Headwaters' Q2 Loss Narrower than Expected - Analyst Blog

Shares of Headwaters Incorporated HW gained around 9.5% and closed at $12.53 on May 5, since the company reported second-quarter fiscal 2014 (ended Mar 31, 2014) results on Apr 29. The company posted loss of 4 cents per share, flat compared to the prior-year quarter. The loss per share was narrower than the Zacks Consensus Estimate of a loss of 13 cents per share.

Including adjustments, Headwaters reported a loss per share of 13 cents, which was marginally lesser than the prior-year quarter's loss of 14 cents per share.

Operational Update

Despite tough winter weather, total revenue increased 11% year over year to $157 million. Revenues also surpassed the Zacks Consensus Estimate of $149 million. The overall rise in revenues reflected 6% organic growth and 5% growth from acquisitions.

Cost of sales increased 8.6% to $118 million from $108.6 million in the year-ago quarter. Gross profit rose 18.9% year over year to $38.6 million. However, gross margin expanded 160 bps (basis points) year over year to 24.6%. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) recorded 11.9% year-over-year improvement to $17.8 million.
 
Selling, general and administrative expenses increased 15% to $32.5 million from the year-earlier quarter. Operating profit in the quarter was $0.55 million compared with an operating loss of $1.1 million in the prior year quarter.

Segmental Performance

Light Building Products: Revenues increased 11% year over year to $94 million including acquisition revenue of $7.3 million. Organic growth in the segment was 2% for the quarter, led by growth in stone, block and roofing sales, partly offset by declines in siding business sales. Operating income grew 46% year over year to $1.9 million.

Heavy Construction Materials: Segment revenues in the quarter were $59 million, up 9% from $54 million in the prior-year quarter. The improvement was primarily due to increase in price and volume year-over-year. The segment's operating income improved 41% year over year to $5.2 million.
 
Energy Technology: Reported sales were $3.3 million compared with $2.2 million in the year-ago quarter. The segment reported an operating loss of $0.8 million against a loss of $1.2 million in the prior-year quarter.

Financial Update

As of Mar 31, 2014, cash and cash equivalents amounted to $154.2 million versus $75.3 million as of Sep 30, 2013. Long-term debt was $599.5 million as of Mar 31, 2014, compared with $456.9 million as of Sep 30, 2013.

Outlook

Headwaters reaffirmed its adjusted EBITDA range of $130–$145 million for fiscal 2014. Headwaters expects strong organic revenue growth and improvements in operating margins in Light Building Products and Heavy Construction Materials segment, on the back of improvement in the repair and remodel market. Its continuous focus on capital structure will help in increasing shareholder value. However, cost inflation could be a headwind, going forward.
 
Our View

Headwaters is well positioned to benefit from the strong performance of its Light Building Products and Heavy Construction Materials segments. A significant contribution from margins, together with the growing demand will help the company generate adequate cash.

In addition, Headwaters acquired 80% equity interest in the Roof Tile business.The acquisitions will help in increasing sales and distribution networks in the building products market in Florida. They will also likely stimulate sales growth on a geographical basis.

Macroeconomic factors like population growth, household formation, inventory trends and psychology of customers play key roles in the company's long-term growth. Headwaters expects to meet its targets owing to a multi-year appreciation cycle and positive remodel trends in the housing market, which will provide significant opportunities to serve the residential real estate end markets.

South Jordan, UT-based Headwaters is a diversified growth company providing building products as well as technologies and services to the heavy construction materials, light building products, and energy technology industries.

Currently, Headwaters carries a Zacks Rank #3 (Hold). Other stocks performing well in the same industry include Simpson Manufacturing Co., Inc. SSD, United Rentals, Inc. URI and Aegion Corporation AEGN. While Simpson and United Rentals carry a Zacks Rank #1 (Strong Buy), Aegion has a Zacks Rank #2 (Buy).