume fluctuations in recent months and years. This volatility has affected the market prices of securities issued by many companies for reasons unrelated to their operating performance and may adversely affect the price of our common stock. In addition, our announcements of our quarterly operating results, changes in general conditions in the economy or the financial markets and other developments affecting us, our affiliates or our competitors could cause the market price of our common stock to fluctuate substantially.

We have never paid dividends and do not anticipate paying any dividends on our common stock in the future, so any short-term return on your investment will depend on the market price of our common stock.

We currently intend to retain any earnings to finance our operations and growth. The terms and conditions of our senior secured credit facility restrict and limit payments or distributions in respect of our common stock.

Delaware law and our charter documents may impede or discourage a takeover, which could cause the market price of our shares to decline.

We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing

27


 

stockholders. In addition, our board of directors has the power, without stockholder approval, to designate the terms of one or more series of preferred stock and issue shares of preferred stock, including the adoption of a “poison pill,” which could be used defensively if a takeover is threatened. The ability of our board of directors to create and issue a new series of preferred stock and certain provisions of Delaware law and our certificate of incorporation and bylaws could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the market price of our common stock.

Future sales of our common stock in the public market could cause our stock price to fall.

The sale of substantial amounts of our common stock could adversely impact our stock price. As of September 30, 2016, we had outstanding approximately 74.2 million shares of our common stock and options to purchase approximately <0.1 million shares of our common stock (all of which were exercisable as of that date). We also had outstanding approximately 3.5 million stock appreciation rights as of September 30, 2016, of which approximately 3.3 million were exercisable. The sale or the availability for sale of a large number of shares of our common stock in the public market could cause the price of our common stock to decline.

If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business. We have a relatively small number of equity research analysts providing coverage on our common stock. Equity research analysts may elect not to provide research coverage of our common stock, and such lack of research coverage may adversely affect the market price of our common stock. We do not have any control of the analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

Risks Relating to Our Indebtedness

We have a substantial amount of indebtedness, which could have a material adverse effect on our financial condition and our ability to obtain financing in the future and to react to changes in our business.

We have a substantial amount of debt, which requires significant principal and interest payments. As of September 30, 2016, we had approximately $768.8 million face value of debt outstanding all of which related to our senior secured Term Loan Facility. We also have $70.0 million of undrawn availability, subject to a borrowing base limitation, under the ABL Revolver. After giving effect to the borrowing base limitation and issuance of letters of credit, we had availability of approximately $59.4 million under the ABL Revolver as of September 30, 2016.

Our significant amount of debt could have important consequences. For example, it could:

make it more difficult for us to satisfy our obligations under our notes and the ABL Revolver;

increase our vulnerability to adverse economic and general industry conditions, including interest rate fluctuations, because a portion of our borrowings, including those under the ABL Revolver, are and will continue to be at variable rates of interest;

require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which would reduce the availability of our cash flow from operations to fund working capital, capital expenditures or other general corporate purposes;

limit our flexibility in planning for, or reacting to, changes in our business and industry;

place us at a disadvantage compared to competitors that may have proportionately less debt;

limit our ability to obtain additional debt or equity financing due to applicable financial and restrictive covenants in our debt agreements; and

increase our cost of borrowing.

Despite our current indebtedness levels, Headwaters Incorporated and its subsidiaries may still incur significant additional indebtedness. Incurring more indebtedness could increase the risks associated with our substantial indebtedness.

Headwaters Incorporated and its subsidiaries may be able to incur substantial additional indebtedness, including additional secured indebtedness, in the future. The terms of the secured Term Loan Facility and the credit agreement

28


 

governing our ABL Revolver restrict, but do not completely prohibit us from doing so. We have $70.0 million of undrawn availability under the ABL Revolver, subject to borrowing base limitations. After giving effect to the borrowing base limitation, we had availability of approximately $59.4 million under the ABL Revolver as of September 30, 2016. In addition, the secured Term Loan Facility allows us to issue additional secured term loan notes under certain circumstances, which would be guaranteed by our subsidiary guarantors, would allow our foreign subsidiaries to incur additional debt, and would be structurally senior to our existing secured Term Loan Facility. In addition, the indentures do not prevent us from incurring other liabilities that do not constitute indebtedness. If new debt or other liabilities are added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.

If we default under the ABL Revolver, our Term Loan Facility, or other indebtedness, we may not be able to service our debt obligations.

In the event of a default under the ABL Revolver, secured Term Loan Facility or other indebtedness, lenders could elect to declare all amounts borrowed, together with accrued and unpaid interest and other fees, to be due and payable. If such acceleration occurs, thereby permitting an acceleration of amounts outstanding under our debt obligations, we may not be able to repay the amounts due. Events of default are separately defined in each loan agreement or indenture, but include events such as failure to make payments when due, breach of covenants, default under certain other indebtedness, failure to satisfy judgments in excess of $1.0 million, certain insolvency events and the occurrence of a material adverse effect (as defined in the ABL Revolver). The occurrence of an event of default could have serious consequences to our financial condition and results of operations, and could cause us to become bankrupt or insolvent.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We will also be required to obtain the consent of the lenders under the ABL Revolver to refinance material portions of our indebtedness. We cannot assure you that we will maintain a level of cash flow from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them, and these proceeds may not be adequate to meet any debt service obligations then due. Additionally, our debt agreements limit the use of the proceeds from any disposition; as a result, we may not be allowed, under these documents, to use proceeds from such dispositions to satisfy all current debt service obligations.

Headwaters Incorporated is a holding company with no independent operations or assets. Repayment of our indebtedness is dependent on cash flow generated by our subsidiaries.

Headwaters Incorporated is a holding company and repayment of our indebtedness is dependent upon cash flow generated by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are guarantors of our indebtedness, our subsidiaries do not have any obligation to pay amounts due on our notes or to make funds available for that purpose. Our subsidiaries may not be able to, or be permitted to, make distributions to enable us to make payments in respect of our indebtedness. For instance, if there is a default under the ABL Revolver, the ABL Borrowers will not be permitted to transfer funds to us to pay other indebtedness. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While our secured Term Loan Facility limits the ability of our subsidiaries to restrict the payment of dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

29


 

Our debt agreements impose significant operating and financial restrictions on us and our subsidiaries, which may prevent us from capitalizing on business opportunities.

The agreement governing our secured Term Loan Facility and the credit agreement governing the ABL Revolver impose significant operating and financial restrictions on us. These restrictions limit our ability, among other things, to:

incur additional indebtedness or issue certain disqualified stock and preferred stock;

pay dividends or certain other distributions on our capital stock or repurchase our capital stock;

make certain investments or other restricted payments;

place restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us;

engage in transactions with affiliates;

sell certain assets or merge with or into other companies;

guarantee indebtedness; and

create liens.

When (and for as long as) the availability under the ABL Revolver is less than a specified amount for a certain period of time, funds deposited into deposit accounts used for collections will be transferred on a daily basis into a blocked account with the administrative agent and applied to prepay loans under the ABL Revolver.

As a result of these covenants and restrictions, we may be limited in how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.

There are limitations on our ability to incur the full $70.0 million of commitments under the ABL Revolver. Borrowings under our ABL Revolver are limited by a specified borrowing base consisting of a percentage of eligible accounts receivable and inventory, less customary reserves. In addition, under the ABL Revolver, a monthly fixed charge maintenance covenant would become applicable if excess availability under the ABL Revolver is at any time less than 12.5% of the total $70 million of current revolving loan commitments, or $8.75 million currently. As of September 30, 2016, availability under the ABL Revolver was approximately $59.4 million. However, due primarily to the seasonality of our operations, it is possible that availability under the ABL Revolver could fall below the 12.5% threshold in a future period. If the covenant trigger were to occur, the ABL Borrowers would be required to satisfy and maintain on the last day of each month a fixed charge coverage ratio of at least 1.0x for the preceding twelve‑month period. As of September 30, 2016, our fixed charge coverage ratio was approximately 1.9x. Our ability to meet the required fixed charge coverage ratio can be affected by events beyond our control, and we cannot assure you that we will meet this ratio. A breach of any of these covenants could result in a default under the ABL Revolver.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

Our headquarters are located at 10701 South River Front Parkway, Suite 300, South Jordan, Utah 84095. The lease for this office space of approximately 25,000 square feet has a term expiring December 2023. The monthly rent is approximately $49,000 for 2017, with certain adjustments for inflation plus expenses.

As of September 30, 2016, HBP owns or leases approximately 45 properties for its building products manufacturing, distribution, and sales operations. HBP has offices in Wixom, Michigan; San Marcos, California; Oceanside, California; Dallas, Texas; and Alleyton, Texas and has major manufacturing facilities in Metamora, Michigan; Elkland, Pennsylvania; Greencastle, Pennsylvania; Franklin, Ohio; Westfield, Massachusetts; Okeechobee, Florida; Oceanside, California; Alleyton, Texas; Dallas, Texas; Latta, South Carolina; Chatham, Ontario, Canada; and Rosarito, Mexico.

30


 

As of September 30, 2016, HCM owns or leases approximately 20 properties nationwide for its fly ash storage and distribution operations with East, Central, and West regional divisions. HCM also conducts operations at approximately 120 other sites via rights granted in various CCP through-put, handling and marketing contracts (for example, operating a storage or load-out facility located on utility-owned properties).

HTI owns approximately six acres in Lawrenceville, New Jersey where it maintains its principal office and research facility.

 

ITEM 3.  LEGAL PROCEEDINGS

The information set forth under the caption “Legal Matters” in Note 12 to the consolidated financial statements in Item 8 of this Form 10‑K is incorporated herein by reference.

ITEM 4.  MINE SAFETY DISCLOSURES

Our discontinued coal cleaning operations were subject to regulation by the federal Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977. Because one of Headwaters’ subsidiaries is currently performing permit reclamation responsibilities at one site, information concerning mine safety violations or other regulatory matters required by section 1503(a) of the Dodd‑Frank Wall Street Reform and Consumer Protection Act and Item 106 of Regulation S‑K (17 CFR 229.106) has been included in Exhibit 95 to this annual report.

 

PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The shares of our common stock trade on the New York Stock Exchange under the symbol HW. Options on our common stock are traded on the Chicago Board Options Exchange under the symbol HQK. The following table sets forth the low and high trading prices of our common stock as reported by the New York Stock Exchange for 2015 and 2016.

 

 

 

 

 

 

 

 

Fiscal 2015

    

Low

    

High

 

Quarter ended December 31, 2014

 

$

10.54

 

$

15.17

 

Quarter ended March 31, 2015

 

 

13.37

 

 

18.50

 

Quarter ended June 30, 2015

 

 

17.51

 

 

20.31

 

Quarter ended September 30, 2015

 

 

13.41

 

 

21.76

 

Fiscal 2016

 

 

 

 

 

 

 

Quarter ended December 31, 2015

 

$

16.55

 

$

20.93

 

Quarter ended March 31, 2016

 

 

13.62

 

 

19.89

 

Quarter ended June 30, 2016

 

 

16.49

 

 

21.25

 

Quarter ended September 30, 2016

 

 

16.34

 

 

20.05

 

 

The following graph shows a comparison of the cumulative total stockholder return, calculated on a dividend reinvestment basis, for September 30, 2011 through September 30, 2016, on our Common Stock with the New York Stock Exchange Composite Index and the Dow Jones US Building Materials & Fixtures TSM Index. The comparison assumes $100 was invested on September 30, 2011. Historic stock price performance shown on the graph is not indicative of future price performance.

31


 

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*

Among Headwaters Incorporated, the NYSE Composite Index,

and the Dow Jones US Building Materials & Fixtures TSM Index

 

Picture 7


*    $100 invested on 9/30/11 in stock or index, including reinvestment of dividends. Fiscal year ended September 30.

As of October 31, 2016 there were 279 stockholders of record of our common stock. We have not paid dividends on our common stock to date and do not intend to pay dividends in the foreseeable future. Pursuant to the terms of our debt agreements (see Note 7 to the consolidated financial statements), we are prohibited from paying cash dividends. We intend to retain earnings to finance the development and expansion of our business. Payment of common stock dividends in the future will depend upon our debt covenants, our ability to generate earnings, our need for capital, our investment opportunities and our overall financial condition, among other things.

The information required by this item regarding equity compensation plans is incorporated by reference from the information set forth in Item 12 of this Annual Report on Form 10‑K. See Note 10 to the consolidated financial statements for a description of securities authorized for issuance under equity compensation plans.

We did not have any sales of unregistered equity securities during the quarter ended September 30, 2016, but did purchase treasury stock. As described in Note 10 to the consolidated financial statements, we have a Directors’ Deferred Compensation Plan (DDCP) under which non‑employee directors can elect to defer certain compensation and choose from various options how the deferred compensation will be invested. One of the investment options is Headwaters common stock. When an eligible director chooses our common stock as an investment option, we purchase the common stock in open‑market transactions in accordance with the director’s request and hold the shares until such time as the deferred compensation obligation becomes payable. At such time, the treasury shares will be distributed to the director in satisfaction of the obligation.

32


 

The following table provides details about the treasury stock purchased in connection with the DDCP during the quarter ended September 30, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Total Number of

    

Approximate Dollar

 

 

 

Total

 

Average

 

Shares Purchased

 

Value of Shares that

 

 

 

Number of

 

Price

 

as Part of Publicly

 

May Yet Be

 

 

 

Shares

 

Paid per

 

Announced Plans

 

Purchased Under the

 

Period

 

Purchased

 

Share(1)

 

or Programs

 

Plans or Programs

 

July 1, 2016 – July 31, 2016

 

0

 

 

n/a

 

n/a

 

n/a

 

August 1, 2016 – August 31, 2016

 

5,289

 

$

19.38

 

n/a

 

n/a

 

September 1, 2016 – September 30, 2016

 

0

 

 

n/a

 

n/a

 

n/a

 

Total

 

5,289

 

$

19.38

 

n/a

 

n/a

 


(1)

Includes broker commissions.

ITEM 6.  SELECTED FINANCIAL DATA

The following selected financial data are derived from our consolidated financial statements. This information should be read in conjunction with the consolidated financial statements, related notes and other financial information included in this Form 10‑K. The selected financial data as of and for the years ended September 30, 2012 and 2013 and as of September 30, 2014 are derived from audited financial statements not included in this Form 10‑K. The selected financial data as of September 30, 2015 and 2016 and for the years ended September 30, 2014, 2015, and 2016 were derived from our audited financial statements included in this Form 10‑K.

As described in Note 2 to the consolidated financial statements, in connection with the adoption of ASU 2015‑17, we have classified all deferred income taxes as noncurrent. Accordingly, certain amounts shown below for working capital, total assets, and long-term liabilities have changed from prior years’ presentations. As described in Note 4, we have acquired several businesses, the operations of which are included in the operating data below only subsequent to the dates of acquisition. As described in Note 13, our coal cleaning business has been presented as a discontinued operation and is therefore not included in the results from continuing operations shown in the table below. As described in Notes 7 and 16, interest expense includes $24.8 million of non‑routine interest expense related to early repayments of debt in 2015 and $8.7 million of non-routine expense in 2016. As described in Notes 9 and 16, in 2015 we released approximately $109.3 million of the deferred income tax valuation allowance established in prior years, of which $96.8 million represents a non‑routine income tax benefit.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended September 30,

 

(in thousands, except per share data)

 

2012

 

2013

 

2014

 

2015

 

2016

 

OPERATING DATA:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

 

Total revenue

 

$

632,787

 

$

702,579

 

$

791,447

 

$

895,333

 

$

974,807

 

Income (loss) from continuing operations

 

 

(26,429)

 

 

8,285

 

 

16,473

 

 

132,128

 

 

49,679

 

Diluted income (loss) per share from continuing operations attributable to Headwaters Incorporated

 

 

(0.43)

 

 

0.12

 

 

0.21

 

 

1.74

 

 

0.64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30,

 

(in thousands)

 

2012

 

2013

 

2014

 

2015

 

2016

 

BALANCE SHEET DATA:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

 

Working capital

 

$

62,655

 

$

81,273

 

$

196,715

 

$

210,330

 

$

157,607

 

Net property, plant and equipment

 

 

159,706

 

 

159,619

 

 

182,111

 

 

185,718

 

 

206,792

 

Total assets

 

 

663,015

 

 

704,491

 

 

885,230

 

 

979,019

 

 

1,238,443

 

Long-term liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

493,490

 

 

443,938

 

 

592,458

 

 

558,080

 

 

746,716

 

Other

 

 

31,486

 

 

27,569

 

 

40,752

 

 

36,776

 

 

41,230

 

Total long-term liabilities

 

 

524,976

 

 

471,507

 

 

633,210

 

 

594,856

 

 

787,946

 

Total stockholders’ equity (net capital deficiency)

 

 

(3,129)

 

 

84,410

 

 

102,442

 

 

237,851

 

 

289,987

 

33


 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the information set forth under the caption entitled “ITEM 6. SELECTED FINANCIAL DATA” and the consolidated financial statements and related notes included in this Form 10‑K. Our fiscal year ends on September 30 and unless otherwise noted, references to years refer to our fiscal year rather than a calendar year.

Overview

Consolidation and Segments.    The consolidated financial statements include the accounts of Headwaters, all of our subsidiaries, and other entities in which we have a controlling interest. All significant intercompany transactions and accounts are eliminated in consolidation. We currently operate primarily in two building materials-oriented business segments: building products and construction materials, and have several product lines within those segments. The end uses for our products and materials include new housing construction, residential repair and remodeling, and commercial, institutional and infrastructure construction. Our third non-core operating segment is energy technology.

 

Operations and Products.  In the building products segment, we design, manufacture, and sell manufactured architectural stone, exterior siding accessories (such as shutters, mounting blocks, and vents), roofing materials, concrete block, windows and other building products. We manufacture our building products in approximately 25 locations. Revenues consist of product sales to wholesale and retail distributors, contractors and other users of building products.

 

Over the last several years, we have closed several acquisitions within our building products segment, as follows:

 

·

In December 2012, we acquired the assets of Kleer Lumber, Inc., a manufacturer of PVC trim board and moulding products;

 

·

In December 2013, we acquired 80% of the equity interests in the business of Roof Tile, Inc., a manufacturer of high quality concrete roof tiles and accessories sold primarily under the Entegra brand;

 

·

In May 2014, we acquired the stone coated metal roofing business of Metals USA Building Products, L.P., the products of which are sold under the Gerard and Allmet brands;

 

·

In fiscal 2015, we acquired two small businesses in the building products industry;

 

·

In November 2015, we acquired 100% of the equity interests in several related companies, together which comprise a stone-coated metal roofing business known as Metro Roof Products;

 

·

In December 2015, we acquired certain assets and assumed certain liabilities of Enviroshake Inc., a company that manufactures and sells composite roofing products;

 

·

In January 2016, we acquired certain assets of a small decking and railing business;

 

·

In April 2016, we completed the acquisition of a small concrete roof tile business; and

 

·

In August 2016, we acquired the assets of Krestmark, a business that manufactures and sells high quality vinyl windows in the U.S.

 

Our construction materials business acquires fly ash from coal-fueled electric generating utilities. Using a nationwide storage and distribution network, we sell fly ash directly to concrete manufacturers who use it as a mineral admixture for the partial replacement of portland cement in concrete. In addition to fly ash and other coal combustion products (CCP) sales, revenues also include CCP disposal services provided to utilities. In 2014, we acquired two small

34


 

businesses in the CCP industry, and in March 2016 we completed the acquisition of Synthetic Materials, LLC, a synthetic gypsum processing and marketing business.

 

The non-core energy technology segment has been focused on reducing waste and increasing the value of energy-related feedstocks, primarily in the area of low-value oil. Revenues for the energy technology segment consist primarily of catalyst sales to oil refineries. In September 2011, we committed to a plan to sell our coal cleaning business and since then the coal cleaning business has been presented as a discontinued operation. In January 2013, we sold all of our remaining coal cleaning facilities.

 

Building Products Segment.  Our strategy in the building products segment is to obtain growth with leadership economics, which includes four elements: (1) increase the number of products we are selling to core customers through internal development and bolt-on acquisitions; (2) focus on a total customer solution to value creation for our customers, rather than solely on price and product; (3) leverage our sales and marketing spend to core customers; and (4) standardize non-customer interfacing infrastructure. We believe we have successfully executed our strategy over the past several years, adding new trim, moulding, block, roofing and window products to our portfolio, while improving margins.

 

Construction Materials Segment.  The four elements noted above for our building products segment are also operative for the construction materials segment. In addition, our strategy in this segment includes the negotiation of long-term contracts with suppliers, supported by investment in transportation and storage infrastructure for the marketing and sale of CCPs. Demand for CCPs is somewhat dependent on federal and state funding of infrastructure projects, and is associated with demand for portland cement. We are continuing our efforts to expand the demand for high-quality CCPs, develop more uses for lower-quality CCPs, and expand our CCP disposal services and site service revenue generated from CCP management.

 

Seasonality and Weather.  Both our building products and construction materials segments are greatly impacted by seasonality. Accordingly, revenues and profitability are generally highest in the June and September quarters.

 

Capitalization and Liquidity.  In December 2013, we issued $150.0 million of 7¼% senior notes for net proceeds of approximately $146.7 million. Most of those net proceeds were used to acquire some of the businesses described above.

 

In connection with several transactions during the March 2015 quarter, we significantly restructured our long-term debt, including repayment of our outstanding convertible senior subordinated notes. We entered into a new Term Loan Facility, under which a senior secured loan for $425.0 million was obtained. This variable-rate loan currently carries an interest rate of 4.0% and matures in March 2022. The net proceeds of approximately $414.7 million were used to pay the redemption price in connection with the redemption of all of the outstanding 7-5/8% senior secured notes which carried a maturity date of April 2019. Also, our ABL Revolver was amended to extend its maturity to March 2020, subject to certain early termination provisions, with more favorable interest rates.

 

In August 2016, we entered into an incremental amendment to the Term Loan Facility for an additional senior secured loan totaling $350.0 million, with substantially the same terms as the original loan of $425.0 million. Net proceeds were approximately $341.6 million and were used to acquire Krestmark and to redeem the remaining outstanding $99.0 million of the 7¼% senior notes.

 

Currently, except for the required repayments of the Term Loan Facility of approximately $1.9 million per quarter, we have no expected debt maturities until March 2022. As of September 30, 2016, we had approximately $65.3 million of cash on hand and total liquidity of approximately $124.7 million. Additionally, we expect positive cash flow to be generated from operations over the next 12 months.

 

Capital expenditures for each of the fiscal years 2014 through 2016 ranged from approximately $36.0 million to $53.0 million, and are currently expected to be approximately $45.0 million to $65.0 million during 2017, depending largely on what growth opportunities are pursued.

 

35


 

In summary, our strategy for fiscal 2017 and subsequent years is to continue activities to improve operational efficiencies and reduce operating costs. We also plan to pursue growth opportunities through targeted capital expenditures and strategic acquisitions of niche products or entities that expand our current operating platform when opportunities arise.

Critical Accounting Policies and Estimates

Our significant accounting policies are identified and described in Note 2 to the consolidated financial statements. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect i) the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and ii) the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.

We continually evaluate our policies and estimation procedures. Estimates are often based on historical experience and on assumptions that are believed to be reasonable under the circumstances, but which could change in the future. Some of our accounting policies and estimation procedures require the use of substantial judgment, and actual results could differ materially from the estimates underlying the amounts reported in the consolidated financial statements. Such policies and estimation procedures have been reviewed with our Audit Committee. The following is a discussion of our critical accounting policies and estimates.

Income Taxes.  Significant estimates and judgments are routinely required in the calculation of our income tax provisions. We recognize potential liabilities for anticipated tax audit issues in the U.S. and state tax jurisdictions based on estimates of whether, and the extent to which, additional taxes and interest will be due. If events occur (or do not occur) as expected and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when it is determined the liabilities are no longer required to be recorded in the consolidated financial statements. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.

Beginning in 2011, we recorded a full valuation allowance on our net amortizable deferred tax assets and accordingly, did not recognize benefit for tax credit carryforwards, net operating loss (NOL) carryforwards or other deferred tax assets, except to the extent of earnings in 2014. We recorded approximately $3.6 million of income tax expense in 2014, primarily due to state income taxes in certain state jurisdictions where we generated taxable income.

In 2015, we recorded an income tax benefit of approximately $94.5 million, primarily due to the release of approximately $109.3 million of the valuation allowance established in prior years. A valuation allowance is required when there is significant uncertainty as to the realizability of deferred tax assets. The ability to realize deferred tax assets is dependent upon our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. We considered the following possible sources of taxable income when assessing the realization of our deferred tax assets:

·

future reversals of existing taxable temporary differences;

·

future taxable income or loss, exclusive of reversing temporary differences and carryforwards;

·

tax‑planning strategies; and

·

taxable income in prior carryback years.

We considered both positive and negative evidence in determining the continued need for a valuation allowance, including the following:

Positive evidence:

·

Current forecasts indicated that we would generate pre‑tax income and taxable income in the future.

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·

We had a three‑year cumulative income as of September 30, 2015.

·

A majority of our tax attributes have significant carryover periods of 20 years or more.

Negative evidence:

·

We operate in cyclical industries that are difficult to forecast.

We placed more weight on objectively verifiable evidence than on other types of evidence and management believed that available positive evidence outweighed the available negative evidence. Management therefore determined that we met the “more likely than not” threshold that net operating losses (NOLs), tax credits and other deferred tax assets will be realized. Accordingly, a full valuation allowance was no longer deemed to be required as of September 30, 2015. A valuation allowance of approximately $10.1 million was maintained against capital loss carryforwards, certain state NOL carryforwards, and certain tax credit carryforwards as of September 30, 2015.

All of the factors we considered in evaluating whether and when to release all or a portion of the deferred tax asset valuation allowance involved significant judgment. For example, there are many different interpretations of “cumulative income or losses in recent years” which can be used. Also, significant judgment is involved in making projections of future financial and taxable income, especially because our financial results are significantly dependent upon industry trends, including new housing construction, repair and remodeling, and infrastructure construction. Most of the end use categories in which we sell our products and services are currently in varying states of recovery from the historic downturn experienced in recent years; however, it is not possible to accurately predict whether recovery will continue, and if it does, at what rate and for how long.

In 2016, we recorded income tax expense of approximately $22.8 million. The reported 31% effective rate for 2016 is the result of being subject to normal statutory rates following the valuation allowance reversal in 2015. The reported effective tax rate is less than the statutory rate primarily due to unrecognized income tax benefits that were reversed due to audit periods that closed and changes to prior year estimated amounts for research and development tax credits.

As of September 30, 2016, our U.S. and state NOL and capital loss carryforwards totaled approximately $43.0 million (tax effected). The NOLs expire from 2017 to 2036. In addition, there are approximately $27.4 million of tax credit carryforwards as of September 30, 2016, which expire from 2025 to 2036. A valuation allowance of approximately $10.4 million was recorded against capital loss carryforwards, certain state NOL carryforwards, and certain tax credit carryforwards as of September 30, 2016.

As of September 30, 2016, we had approximately $2.6 million of unrecognized income tax benefits related to uncertain tax positions. It is reasonably possible that the amount of our unrecognized income tax benefits could change significantly within the next 12 months. These changes could be the result of ongoing tax audits, the settlement of outstanding audit issues or the lapse of tax statutes of limitation. However, due to the issues being examined, at the current time, an estimate of the range of reasonably possible outcomes cannot be made, beyond amounts currently accrued. The calculation of tax liabilities involves uncertainties in the application of complex tax regulations in multiple tax jurisdictions, and we currently have open tax years subject to examination by the IRS and state tax authorities for the years 2013 through 2016. It is not possible to predict the outcome of future audits by the IRS or any other taxing authority.

Litigation.  We have ongoing litigation and asserted claims which have been incurred during the normal course of business, including the specific matters discussed in Note 12 to the consolidated financial statements. We intend to vigorously defend or resolve these matters by settlement, as appropriate. Management does not currently believe that the outcome of these matters will have a material adverse effect on our operations, cash flow or financial position.

In accounting for legal matters, we follow the guidance in ASC Topic 450 Contingencies, under which loss contingencies are accounted for based upon the likelihood of the incurrence of a liability. If a loss contingency is “probable” and the amount of loss can be reasonably estimated, it is accrued. If a loss contingency is “probable” but the amount of loss cannot be reasonably estimated, disclosure is made. If a loss contingency is “reasonably possible,” disclosure is made, including the potential range of loss, if determinable. Loss contingencies that are “remote” are neither

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accounted for nor disclosed. We record legal fees associated with loss contingencies when incurred and do not record estimated future legal fees. Management uses outside legal counsel to assist in estimating the likelihood of the existence of liabilities with regard to all significant legal matters.

We incurred approximately $5.1 million, $2.2 million and $(1.4) million of expense (credit) for legal matters in 2014, 2015 and 2016, respectively. Except for 2014, when $2.8 million of expense was recorded for potential losses, costs for outside legal counsel comprised a majority of our litigation‑related costs in the years presented. We currently believe the range of potential loss for all unresolved legal matters, excluding costs for outside counsel, is from $0 up to the amounts sought by claimants and have recorded a liability as of September 30, 2016 of $0. The substantial claims and damages sought by claimants in excess of this amount are not currently deemed to be probable. Our outside counsel and management currently believe that unfavorable outcomes of outstanding litigation beyond the amount accrued are neither probable nor remote. Accordingly, management cannot express an opinion as to the ultimate amount, if any, of our liability, nor is it possible to estimate what litigation‑related costs will be in future periods.

The specific matters discussed in Note 12 raise difficult and complex legal and factual issues, and the resolution of these issues is subject to many uncertainties, including the facts and circumstances of each case, the jurisdiction in which each case is brought, and the future decisions of juries, judges, and arbitrators. Therefore, although management believes that the claims asserted against us in the named cases lack merit, there is a possibility of material losses in excess of the amount accrued if one or more of the cases were to be determined adversely against us for a substantial amount of the damages asserted. It is possible that a change in the estimate of probable liability could occur, and the changes could be material. Additionally, as with any litigation, these proceedings require that we incur substantial costs, including attorneys’ fees, managerial time and other personnel resources, in pursuing resolution.

Acquisitions.  A component of our growth strategy has been to acquire and integrate businesses that complement our existing operations. We account for business combinations in accordance with ASC 805 Business Combinations, which requires that we estimate at the date of acquisition the fair values of all assets acquired and liabilities assumed in a transaction. Accounting for acquisitions requires us to make significant estimates and assumptions. While we believe the estimates and assumptions we have made for completed acquisitions have been reasonable and appropriate, they are based in part on historical experience, information obtained from management of the acquired companies, and other information available at the time, much of which is inherently uncertain and subject to refinement. During the measurement period, which can be up to one year from the acquisition date, we often record adjustments to the initial estimates of value. When such adjustments are made, a corresponding change is made to recorded goodwill. Following the measurement period, any necessary adjustments to acquired assets or assumed liabilities are reflected in our results of operations.

In determining the fair values of assets acquired and liabilities assumed, we use various recognized valuation methods, including present value modeling and market values when available. Valuations are performed by management, often with the assistance of independent valuation specialists under management’s supervision. Valuation specialists are most often used in valuing intangible assets. They also assist in determining estimated useful lives over which the intangible assets should be amortized. Examples of critical factors in the valuation of intangible assets include estimates of future revenues and cash flows to be generated by the acquired business, market participant assumptions, and the determination of weighted cost of capital assumptions, royalty rates and terminal values.

Estimates are also required when a transaction involves contingent consideration, or when there are other contingent liabilities that may exist. We recognize the fair value of contingent consideration at the date of acquisition as part of the consideration transferred to acquire a business. Such liabilities are remeasured at fair value at the end of each reporting period. There have not been any material remeasurements of contingent consideration for any acquisition during the periods presented.

Acquisitions consummated during the periods presented are described in detail in Note 4 to the consolidated financial statements. As of September 30, 2016, there are several material acquisitions for which the measurement period has not closed.

Valuation of Long‑Lived Assets, including Property, Plant and Equipment, Intangible Assets and Goodwill.  Long‑lived assets consist primarily of property, plant and equipment, intangible assets and goodwill. Intangible assets

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consist primarily of identifiable intangible assets obtained in connection with acquisitions. Most of our intangible assets are being amortized, using the straight‑line method, our best estimate of the pattern of economic benefit, over their estimated useful lives. We also have some indefinite‑lived intangible assets, consisting primarily of certain tradenames, which are not amortized. Goodwill consists of the excess of the purchase price for businesses acquired over the acquisition‑date fair values of identified assets, net of liabilities assumed.

Acquisition‑date fair values of property, plant and equipment and intangible assets are estimated following the consummation of each business acquisition. Outside consultants are sometimes used to assist management in estimating the fair value of acquired property, plant and equipment, especially real estate, and in determining estimated useful lives of those assets. Outside consultants are almost always used to assist management in estimating the fair values of acquired intangible assets, and in determining their estimated useful lives.

In accordance with the requirements of ASC Topic 350 Intangibles—Goodwill and Other, we do not amortize goodwill or indefinite‑lived intangible assets. ASC Topic 350 requires us to periodically test these assets for impairment, at least annually, or sooner if indicators of possible impairment arise. As described in Note 6 to the consolidated financial statements, we perform our annual impairment testing during the fourth quarter of our fiscal year, using a June 30 test date and a one‑ to three‑step process, the first step of which is a qualitative assessment of the likelihood of an existing impairment. Our reporting units for purposes of impairment testing are the same as our operating segments. Long‑lived assets other than goodwill and indefinite‑lived intangible assets are evaluated for impairment only when indicators of potential impairment arise.

We evaluate, based on current events and circumstances, the carrying values of all long‑lived assets, as well as the related amortization periods, to determine whether adjustments to these amounts or to the estimated useful lives are required. Changes in circumstances such as technological advances, or changes in our business model or capital strategy could result in actual useful lives differing from our current estimates. In those cases where we determine that the useful lives of property, plant and equipment or intangible assets should be changed, we amortize the net book value in excess of salvage value over the revised remaining useful life, thereby prospectively adjusting depreciation or amortization expense as necessary. In 2016, approximately $2.1 million of accelerated depreciation and amortization was recognized due to changes in certain assets’ useful lives. No other significant changes to estimated useful lives were made during the periods presented.

The carrying value of a long‑lived asset other than goodwill or indefinite‑lived intangible assets is considered impaired when the anticipated cumulative undiscounted cash flow from the use and eventual disposition of that asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long‑lived asset. Indicators of impairment include such things as a significant adverse change in legal factors or in the general business climate, a history of operating or cash flow losses, a decline in operating performance, a significant change in competition, or an expectation that significant assets will be sold or otherwise disposed of.

No material impairments of long‑lived assets were recorded in any year presented. It is possible that some of our tangible or intangible long‑lived assets or goodwill could be impaired in the future and that any resulting write‑downs could be material.

In evaluating potential impairment of goodwill and indefinite‑lived intangible assets, we follow the accounting rules described in Note 6 to the consolidated financial statements, whereby companies may evaluate qualitative factors, including macroeconomic conditions, industry and market considerations, overall financial performance and cost factors, to determine whether it is necessary to perform step 1 of the two‑step impairment test. This qualitative evaluation is commonly referred to as “step 0.” We concluded that it was more likely than not that the fair values exceeded the carrying amounts of goodwill and indefinite‑lived intangible assets for both the building products and construction materials reporting units as of June 30, 2014, 2015 and 2016. Accordingly, further step 1 and step 2 testing for impairment was not required to be performed.

In summary, for both reporting units, general industry trends are more positive than in recent prior years, and the overall financial performance of these reporting units improved in 2014, in 2015 and again in 2016 as compared to

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previous years. Based on currently available information and results of operations, management currently believes it is not likely there will be any material impairments of goodwill or indefinite‑lived intangible assets in the near future.

Year Ended September 30, 2016 Compared to Year Ended September 30, 2015

 

The information set forth below compares our operating results for the year ended September 30, 2016 with operating results for the year ended September 30, 2015. Except as noted, the references to captions in the Statements of Income refer to continuing operations only.

 

Summary.  Our total revenue for 2016 was $974.8 million, up 9% from $895.3 million for 2015. Gross profit increased 7%, from $269.9 million in 2015 to $288.2 million in 2016. Operating income of $102.1 million in 2015 improved by 8%, to $110.7 million in 2016. Income from continuing operations was $49.7 million, or $0.64 per diluted share, for 2016, compared to $132.1 million, or $1.74 per diluted share, for 2015, with the decrease primarily due to a normalized income tax expense in 2016 compared to a significant income tax benefit in 2015 due to the release of deferred tax asset valuation allowances.

 

Net interest expense decreased from $64.2 million in 2015 to $42.4 million in 2016. Net interest expense included approximately $24.8 million of incremental interest expense related to early debt repayments in 2015, and approximately $10.1 million of non-routine expense related to early debt repayments and other debt transactions in 2016. Other income in 2016 includes gains on certain assets acquired in 2016 transactions. Discontinued operations were immaterial in both 2015 and 2016.

 

Revenue and Gross Margins.  The major components of segment revenue, along with gross margins, are discussed in the sections below.

 

Building Products Segment.  Building products revenue increased 14%, from $523.6 million in 2015 to $594.3 million in 2016. Gross profit increased 9% to $170.4 million in 2016 from $156.5 million in 2015, and operating income increased 2% to $65.4 million from $64.4 million.

 

Revenue growth in 2016 was due to higher sales in all of our major product groups as a result of demand driven volume increases and acquisitions completed in 2015 and 2016, partially offset by the impact of adverse weather in a number of our markets, including heavy rain in the Texas and Gulf regions. Led by our trim product, our siding products contributed significantly to overall segment revenue growth and margin expansion. Demand has also been strong in our non-residential Texas markets, offsetting any impact from low oil prices on residential construction. Operational improvement efforts in our stone and block categories also contributed to margin improvement. Several of our product groups continued to benefit from lower raw material, transportation and energy costs, which more than offset increased costs in other areas.  

 

Underlying fundamentals of our end-markets continued to strengthen in 2016 as single family housing starts are growing modestly. Builders have experienced shortages in skilled labor and construction labor, which have contributed to a more gradual recovery, but demand remains strong for our building products used in new residential construction. Many repair and remodel markets across the country are also gradually improving, although roofing demand is somewhat dependent upon storm generated activity.

 

New housing construction and residential repair and remodeling, which experienced significant declines in activity several years ago, have seen some recovery in recent years, although the recovery has been uneven. There have been and continue to be significant regional differences in the strength of the improvement that has occurred. For example, the recovery has been more robust in some sections of the West and South, including Texas, as compared to parts of the Northeast, Southeast and Midwest regions, where growth has not been as strong. Continued low oil prices may impact growth in certain areas of Texas, such as Houston, but the Dallas market continues to have a strong new residential construction market. Regional differences in the health of housing construction impact the sales of our various product groups differently. It is not possible to know whether improved selling conditions and the housing recovery will be sustainable over the long-term.

 

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According to the National Association of Home Builders (NAHB), new housing construction starts as of September 2016 were at a seasonally-adjusted annualized level of approximately 1.0 million units, compared to 1.0 million units and 1.1 million units in calendar 2014 and 2015, respectively. The most current 10- and 50-year averages for new housing starts were 1.0 million and 1.4 million units, respectively. During the last 57 years, the seven years with the lowest number of housing starts were the seven consecutive calendar years 2008 through 2014. According to a 2016 report by The Joint Center for Housing Studies of Harvard University, the U.S. homeownership rate has tumbled to its lowest level in nearly a half-century, but household growth is projected to average over 1.3 million units a year over the coming decade.

 

The National Association of Realtors reported that annual existing-home sales were at a seasonally adjusted rate of 5.5 million units in September 2016. For all of calendar 2015, there were 5.3 million units sold, compared to 4.9 million units sold in calendar 2014. Total housing inventory as of September 30, 2016 was 2.0 million existing homes for sale, representing a 4.5-month supply. This compares to a 4.8-month supply as of September 30, 2015 and a 4.3-month supply in May 2005, near the peak of the housing boom. The median sales price for existing homes of all types in September 2016 was 6% higher than in September 2015.

 

In recent years, some of our product offerings have been impacted by the continuing weakness in some sectors of repair and remodeling, including resin-based siding, which continues to be weaker than new housing construction. However, as noted above, some improvement has been observed in repair and remodeling activity recently. Key trends, such as rising home sales and values, indicate potential for further growth in repair and remodeling, which represents the largest end use for our products. As noted above, roofing repair and remodel markets can be negatively impacted by a lack of storm activity.

 

Construction Materials Segment.  Construction materials revenue increased by 5% to $370.4 million, compared to $352.3 million in 2015. The increase in revenue is primarily attributable to positive pricing for high-value CCPs and the acquisition of SynMat in March 2016. Gross profit increased by 9% to $112.0 million in 2016, compared to $103.2 million in 2015, and gross margin increased by 90 basis points to 30.2%. Operating income increased $11.1 million, or 17%, from $65.0 million in 2015 to $76.1 million in 2016, with a 210 basis point increase in operating margin. Improvements in gross profit and operating income and in the respective margins were primarily due to the continued favorable pricing environment as well as to cost management initiatives. The favorable pricing environment is the result of solid demand for high quality CCPs used to replace portland cement as well as the continued improvement in portland cement demand and pricing.

 

We believe that our fly ash supply in 2016 compared to 2015 was lower because of a temporary seasonal decline in fly ash production during the summer of 2016 due primarily to lower electricity demand and unusually low natural gas prices, both impacted by unseasonably mild temperatures. Sales volumes were also impacted by rain.

 

According to the Portland Cement Association’s (PCA) most recent forecast, U.S. cement consumption is projected to increase approximately 3.4% in calendar 2016 and approximately 4.3% in calendar 2017. It is not possible to accurately predict the future trends of cement consumption, nor the precise correlation between cement usage and fly ash sales. Nevertheless, because fly ash is sold as an admixture for the partial replacement of portland cement in a wide variety of concrete uses—including infrastructure, commercial, and residential construction—statistics and trends for portland and blended cement sales can be an indicator for fly ash sales. In April 2015, the PCA’s Chief Economist indicated that in 2013 a trough point was reached for road construction, which accounts for the largest amount of public cement consumption.

 

An important aspect of our strategy is to continue to increase our supply of high-value CCPs for marketing during the construction season. Low natural gas prices, EPA regulations, and reduced power demand, have combined to force the long-term shutdown, temporary idling, or lower utilization of multiple coal combustion power plant units, negatively impacting the supply of CCPs for beneficial use in certain areas. This trend has impacted somewhat our CCP supplies in certain regions of the country; however, we have multiple sources of supply and a broad distribution system, which allow us to move CCPs to locations where power plant units have closed. Reallocating CCP supplies can increase our transportation costs, some but not all of which we have historically been able to pass on to customers.

 

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Weather, plant outages, limits on storage capacity and other factors can create short-term supply interruptions that sometimes result in CCP shortages in certain geographic areas. We are constantly seeking opportunities to increase the supply of high-value CCPs through incremental storage, conversion, blending, treatment, and new contracts. We are also working to develop fly ash sources which are not dependent upon current electricity generation. We have been actively involved in creative strategies to secure additional supplies, and believe that some of these strategies will be operational in 2017. For example, we believe that we can reclaim high quality fly ash previously disposed by utilities, and are currently working on this initiative at multiple sites. The American Coal Ash Association (ACAA) estimates that there are hundreds of millions of tons of potentially available CCPs, much of which we believe could be reclaimed for use as fly ash.

 

During 2016, the ACAA released findings on the U.S. production and utilization of CCPs, particularly fly ash. The ACAA report, which is based on an in-depth 2011 analysis by the American Road and Transportation Builders Association, takes into account the economic and political factors that have influenced production and utilization of CCPs over the last 40 years, and predicts the availability and demand for CCPs for the next 20 years. The forward looking projections take into account historic CCP data, projected electric generation from coal-fueled utilities, and the U.S. economy.

 

CCPs are used as a supplementary cementitious material, and are widely used along with cement in concrete mixtures to enhance the strength and durability of concrete structures. Data shows that using fly ash as a partial replacement for portland cement can almost double the life of a highway system. Demand for ready mixed concrete is a primary driver for fly ash utilization. The ACAA report stated, “The utilization rate of fly ash has grown from 8.4 percent of production in 1974 to 43.7 percent in 2013, when 23.3 million tons were beneficially used.” The ACAA report continues, “Based on ready mixed concrete market projections, fly ash utilization is forecast to increase to 35.7 million tons in 2033 — a 53 percent cumulative increase over the next two decades.” Beneficial uses of fly ash include grout, mining applications, structural fill, stabilization of soils and wastes, cement raw feed, and the partial replacement of portland cement in concrete.

 

The report also predicts a steady supply of CCPs will be available due to anticipated growth in electricity demand. “Coal will continue to account for a significant percentage of U.S. electric generation during the next two decades. As a result, CCP production is expected to remain steady, increasing by 5 percent through 2033. Fly ash production is forecast to reach 54.6 million tons in 2033.”

 

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The following chart from the U.S. Energy Information Administration shows the potential significance of the major sources of electricity generation under several different scenarios, all of which show that coal will continue to be a major fuel source for many years to come.

 

Electricity-Generation v2

 

Also, as shown in the graph below from the American Road and Transportation Builders Association, CCP supply is expected to grow in the future even as electric generation remains relatively stable.

 

CCP-production-forecast v2

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Energy Technology Segment.  Energy technology segment revenue was not material for either 2016 or 2015. Revenue is primarily impacted by the timing of shipments to the three refineries which use our HCAT heavy oil upgrading catalyst. Shipments depend upon the timing of orders and customer onsite inventory levels.

 

Operating Expenses.  Selling, general and administrative expenses increased 5% from 2015 to 2016 due primarily to approximately $15.2 million of non-recurring and recurring expenses for the businesses acquired in fiscal 2015 and 2016, and to a lesser extent, organic growth in our operations. Partially offsetting these increases was lower employee incentive compensation in 2016. The change in amortization of intangible assets was due primarily to the amortizable intangible assets acquired in the 2015 and 2016 business acquisitions.

 

Net Interest Expense.  In 2016, net interest expense decreased approximately $21.8 million from 2015, due primarily to the debt restructuring that occurred in the March 2015 quarter. The 2015 restructuring transactions resulted in approximately $24.8 million of incremental interest expense related to loss on extinguishment of senior secured debt and early repayments of convertible senior subordinated notes, which transactions are described in detail in Note 7 to the consolidated financial statements. In 2016, non-routine interest expense related to early debt repayments and other debt transactions was $10.1 million. Also contributing to the decrease in interest expense in 2016 was a lower overall weighted average interest rate, resulting primarily from the 2015 debt restructuring. Based on our current debt structure and assuming no early debt repayments, interest expense is currently expected to be approximately $34.0 million in 2017.

 

Other Income.  Other income in 2016 consisted primarily of gains on certain assets being held for sale which were acquired in one of the 2016 business acquisitions. Provisional estimated values have been ascribed to the assets which have not yet been sold and at the current time there is significant uncertainty regarding the fair values of those assets. Accordingly, those provisional values could change in the future when final determinations of fair value for purchase accounting purposes have been completed. It is currently expected that additional gains could be realized in future periods as future sales transactions are consummated.

 

Income Tax Provision.  In 2015, we recorded an income tax benefit of approximately $94.5 million, primarily due to the release of approximately $109.3 million of the valuation allowance established in prior years. A valuation allowance is required when there is significant uncertainty as to the realizability of deferred tax assets. See “Critical Accounting Policies and Estimates – Income Taxes” in this management discussion for a detailed discussion of this valuation allowance. In 2016, we recorded income tax expense at a normalized rate, but until our NOL and tax credit carryforwards are exhausted, current income taxes will be minimal, representing primarily state income taxes in certain state jurisdictions. Reference is made to Note 9 to the consolidated financial statements for details about the significant income tax benefit recorded in 2015 and the 31% effective tax rate for 2016.

 

Discontinued Operations.  We recorded $0.1 million of gain from discontinued operations in 2016 and ($0.5) million of loss in 2015. The results for both periods include activity related to certain litigation which commenced prior to disposal of the business. Certain of this litigation was favorably settled during 2016, resulting in a gain of approximately $3.6 million. In accordance with terms of the settlement agreement, we could receive additional cash receipts in the future, dependent primarily upon future coal sales by the buyer. Potential future cash receipts are being recognized in the periods when received.

 

We sold all of our coal cleaning facilities in 2012 and 2013, and recognized estimated gains on the sales dates. Subsequent to the dates of sale, adjustments of the previously recognized estimated gains on the sales transactions have been recorded. We currently expect that additional adjustments to the recognized gains and losses may be recorded in the future as certain contingencies are resolved. For all sales transactions, a majority of the consideration was in the form of potential production royalties and deferred purchase price, which amounts are dependent upon the buyer’s future production levels. Potential future production royalties and deferred purchase price on the sales transactions were not considered as being probable in the original gain calculations and are being accounted for in the periods if and when any such amounts are received. Coal markets in the U.S. have deteriorated since the coal cleaning facilities were sold and there were no cash receipts for royalties or deferred purchase price in 2015 or 2016.

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In accordance with the terms of the asset purchase agreement for one of the sales transactions, the buyer of the coal cleaning facilities agreed to assume the lease and reclamation obligations related to certain of the facilities. Subsequent to the date of sale, our subsidiaries which sold the facilities amended the purchase agreement to provide the buyer with additional time to make payments, as well as fulfill contractual requirements related to the assumed reclamation obligations. One of our subsidiaries is currently performing permit reclamation responsibilities at one site. As of September 30, 2015 and 2016, approximately $7.4 million and $9.3 million, respectively, was accrued for this reclamation liability.

 

Year Ended September 30, 2015 Compared to Year Ended September 30, 2014

The information set forth below compares our operating results for the year ended September 30, 2015 with operating results for the year ended September 30, 2014. Except as noted, the references to captions in the statements of income refer to continuing operations only.

Summary.  Revenue for the year ended September 30, 2015 was $895.3 million, up 13% from $791.4 million for 2014. Gross profit increased 20%, from $225.7 million in 2014 to $269.9 million in 2015. Operating income of $66.7 million in 2014 improved by 53%, to $102.1 million in 2015. Income from continuing operations of $16.5 million, or diluted income per share of $0.21, in 2014 improved to $132.1 million, or $1.74 per diluted share, in 2015. The results for 2015 include $24.8 million of incremental interest expense recorded in the March 2015 quarter related to early debt repayments. Results for 2015 also include the non‑routine income tax benefit of $96.8 million from reversal of the income tax valuation allowance. Net income attributable to Headwaters for 2015 including discontinued operations was $130.8 million, or diluted income per share of $1.73, compared to $15.3 million, or $0.20 per diluted share, in 2014.

Revenue and Gross Margins.  The major components of segment revenue, along with gross margins, are discussed in the sections below.

Building Products Segment.  Building products revenue increased 11%, from $472.4 million in 2014 to $523.6 million in 2015, as a result of organic growth and the acquisitions of Entegra and Gerard in December 2013 and May 2014, respectively. In 2015, gross profit increased by 15%, to $156.5 million from $136.2 million in 2014, and operating income increased by 37%, to $64.4 million from $46.9 million.

Revenues increased 5% organically for the year despite soft international sales which were impacted by the strong U.S. dollar and economic challenges in Canada and some overseas markets. Growth was wide‑spread as all four of our major product groups had revenue growth in 2015. Product revenue associated with repair and remodeling construction continued to improve in 2015 as compared to 2014, despite difficult winter conditions in the Northeast during the March 2015 quarter and record rainfall in much of the U.S. during the June 2015 quarter.

Our Texas‑based block product group performed particularly well as there was strong demand for both our standard block products as well as our higher‑margin specialty blocks. Our block business’ largest exposure is to the commercial and institutional end markets, and we experienced minimal revenue impact in 2015 from lower oil prices, which can affect the strength of the Texas economy. Product introductions also helped revenue growth in 2015 as many of our new products were well received by the market. For example, our new specialty siding product that we introduced in the March 2015 quarter resulted in sales that exceeded our first year expectations.

Gross margin increased by 110 basis points to 29.9% in 2015 and the operating income margin increased by 240 basis points in 2015, as compared to 2014. We benefitted from the decline in oil prices through lower diesel costs in our block group and lower resin costs in siding accessories and roofing. Lower raw material and energy costs, combined with operational improvements, more than offset increased costs in labor, cement and aggregates.

Construction Materials Segment.  Construction materials revenue increased by 14%, to $352.3 million in 2015, compared to $309.3 million in 2014. The increase in revenue was primarily attributable to positive pricing and increases in the volume of high‑value CCPs sold. The favorable pricing environment resulted from demand for high‑quality CCPs to replace portland cement and continued strength in portland cement pricing. Service revenue represented approximately 21% of total segment revenue for 2015, compared to 25% for 2014. While site‑service revenue typically has lower margins than our product sales, they are not as seasonal as construction spending. The smaller percentage of

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service revenue to total segment revenue in 2015 as compared to 2014 was due to the completion of a number of service contracts early in the year, and from the growth in high‑quality CCP sales.

Gross profit increased by 22% to $103.2 million in 2015, compared to $84.4 million in 2014, and gross margin increased by 200 basis points to more than 29%. The operating income margin increased by 180 basis points in 2015. The improved margins for the year resulted from a shift in product mix and continued cost reductions through continuous improvement.

Energy Technology Segment.  Energy technology segment revenue in 2015 was $19.4 million, compared to $9.7 million in 2014, and gross profit in 2015 was $10.2 million compared to $5.1 million in 2014. Revenue and gross profit in 2015 benefited from profitable technology design contracts. Revenue in both years was impacted by the timing of shipments to the three refineries which used our HCAT heavy oil upgrading catalyst.

Operating Expenses.  Selling, general and administrative expenses increased 9% from 2014 to 2015 due primarily to recurring expenses of the businesses acquired during 2014 and 2015, and, to a lesser extent, an increase in incentive‑based compensation due to improved operating results in 2015. Amortization of intangible assets was lower in 2015 than in 2014 due to reduced amortization from fully amortized assets, partially offset by increased amortization of the assets acquired in the 2014 and 2015 business acquisitions.

Net Interest Expense.  In 2015, net interest expense increased approximately $17.9 million over 2014. This increase was due primarily to approximately $24.8 million of non‑routine interest expense related to the early repayments of debt during the March 2015 quarter which are described in detail in the Liquidity and Capital Resources—Financing Activities portion of this management discussion, partially offset by approximately $8.0 million of reduced interest costs incurred in the last half of 2015, also a consequence of the debt restructuring that occurred in the March 2015 quarter. 

Income Tax Provision.  In 2014, we recorded a full valuation allowance on our net amortizable deferred tax assets and accordingly, did not recognize benefit for tax credit carryforwards, NOL carryforwards or other deferred tax assets, except to the extent of earnings in that year. In 2015, we recorded an income tax benefit of approximately $94.5 million, primarily due to the release of approximately $109.3 million of the valuation allowance established in prior years. A valuation allowance is required when there is significant uncertainty as to the realizability of deferred tax assets. See “Critical Accounting Policies and Estimates—Income Taxes” in this management discussion for a detailed discussion of this valuation allowance. Reference is made to Note 9 to the consolidated financial statements for details about the significant income tax benefit recorded in 2015 and the 18% effective tax rate for 2014.

Discontinued Operations.  We recorded $0.5 million of loss from discontinued operations in 2015, representing small amounts of operating losses (primarily expenses for certain litigation which commenced prior to disposal of the business), adjustments of the previously recognized estimated gains related to the coal cleaning facilities sold in January 2013, net of an income tax benefit. We recorded $0.4 million of loss from discontinued operations in 2014, representing $3.1 million of operating losses (primarily expenses for litigation) and $2.7 million of gain related to the coal cleaning facilities sold in January 2013. The initial gain recorded on disposal was estimated, based on information available at the time, and in 2014, we received $4.7 million of deferred purchase price payments, along with the collection of certain receivables which had been reserved.

Impact of Inflation and Related Matters

In certain periods, some of our operations in the building products segment have been negatively impacted by increased raw materials costs for commodities such as polypropylene, poly-vinyl chloride (PVC), cement and aggregates. Currently, cement and aggregate costs are increasing, while resin costs are stable. In prior periods, we have experienced increases in our transportation costs in many parts of our business. We currently believe it is likely that raw materials and commodities such as fuels, along with the prices of other goods and services, could increase in future periods. We have passed certain increased costs to customers, but it is not possible to accurately predict the future trends of these costs, nor our ability to pass on future cost increases.

 

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There has been a dramatic reduction in oil prices since the summer of 2014, which has had a positive effect on fuel and transportation costs during 2015 and 2016. If oil prices were to remain near their current low level for the long-term, the positive impact on costs may continue for some time, but manufacturers of resins are anticipating increased sales prices as they modify manufacturing capacity. Further, revenues in certain of our operations could be negatively affected by lower oil prices. For example, if oil prices remained low for an extended period of time, the Texas economy could be impacted, which in turn could impact some of our Texas-based revenues.

Liquidity and Capital Resources

Summary of Cash Flow Activities.    Net cash provided by operating activities in 2016 was approximately $120.3 million, compared to net cash provided by operating activities of approximately $81.7 million in 2015, a change of $38.6 million. Most of this change was due to the $81.9 million decrease in net income in 2016, which was more than offset by a $119.5 million change related to deferred income taxes. The significant change in deferred taxes was caused by the release of substantially all of the valuation allowance in September 2015. In addition to the changes in net income and deferred income taxes, there were 1) an $8.5 million increase in depreciation and amortization in 2016, primarily the result of several business acquisitions in 2016;  2) a $12.9 million decrease in debt pre-payment premiums in 2016 compared to 2015;  3) a $4.5 million gain on assets held for sale in 2016; and  4) a $13.1 million increase related to collection of accounts receivable, primarily in the energy technology segment.

 

In 2016, our primary investing activities consisted of business acquisitions and capital expenditures, and in 2015 our primary investing activity consisted of capital expenditures. There were significant financing activities in both 2016 and 2015 related to the restructuring of our long-term debt in 2015, and both repayments on long-term debt and the issuance of long-term debt in 2016. More details about our investing and financing activities are provided in the following paragraphs.

 

Investing Activities.  In 2016, we acquired five businesses in the building products industry and one business in the construction materials industry. Combined consideration paid for all of the 2016 acquisitions, net of cash acquired, was approximately $342.4 million, subject to adjustment for certain final calculations of acquisition-date working capital, which calculations are currently expected to be finalized in the December 2016 quarter. Direct acquisition costs were not material.

 

In building products, we acquired 100% of the equity interests in several related companies, together which comprise a stone-coated metal roofing business located in California known as Metro Roof Products, and acquired certain assets and assumed certain liabilities of Enviroshake Inc., a Canadian company that manufactures and sells composite roofing products, primarily in the U.S. and Canada. We also acquired certain decking manufacturing assets which have been relocated to one of our current manufacturing sites. This acquisition provides an opportunity to expand distribution to existing customers, develop additional decking related products, and increase our product and manufacturing expertise. Our minority-owned subsidiary acquired all of the equity interests in several related companies, together which comprise a concrete roof tile business with operations primarily in Florida. This acquisition is expected to expand our presence in that niche roofing sector. Finally, we acquired substantially all of the assets and assumed certain liabilities of Krestmark Industries, L.P., a Texas-based business that manufactures and sells high quality vinyl windows in the U.S. This acquisition is a natural extension of our focus on supplying customers and homeowners with attractive products for the exterior of the home. In construction materials, we acquired 100% of the equity interests in a synthetic gypsum processing and marketing business known as Synthetic Materials, LLC, with operations in several locations in the Eastern U.S. This acquisition is expected to expand our presence in the CCP industry.

 

In 2015, we acquired the remaining 50% interest in a former equity method investee for a cash payment of approximately $1.2 million, and the assets of another company for initial cash consideration of approximately $4.5 million. Both of these companies are in the building products segment.

 

In 2015, a majority of capital expenditures for property, plant and equipment was for maintenance of operating capacity in our building products segment, with a smaller amount related to the construction materials segment and more discretionary expenditures for new product lines or projects. In 2016, capital expenditures were more evenly split between maintenance and growth. In both periods, a substantial majority of capital expenditures were made in the building products segment. Capital expenditures for 2017 are currently expected to be approximately $45.0 million to

47


 

$65.0 million, depending largely on what growth opportunities are pursued. Funding will come from working capital. As of September 30, 2016, we were committed to spend approximately $3.6 million on capital projects that were in various stages of completion.

 

We intend to continue to expand our business through growth of existing operations in our core building materials segments. Acquisitions have historically been an important part of our long-term business strategy and we continue to look for bolt-on niche acquisitions that meet our criteria and enhance product offerings to our core customer base. Current debt agreements limit potential acquisitions and investments in joint ventures. The ABL Revolver limits potential acquisitions and investments in joint ventures if pro forma net excess availability is 20% or less of total potential availability under the facility.

 

Following the sale of all remaining coal cleaning facilities in 2013, there are no remaining assets held for sale from our discontinued operations. For all sales transactions, a majority of the consideration was in the form of potential production royalties and deferred purchase price, which amounts are dependent upon plant production levels. Potential future production royalties and deferred purchase price on the sales transactions were not considered as being probable in the original gain calculations and are being accounted for in the periods if and when any such amounts are received. There were no cash receipts for royalties or deferred purchase price in 2015 or 2016.

 

One of our subsidiaries is currently performing permit reclamation responsibilities at one former coal cleaning site. As of September 30, 2016, approximately $9.3 million was accrued for this reclamation liability. It is not possible to accurately predict the timing or amounts of any future cash receipts or payments related to our discontinued coal cleaning business.

 

Financing Activities.  In March 2015, we entered into a Term Loan Facility, under which a senior secured loan for $425.0 million was obtained. In August 2016 we entered into an Incremental Amendment to the Term Loan Facility for an additional senior secured loan totaling $350.0 million. Features and restrictions relating to the Term Loan Facility are described in Note 7 to the consolidated financial statements.

 

The Term Loan Facility requires scheduled quarterly repayments in an aggregate annual amount equal to approximately 1.0% of the original combined principal amounts (subject to reduction for certain permitted prepayments), with the balance due at maturity in March 2022. Except for the required repayments of the senior secured Term Loan Facility of approximately $1.9 million per quarter, we have no expected debt maturities until March 2022. Pursuant to open market transactions during the March 2016 quarter, we repurchased and cancelled approximately $3.75 million of the 7¼% senior notes. During the September 2016 quarter, we redeemed the remaining $146.25 million of these notes at a redemption price equal to 103.625% of the principal amount. The associated premiums and accelerated amortization of debt issue costs aggregating approximately $8.3 million for all transactions were charged to interest expense.

 

We may voluntarily repay outstanding loans under the Term Loan Facility at any time without premium or penalty, other than customary breakage costs with respect to LIBO rate loans, which shall be subject to a prepayment premium of 1.0%. The Term Loan Facility requires us to prepay outstanding term loans, subject to certain exceptions, with (i) up to 50% of our annual excess cash flow, as defined, to the extent such excess cash flow exceeds $1.0 million, with such required prepayment to be reduced by the amount of voluntary prepayments of term loans and certain other types of senior secured debt; (ii) 100% of the net cash proceeds of certain non-ordinary course asset sales; and (iii) 100% of the net cash proceeds of certain issuances of debt. We were not required to make any prepayments under these requirements during 2015 or 2016.

 

The Term Loan Facility allows us to request one or more incremental term loans and certain other types of incremental debt in an aggregate amount not to exceed $150.0 million plus an additional amount which is dependent on our pro forma net leverage ratio, as defined. Any additional borrowings are contingent upon the receipt of commitments by existing or additional lenders.

 

Headwaters is a holding company and repayment of our senior secured Term Loan Facility is dependent upon cash flow generated by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. In the event of a default, the ABL Revolver limits the ability of the ABL borrowers, all of which are our

48


 

subsidiaries, to make distributions to enable us to make payments in respect of our senior secured Term Loan Facility. There are no other significant contractual or governmental restrictions on our ability to obtain funds from our guarantor subsidiaries.

 

We were in compliance with all debt covenants as of September 30, 2016. The senior secured Term Loan Facility and ABL Revolver limit the incurrence of additional debt and liens on assets, prepayment of future new subordinated debt, merging or consolidating with another company, selling all or substantially all assets, making acquisitions and investments and the payment of dividends or distributions, among other things. In addition, if availability under the ABL Revolver is less than 12.5% of the total $70.0 million commitment, or $8.75 million currently, we are required to maintain a monthly fixed charge coverage ratio of at least 1.0x for the preceding twelve-month period.

 

There have been no borrowings under the ABL Revolver since it was put in place. The ABL Revolver has a termination date of March 2020, with a contingent provision for early termination at any time within three months prior to the earliest maturity date of the Term Loan Facility, at which time any amounts borrowed must be repaid. Availability under the ABL Revolver cannot exceed $70.0 million, which includes a $35.0 million sub-line for letters of credit and a $10.5 million swingline facility. Availability under the ABL Revolver is further limited by the borrowing base valuations of the assets of our building products and construction materials segments which secure the borrowings, currently consisting of certain trade receivables and inventories. In addition to the first lien position on these assets, the ABL Revolver lenders have a second priority position on substantially all other assets.

 

As of September 30, 2016, availability under the ABL Revolver was approximately $59.4 million. However, due primarily to the seasonality of our operations, the amount of availability varies from period to period and, while not currently expected, it is possible that the availability under the ABL Revolver could fall below the 12.5% threshold, or $8.75 million, in a future period. As of September 30, 2016, our fixed charge coverage ratio, as defined in the ABL Revolver agreement, is approximately 1.9x. The fixed charge coverage ratio is calculated by dividing EBITDAR minus capital expenditures and cash payments for income taxes by fixed charges, as defined. EBITDAR consists of net income i) plus net interest expense, income taxes (as defined), depreciation and amortization, non-cash charges such as goodwill and other impairments, and rent expense; ii) plus or minus other specified adjustments such as equity earnings or loss in joint ventures. Fixed charges consist of cash payments for interest plus certain principal payments and rent expense.

 

If availability under the ABL Revolver were to decline below $8.75 million at some future date and in addition the fixed charge coverage ratio was below 1.0x, the ABL Revolver lender could issue a notice of default. If a notice of default were to become imminent, we would seek an amendment to the ABL Revolver, or alternatively, a waiver of the availability requirement and/or fixed charge coverage ratio for a period of time. We do not currently believe it is likely we will reach the lower limits of both our ABL Revolver and the fixed charge coverage ratio. See Note 7 to the consolidated financial statements for more detailed descriptions of the terms of our long-term debt and our ABL Revolver.

 

In August 2015, we filed a universal shelf registration statement with the SEC. A prospectus supplement describing the terms of any future securities to be issued is required to be filed before any offering can commence under the registration statement.

 

Working Capital.  As of September 30, 2016, our working capital was $157.6 million (including $65.3 million of cash and cash equivalents) compared to $210.3 million as of September 30, 2015. We currently expect operations to produce positive cash flow during 2017 and in future years. We also currently believe working capital will be sufficient for our operating needs for the next 12 months, and that it will not be necessary to utilize borrowing capacity under the ABL Revolver for our seasonal operational cash needs in the foreseeable future.

 

Income Taxes.  Cash outlays for income taxes were less than $5.0 million for both 2016 and 2015. As of September 30, 2016, our U.S. and state NOL and capital loss carryforwards totaled approximately $43.0 million (tax effected). The NOLs expire from 2017 to 2036. In addition, there are approximately $27.4 million of tax credit carryforwards as of September 30, 2016, which expire from 2025 to 2036.

 

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We do not currently expect cash outlays for income taxes during the next 12 months to be significant. Even though we are now recording income tax expense at a normalized rate of approximately 39%, until our NOL and tax credit carryforwards are exhausted, cash payments for income taxes will be minimal, representing primarily state income taxes in certain state jurisdictions.

 

Summary of Future Cash Requirements.  Significant cash requirements for the next 12 months, beyond seasonal operational working capital requirements, consist primarily of capital expenditures and interest payments on long-term debt. In subsequent periods, significant cash requirements will include the repayment of debt. See Note 12 to the consolidated financial statements where the potential risks of litigation are described. Adverse conclusions to those legal matters could involve material amounts of cash outlays in future periods.

Legal Matters

We have ongoing litigation and asserted claims which have been incurred during the normal course of business. Reference is made to Note 12 to the consolidated financial statements for a description of our accounting for legal costs and for other information about legal matters.

Off‑Balance Sheet Arrangements

As described in Note 12 to the consolidated financial statements, we have operating leases for certain facilities and equipment. Other than operating leases, we do not have any off‑balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, or capital resources.

Contractual Obligations, Commitments and Contingent Liabilities

The following table presents a summary by period of our contractual cash obligations as of September 30, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by Fiscal Year

 

(in millions)

 

Total

 

2017

 

2018 - 2019

 

2020 - 2021

 

After 2021

 

Senior secured term loan

    

$

768.8

    

$

7.8

    

$

15.6

    

$

15.6

    

$

729.8

 

Interest payments on long-term debt

 

 

166.4

 

 

31.0

 

 

61.2

 

 

60.0

 

 

14.2

 

Unconditional purchase obligations

 

 

220.4

 

 

25.9

 

 

49.9

 

 

51.7

 

 

92.9

 

Operating lease obligations

 

 

177.2

 

 

34.1

 

 

50.0

 

 

38.2

 

 

54.9

 

Other long-term obligations

 

 

47.2

 

 

28.7

 

 

16.4

 

 

1.6

 

 

0.5

 

Total contractual cash obligations

 

$

1,380.0

 

$

127.5

 

$

193.1

 

$

167.1

 

$

892.3

 

 

As disclosed in Note 7 to the consolidated financial statements, we have no borrowings under our ABL Revolver as of September 30, 2016. The ABL Revolver provides for potential borrowings of up to $70.0 million, which includes a $35.0 million sub‑line for letters of credit and a $10.5 million swingline facility.

As disclosed in Note 4 to the consolidated financial statements, in connection with one business acquisition, approximately $12.0 million of liabilities have been recorded for future estimated payments, all of which are currently expected to be made during 2017. This estimated amount has been included in the table above.

Reference is made to the caption “Compensation Arrangements” in Note 12 to the consolidated financial statements for a detailed discussion of potential commitments to certain officers and employees under employment agreements, executive change in control agreements, cash performance unit awards and cash‑settled SARS. Amounts in addition to those included in the table above could become obligations under the terms of those agreements, depending upon the outcomes of the future events described in Note 12.

As described in Notes 10 and 12, we have two deferred compensation plans whereby directors, officers and certain employees can elect to defer receipt of certain compensation otherwise payable when earned. Our related

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obligations to make payments under these plans, totaling approximately $18.0 million as of September 30, 2016, have not been included in the table above because of the substantial uncertainty regarding timing of these payments.

We have ongoing litigation and asserted claims which have been incurred during the normal course of business, including the specific matters discussed in Note 12. We intend to vigorously defend or resolve these matters by settlement, as appropriate. We have recorded a liability of $0 as of September 30, 2016 for all legal matters; however, it is not possible to know what amounts will ultimately be paid, nor when any such payments will occur and no amounts for legal matters have been included in the table above. We do not currently believe that the outcome of these matters will have a material adverse effect on our operations, cash flow or financial position. Final resolutions of these matters could affect the amounts included in the table.

As disclosed in Note 9 to the consolidated financial statements, we have certain unrecognized income tax benefits, including potential interest and penalties. At the current time, an estimate of the range of reasonably possible outcomes cannot be made beyond amounts currently accrued, nor can we reliably estimate the timing of any potential payments.

Recent Accounting Pronouncements

See Note 2 to the consolidated financial statements for a discussion of accounting pronouncements that have been issued which we have not yet adopted.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to financial market risks, primarily related to our stock price and variable‑rate debt. We do not use derivative financial instruments for speculative or trading purposes.

Cash Performance Unit Awards.  As described in Note 12 to the consolidated financial statements, the Compensation Committee approved grants of performance unit awards to certain officers and employees based on the achievement of cash flow generated during 2014. The terms of the awards also provided for i) adjustment for changes in Headwaters’ average stock price for the 60 days prior to and including September 30, 2014 as compared to Headwaters’ average stock price for the 60 days prior to and including September 30, 2013, and ii) potential further adjustment based on cash flows generated in the two years subsequent to the year of grant, or base performance year. Approximately $5.1 million of expense was recorded for the 2014 awards in 2014.

In 2015 and 2016, the Committee approved grants of performance unit awards to certain officers and employees for cash flow generated during those fiscal years, with terms similar to the 2014 awards described above. Approximately $8.6 million and $3.5 million of expense was recognized for these awards during 2015 and 2016, which amounts are subject to adjustment, depending on cash flows generated in future years. As of September 30, 2016, approximately $13.7 million was accrued for all performance unit awards outstanding but unpaid as of that date.

Cash‑Settled SAR Grants.  As described in Note 12 to the consolidated financial statements, in 2012 the Committee approved grants to certain officers and employees of approximately 1.0 million cash‑settled SARs, none of which remain outstanding as of September 30, 2016, the termination date of these awards. These SARs, which are considered liability awards, vested in annual installments through September 30, 2014 and were settled in cash upon exercise by the employee.

In 2011, the Committee approved grants to certain employees of approximately 0.4 million cash‑settled SARs, none of which remained outstanding as of September 30, 2015, the termination date of these awards. Compensation expense/(income) for all cash‑settled SARs was approximately $4.6 million for 2014, $3.1 million for 2015 and $(0.1) million for 2016.

The portion of total cash-based compensation expense/(income) resulting from changes in our stock price for all of the performance unit awards and cash-settled SARs described above, was approximately $6.1 million for both 2014 and 2015, and $(0.5) million for 2016.

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Variable‑Rate Debt.  As described in Note 7 to the consolidated financial statements, we have outstanding a variable‑rate Term Loan Facility which currently bears interest at 4.0%. The interest rate cannot decrease below the current level but will increase if the eurocurrency (LIBO) rate exceeds the 1% floor. Assuming there were no change in the amount of debt outstanding and the LIBO rate did increase beyond the floor, a change in the interest rate of 1% could change our interest expense by up to approximately $7.7 million per year. Also as described in Note 7, any future borrowings under our ABL Revolver will bear interest at a variable rate.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary financial data required by this Item 8 are set forth in Item 15 of this Form 10‑K. All information that has been omitted is either inapplicable or not required.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures—We maintain disclosure controls and procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 (the Exchange Act), such as this Annual Report on Form 10‑K, is recorded, processed, summarized and reported within the time periods specified by SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), to allow timely decisions regarding required disclosure.

Our management evaluated, with the participation of our CEO and CFO, the effectiveness of our disclosure controls and procedures as of September 30, 2016, pursuant to paragraph (b) of Rules 13a‑15 and 15d‑15 under the Exchange Act. This evaluation included a review of the controls’ objectives and design, the operation of the controls, and the effect of the controls on the information presented in this Annual Report. Our management, including the CEO and CFO, do not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our disclosure controls and procedures are designed to provide such reasonable assurance of achieving their objectives. Also, the projection of any evaluation of the disclosure controls and procedures to future periods is subject to the risk that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on their review and evaluation, and subject to the inherent limitations described above, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act) were effective as of September 30, 2016 at the above‑described reasonable assurance level.

Internal Control over Financial Reporting—Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even internal controls determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The effectiveness of our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the possibility of human error, and the risk of fraud. The projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of

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changes in conditions, or that the degree of compliance with policies may deteriorate. Because of these limitations, there can be no assurance that any system of internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.

There has been no change in our internal control over financial reporting during the quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and presentation of our financial statements.

Our management has assessed the effectiveness of internal control over financial reporting as of September 30, 2016 using the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on that assessment, management believes that our internal control over financial reporting was effective as of September 30, 2016.

As described in Note 4 to the consolidated financial statements, we acquired several businesses during 2016. Most elements of the internal control over financial reporting for most of the acquired businesses have been integrated into Headwaters’ internal control over financial reporting subsequent to the respective acquisition dates. However, management has excluded some elements of the internal control over financial reporting for Krestmark from our assessment of the internal control over financial reporting as of September 30, 2016. The total assets and net assets of Krestmark comprised approximately 20% and less than 1%, respectively, of the related consolidated amounts as of September 30, 2016. Krestmark’s total revenue and net income comprised approximately 1% and 2%, respectively, of the related consolidated amounts for the year ended September 30, 2016.

BDO USA, LLP, the independent registered public accounting firm which audits our consolidated financial statements, has issued the following attestation report on the effectiveness of our internal control over financial reporting.

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Headwaters Incorporated

South Jordan, Utah

We have audited Headwaters Incorporated’s internal control over financial reporting as of September 30, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Headwaters Incorporated’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As indicated in the accompanying “Item 9A, Management’s Report on Internal Control over Financial Reporting,” management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Headwaters Windows, LLC (hereinafter referred to as “Krestmark”), which was acquired on August 19, 2016 and is included in the consolidated balance sheet of Headwaters Incorporated as of September 30, 2016, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the year then ended. Krestmark constituted 20% and less than 1% of total assets and net assets, respectively, as of September 30, 2016, and 1% and 2% of revenues and net income, respectively, for the year then ended. Management did not assess the effectiveness of internal control over financial reporting of Krestmark because of the timing of this acquisition which was completed on August 19, 2016. Our audit of internal control over financial reporting of Headwaters Incorporated also did not include an evaluation of the internal control over financial reporting of Krestmark.

In our opinion, Headwaters Incorporated maintained, in all material respects, effective internal control over financial reporting as of September 30, 2016, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Headwaters Incorporated as of September 30, 2015 and 2016, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2016 and our report dated November 15, 2016 expressed an unqualified opinion thereon.

/s/ BDO USA, LLP

Costa Mesa, California

November 15, 2016

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ITEM 9B.  OTHER INFORMATION

None.

PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The applicable information to be set forth under the captions “Executive Officers,” “Corporate Governance,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Proposal No. 1—Election of Directors” in our Proxy Statement to be filed in January 2017 for the Annual Meeting of Stockholders to be held in 2017 (the “Proxy Statement”), is incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

The applicable information to be set forth under the captions “Executive Compensation” and “Corporate Governance” in the Proxy Statement is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information to be set forth under the captions “Summary Information about Incentive Compensation Plans” and “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information to be set forth under the caption “Transactions with Related Persons” in the Proxy Statement is incorporated herein by reference.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

The information to be set forth under the caption “Audit and Non‑Audit Fees” in the Proxy Statement is incorporated herein by reference.

56


 

PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)1.  Financial Statements

2.Financial Statement Schedules

All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information has been provided in the consolidated financial statements or notes thereto.

3.Listing of Exhibits

For convenience, the name Headwaters is used throughout this listing although in some cases the name Covol was used in the original instrument.

 

 

 

Exhibit No.

Description

Location

2.1 

Asset Purchase Agreement between Krestmark Industries, L.P., et. al. and Headwaters dated as of August 1, 2016

(36)

3.1.9

Amended and Restated Certificate of Incorporation of Headwaters dated 1 March 2005

(4)

3.1.10

Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Headwaters dated February 24, 2011

(18)

3.2.5

Amended and Restated By‑Laws of Headwaters

(6)

3.2.6

Amendment of Amended and Restated By‑Laws of Headwaters

(12)

4.2 

Term Loan Credit Agreement dated as of March 24, 2015 among Headwaters, the guarantors party thereto, and Deutsche Bank as administrative agent

(32)

4.2.1

Amendment No. 1 to Term Loan Credit Agreement dated as of June 30, 2016 among Headwaters, the guarantors party thereto, and Deutsche Bank as administrative agent

(35)

4.2.2

Incremental Amendment to Term Loan Credit Agreement dated as of August 19, 2016 among Headwaters, the guarantors party thereto, and Deutsche Bank as administrative agent

(38)

4.9 

Loan and Security Agreement dated as of October 27, 2009, among certain Headwaters subsidiaries and Bank of America, N.A. as the sole administrative agent, arranger and collateral agent, and the lenders named therein

(19)

4.9.1

First Amendment to Loan and Security Agreement among certain Headwaters subsidiaries and various lenders and First Amendment to Guaranty and Security Agreement, dated as of December 10, 2010

(16)

57


 

 

 

 

Exhibit No.

Description

Location

4.9.2

Second Amendment to Loan and Security Agreement and Second Amendment to Guaranty and Security Agreement, dated as of February 15, 2011 among Headwaters, certain Headwaters subsidiaries and certain lenders named therein

(17)

4.9.3

Third Amendment to Loan and Security Agreement, dated as of April 15, 2011 among Headwaters, certain Headwaters subsidiaries and certain lenders named therein

(20)

4.9.4

Fourth Amendment to Loan and Security Agreement and Third Amendment to Guaranty and Security Agreement, dated as of December 29, 2011 among Headwaters, certain Headwaters subsidiaries and certain lenders named therein

(22)

4.9.5

Fifth Amendment to Loan and Security Agreement and Fourth Amendment to Guaranty and Security Agreement, dated as of April 26, 2012 among Headwaters, certain Headwaters subsidiaries and certain lenders named therein

(24)

4.9.6

Sixth Amendment to Loan and Security Agreement, dated as of May 8, 2012 among Headwaters, certain Headwaters subsidiaries and certain lenders named therein

(25)

4.9.7

Seventh Amendment to Loan and Security Agreement, dated as of December 13, 2012 among Headwaters, certain Headwaters subsidiaries and certain lenders named therein

(26)

4.9.8

Eighth Amendment to Loan and Security Agreement and Fifth Amendment to Guaranty and Security Agreement, dated as of November 6, 2013 among Headwaters, certain Headwaters subsidiaries and certain lenders named therein

(27)

4.9.9

Ninth Amendment to Loan and Security Agreement and Sixth Amendment to Guaranty and Security Agreement, dated as of December 9, 2013 among Headwaters, certain Headwaters subsidiaries and certain lenders named therein

(28)

4.9.10

Tenth Amendment to Loan and Security Agreement, dated as of March 26, 2014 among Headwaters, certain Headwaters subsidiaries and certain lenders named therein

(30)

4.9.11

Eleventh Amendment to Loan and Security Agreement and Seventh Amendment to Guaranty and Security Agreement, dated as of March 2, 2015 among Headwaters, certain Headwaters subsidiaries and certain lenders named therein

(31)

4.9.12

Twelfth Amendment to Loan and Security Agreement and Eighth Amendment to Guaranty and Security Agreement, dated as of August 1, 2016 among Headwaters, certain Headwaters subsidiaries and certain lenders named therein

(36)

10.60 

Amended and Restated Employment Agreement with Kirk A. Benson dated as of August 1, 2016

(37)

10.103 

Employment agreement dated December 8, 2010 between Headwaters and Donald P. Newman

(15)

12 

Computation of ratio of earnings to combined fixed charges and preferred stock dividends

*

14 

Code of Ethics

(3)

21 

List of Subsidiaries of Headwaters

*

23 

Consent of BDO USA, LLP

*

31.1 

Rule 13a‑14(a)/15d‑14(a) Certification of Chief Executive Officer

*

31.2 

Rule 13a‑14(a)/15d‑14(a) Certification of Chief Financial Officer

*

32 

Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer

*

95 

Mine Safety Disclosure

*

99.1 

2000 Employee Stock Purchase Plan, as Amended and Restated Effective 5 November 2011

(22)

99.4 

2002 Stock Incentive Plan

(2)

58


 

 

 

 

Exhibit No.

Description

Location

99.7 

2003 Stock Incentive Plan

(1)

99.10 

Amended and Restated Long Term Incentive Compensation Plan (Effective March 3, 2009)

(11)

99.11 

Nominating and Corporate Governance Committee Charter, dated December 19, 2008

(10)

99.12 

Audit Committee Charter, dated December 19, 2008

(10)

99.13 

Compensation Committee Charter, dated 1 May 2015

(33)

99.17 

Form of 2006 Executive Change in Control Agreement

(5)

99.17.1 

Form of (first) Amendment to 2006 Executive Change in Control Agreement

(14)

99.17.2 

Form of (second) Amendment to 2006 Executive Change in Control Agreement

(21)

99.18 

Amended Deferred Compensation Plan

(7)

99.20 

Stock Appreciation Right Agreement (November 2007)

(8)

99.21 

Restricted Stock Award Agreement (November 2007)

(8)

99.22 

2012 Executive Master Bonus Plan

(23)

99.23 

Broad‑Based Management Bonus Plan

(24)

99.24 

Form of Common Stock Certificate

(9)

99.26 

Form of Director Restricted Stock Unit Award Agreement (January 2009)

(10)

99.29 

2010 Incentive Compensation Plan

(13)

99.29.1 

Amendment No. 1 to 2010 Incentive Compensation Plan

(23)

99.34 

Directors’ Deferred Compensation Plan

(24)

99.35 

Form of Performance Unit Award Agreement (November 2013)

(29)

99.36 

Form of Notice of Stock Appreciation Right Grant (November 2015)

(34)

99.37 

Form of Restricted Stock Award Grant Notice (November 2015)

(34)

101.INS

XBRL Instance Document

*

101.SCH

XBRL Taxonomy Extension Schema

*

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

*

101.DEF

XBRL Taxonomy Extension Definition Linkbase

*

101.LAB

XBRL Taxonomy Extension Label Linkbase

*

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

*


*Filed herewith.

Unless another exhibit number is indicated as the exhibit number for the exhibit as “originally filed,” the exhibit number in the filing in which any exhibit was originally filed and to which reference is made hereby is the same as the exhibit number assigned herein to the exhibit.

(1)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Quarterly Report on Form 10‑Q, for the quarter ended December 31, 2002.

(2)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Annual Report on Form 10‑K, for the fiscal year ended September 30, 2004.

59


 

(3)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Quarterly Report on Form 10‑Q, for the quarter ended March 31, 2005.

(4)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated March 1, 2005, filed March 3, 2005.

(5)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Quarterly Report on Form 10‑Q, for the quarter ended June 30, 2006.

(6)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Annual Report on Form 10‑K, for the fiscal year ended September 30, 2006.

(7)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Annual Report on Form 10‑K, for the fiscal year ended September 30, 2007.

(8)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Quarterly Report on Form 10‑Q, for the quarter ended December 31, 2007.

(9)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Annual Report on Form 10‑K, for the fiscal year ended September 30, 2008.

(10)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Quarterly Report on Form 10‑Q, for the quarter ended December 31, 2008.

(11)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Quarterly Report on Form 10‑Q, for the quarter ended March 31, 2009.

(12)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated December 19, 2008, filed December 22, 2008.

(13)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Quarterly Report on Form 10‑Q, for the quarter ended March 31, 2010.

(14)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Annual Report on Form 10‑K, for the fiscal year ended September 30, 2010.

(15)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated December 8, 2010, filed December 10, 2010.

(16)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated December 10, 2010, filed December 14, 2010.

(17)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated February 15, 2011, filed February 16, 2011.

(18)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated February 24, 2011, filed February 25, 2011.

(19)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K/A, for the event dated October 27, 2009, filed March 18, 2011.

(20)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Quarterly Report on Form 10‑Q, for the quarter ended March 31, 2011.

(21)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated August 5, 2011, filed August 8, 2011.

60


 

(22)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Quarterly Report on Form 10‑Q, for the quarter ended December 31, 2011.

(23)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated February 23, 2012, filed February 27, 2012.

(24)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Quarterly Report on Form 10‑Q, for the quarter ended March 31, 2012.

(25)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated May 7, 2012, filed May 9, 2012.

(26)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated December 14, 2012, filed December 17, 2012.

(27)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated November 6, 2013, filed November 12, 2013.

(28)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated December 9, 2013, filed December 12, 2013.

(29)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Quarterly Report on Form 10‑Q, for the quarter ended December 31, 2013.

(30)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Quarterly Report on Form 10‑Q, for the quarter ended March 31, 2014.

(31)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated March 2, 2015, filed March 6, 2015.

(32)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated March 24, 2015, filed March 24, 2015.

(33)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Quarterly Report on Form 10‑Q, for the quarter ended March 31, 2015.

(34)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Quarterly Report on Form 10‑Q, for the quarter ended December 31, 2015.

(35)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated June 30, 2016, filed July 6, 2016.

(36)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated August 1, 2016, filed August 2, 2016.

(37)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Quarterly Report on Form 10‑Q, for the quarter ended June 30, 2016.

(38)

Incorporated by reference to the indicated exhibit filed with Headwaters’ Current Report on Form 8‑K, for the event dated August 19, 2016, filed August 25, 2016.

(b)Exhibits

The response to this portion of Item 15 is submitted as a separate section of this report. See Item 15 (a) 3 above.

(c)Financial Statement Schedules

The response to this portion of Item 15 is submitted as a separate section of this report. See Item 15 (a) 2 above.

61


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

HEADWATERS INCORPORATED

 

 

 

 

By:

/s/ Kirk A. Benson

Kirk A. Benson
Chief Executive Officer (Principal Executive Officer)

 

 

 

 

By:

/s/ Donald P. Newman

Donald P. Newman
Chief Financial Officer (Principal Financial and Accounting Officer)

 

Date: November 15, 2016

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Harlan M. Hatfield and Donald P. Newman, and each of them, his/her true and lawful attorneys‑in‑fact and agents, each with full power of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign any and all amendments to this report on Form 10‑K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑in‑fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that each of said attorneys‑in‑fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SIGNATURE

 

 

 

 

 

TITLE

 

 

 

 

DATE

 

 

 

 

/s/ Kirk A. Benson

Kirk A. Benson

Director and Chief Executive Officer (Principal Executive Officer)

November 15, 2016

 

 

 

/s/ Donald P. Newman

Donald P. Newman

Chief Financial Officer (Principal Financial and Accounting Officer)

November 15, 2016

 

 

 

/s/ James A. Herickhoff

James A. Herickhoff

Director

November 15, 2016

 

 

 

/s/ R Sam Christensen

R Sam Christensen

Director

November 15, 2016

 

 

 

/s/ Malyn K. Malquist

Malyn K. Malquist

Director

November 15, 2016

 

 

 

/s/ Blake O. Fisher, Jr.

Blake O. Fisher, Jr.

Director

November 15, 2016

 

 

 

/s/ Sylvia Summers

Sylvia Summers

Director

November 15, 2016

 

 

 

/s/ Thomas N. Chieffe

Thomas N. Chieffe

Director

November 15, 2016

 

 

62


 

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Headwaters Incorporated

South Jordan, Utah

We have audited the accompanying consolidated balance sheets of Headwaters Incorporated (“Company”) as of September 30, 2015 and 2016 and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Headwaters Incorporated at September 30, 2015 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2016, in conformity with accounting principles generally accepted in the United States of America.

As discussed in note 2 to the consolidated financial statements in paragraph Recent Accounting Pronouncements, the Company changed its method of presentation of deferred income taxes in the consolidated balance sheet in 2016 due to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2015-17, Balance Sheet Classification of Deferred Taxes and the Company also changed its method of presentation of certain cash receipts and cash payments in the consolidated statements of cash flows in 2016 due to the adoption of FASB ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. These changes were applied retrospectively to all periods presented.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Headwaters Incorporated’s internal control over financial reporting as of September 30, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated November 15, 2016 expressed an unqualified opinion thereon.

/s/ BDO USA, LLP

Costa Mesa, California

November 15, 2016

F-1


 

HEADWATERS INCORPORATED

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

September 30,

 

(in thousands, except par value)

    

2015

    

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

142,597

 

$

65,298

 

Trade receivables, net

 

 

134,384

 

 

152,084

 

Inventories

 

 

55,074

 

 

72,668

 

Current income taxes

 

 

329

 

 

1,187

 

Other

 

 

11,827

 

 

13,517

 

Total current assets

 

 

344,211

 

 

304,754

 

Property, plant and equipment, net

 

 

185,718

 

 

206,792

 

Other assets:

 

 

 

 

 

 

 

Goodwill

 

 

178,199

 

 

290,503

 

Intangible assets, net

 

 

143,718

 

 

319,162

 

Deferred income taxes

 

 

92,852

 

 

68,059

 

Other

 

 

34,321

 

 

49,173

 

Total other assets

 

 

449,090

 

 

726,897

 

Total assets

 

$

979,019

 

$

1,238,443

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

25,306

 

$

30,211

 

Accrued personnel costs

 

 

52,544

 

 

45,366

 

Other accrued liabilities

 

 

51,781

 

 

63,785

 

Current portion of long-term debt

 

 

4,250

 

 

7,785

 

Total current liabilities

 

 

133,881

 

 

147,147

 

Long-term liabilities:

 

 

 

 

 

 

 

Long-term debt, net

 

 

558,080

 

 

746,716

 

Other

 

 

36,776

 

 

41,230

 

Total long-term liabilities

 

 

594,856

 

 

787,946

 

Total liabilities

 

 

728,737

 

 

935,093

 

Commitments and contingencies

 

 

 

 

 

 

 

Redeemable non-controlling interest in consolidated subsidiary

 

 

12,431

 

 

13,363

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value; authorized 200,000 shares; issued and outstanding: 73,896 shares at September 30, 2015 (including 83 shares held in treasury) and 74,153 shares at September 30, 2016 (including 105 shares held in treasury)

 

 

74

 

 

74

 

Capital in excess of par value

 

 

728,667

 

 

733,117

 

Retained earnings (accumulated deficit)

 

 

(489,889)

 

 

(441,793)

 

Treasury stock

 

 

(1,001)

 

 

(1,411)

 

Total stockholders’ equity

 

 

237,851

 

 

289,987

 

Total liabilities and stockholders’ equity

 

$

979,019

 

$

1,238,443

 

 

See accompanying notes.

F-2


 

HEADWATERS INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended September 30,

 

(in thousands, except per-share amounts)

    

2014

    

2015

    

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

Building products

 

$

472,434

 

$

523,643

 

$

594,281

 

Construction materials

 

 

309,337

 

 

352,263

 

 

370,439

 

Energy technology

 

 

9,676

 

 

19,427

 

 

10,087

 

Total revenue

 

 

791,447

 

 

895,333