4. Acquisitions

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

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

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

The Kleer Lumber acquisition was accounted for as a business combination in accordance with the requirements of ASC 805 Business Combinations. The following table sets forth the estimated fair values of assets acquired and liabilities assumed as of the acquisition date:

	(in thousands)
Current assets	$	5,818
Current liabilities		(3,093	)
Property, plant and equipment		4,098
Intangible assets:
Customer relationships (15 year life)		11,100
Trade name (indefinite life)		4,800
Goodwill		20,527

Net assets acquired	$	43,250

Kleer Lumber's future growth attributable to new customers, geographic market presence and assembled workforce are additional assets that are not separable and which contributed to recorded goodwill, all of which is tax deductible over 15 years.

Entegra—On December 12, 2013, Headwaters acquired 80% of the equity interests of Roof Tile Acquisition, LLC, a privately-held Florida-based company in the light building products industry, which markets its products primarily under the Entegra brand. Entegra's results of operations have been included with Headwaters' consolidated results beginning December 13, 2013.

Entegra is a leading manufacturer of concrete roof tiles and accessories which are sold primarily into the Florida market. The acquisition of Entegra provides additional product offerings to Headwaters' current roofing products portfolio. Headwaters believes the strategic location of Entegra's centralized manufacturing plant in Florida, the quality of its contractor/customer relationships, and the scope of its products and services provide a competitive advantage. Many of its customers are currently customers of Headwaters, and provide Headwaters the opportunity to expand existing sales and distribution within the Florida market, which is one of the fastest growing states in the U.S. in terms of population.

Total consideration paid for Entegra was approximately $57.5 million, all of which was cash. Direct acquisition costs, consisting primarily of fees for legal services, totaled approximately $0.4 million and were included in selling, general and administrative expense in the statement of operations for 2014. Headwaters has the right, but not the obligation, to acquire the non-controlling 20% equity interest in Entegra for a stipulated multiple of EBITDA adjusted for certain prescribed items. This call right is exercisable at any time after five years following the date of acquisition, unless certain defined events occur prior to that time, in which case the right is exercisable earlier. The non-controlling owners have the right, but not the obligation, to require Headwaters to acquire the non-controlling 20% equity interest, again for a stipulated multiple of EBITDA adjusted for certain prescribed items. This put right is exercisable at any time after 18 months following the date of acquisition, unless certain defined events under Headwaters' control occur prior to that time, in which case the right is exercisable earlier.

The Entegra acquisition has been accounted for as a business combination in accordance with the requirements of ASC 805 Business Combinations. The following table sets forth the estimated fair values of assets acquired and liabilities assumed as of the acquisition date:

	(in thousands)
Current assets	$	8,261
Current liabilities		(3,422	)
Property, plant and equipment		10,589
Intangible assets:
Customer relationships (15 year life)		20,600
Trade name (indefinite life)		6,600
Goodwill		28,156

Net assets acquired		70,784
Less redeemable non-controlling interest		(13,252	)

Net assets attributable to Headwaters	$	57,532

Entegra's future growth attributable to new customers, geographic market presence and assembled workforce are additional assets that are not separable and which contributed to recorded goodwill, all of which is tax deductible over 15 years.

Gerard—On May 16, 2014, Headwaters acquired certain assets and assumed certain liabilities of the roofing products business of Metals USA Building Products, L.P., which products are marketed under the Gerard and Allmet brands. Gerard's results of operations are being reported within the light building products segment and have been included with Headwaters' consolidated results beginning May 16, 2014.

Gerard is one of the largest manufacturers of stone coated metal roofing materials in the U.S. and sells seven primary metal profiles. These niche roofing products combine profiles resembling tile, shake, or slate with a fire proof material and a low lifetime installed cost. The acquisition of Gerard increases the number of specialty niche roofing products that Headwaters provides to its core customers and is an area of focus for Headwaters. With the addition of Gerard, Headwaters now has three product categories in niche roofing, including resin-based composite, concrete, and metal, which could increase opportunities for cross selling. Besides broadening the niche roofing product lines, Gerard also expands Headwaters geographic footprint in the roofing category.

Total consideration paid for Gerard was approximately $27.0 million, all of which was cash. Direct acquisition costs, consisting primarily of fees for legal services, totaled approximately $0.3 million and were included in selling, general and administrative expense in the statement of operations for 2014.

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

	(in thousands)
Current assets	$	9,195
Current liabilities		(1,869	)
Property, plant and equipment		8,314
Intangible assets:
Customer relationships (15 year life)		4,000
Trade name (indefinite life)		3,900
Goodwill		7,332
Long-term liabilities		(3,906	)

Net assets acquired	$	26,966

The process of identifying and valuing the intangible assets that were acquired has not been completed. When the intangible assets have been identified and valued, and estimated useful lives are determined, amortization of those intangible assets will be adjusted effective as of May 16, 2014. Gerard's future growth attributable to new customers, geographic market presence and assembled workforce are additional assets that are not separable and which contributed to recorded goodwill, most of which is tax deductible over 15 years.

Other—During the March 2014 quarter, Headwaters acquired the assets of a company in the heavy construction materials industry located in the Northeast U.S. for initial cash consideration of approximately $3.1 million. This acquisition increased Headwaters' supply of fly ash and bottom ash, improving its competitive position in that region. During the September 2014 quarter, Headwaters acquired the assets of another company in the heavy construction materials industry located in the Southeast U.S. for cash consideration of approximately $7.4 million. This acquisition has increased Headwaters' supply of ash products produced by industrial boilers and has strengthened the ability to meet customers' needs along the Gulf Coast.

Headwaters' goodwill from all acquisitions plus all indefinite-lived trade names are tested for impairment annually. In addition, all acquired goodwill and intangible assets are subject to review for impairment if indicators of impairment develop in the future.

Combined Financial Information—The actual revenue included in Headwaters' statements of operations for 2013 and 2014 from all of the above acquisitions was approximately $28.6 million and $47.6 million, respectively, and the actual earnings (including non-controlling interest) included in Headwaters' statements of operations for 2013 and 2014 was approximately $1.6 million and $5.2 million, respectively. The following unaudited information presents the pro forma consolidated revenue and net income (loss) for Headwaters for the years indicated as if the 2013 Kleer Lumber acquisition had been included in Headwaters' consolidated results of operations beginning October 1, 2011 and the 2014 acquisitions had been included in Headwaters' consolidated results of operations beginning October 1, 2012.

Unaudited (in thousands)	2012			2013		2014
Revenue	$	670,682		$	784,395	$	827,574
Net income (loss)		(63,095	)		12,387		19,909

The above unaudited pro forma results have been calculated by combining the historical results of Headwaters and the acquisitions as if the 2013 Kleer Lumber acquisition had occurred on October 1, 2011 and the 2014 acquisitions had occurred on October 1, 2012, and then adjusting the income tax provisions as if they had been calculated on the resulting, combined results. The pro forma results include estimates for intangible asset amortization which is subject to change when the final asset values have been determined. The pro forma results reflect the following 2013 expenses in 2012 instead of in 2013: $0.9 million of direct acquisition costs, $0.5 million of nonrecurring expense related to the fair value adjustment to acquisition-date inventory, and $0.3 million of other costs; and also reflect the following 2014 expenses in 2013 instead of in 2014: $0.7 million of direct acquisition costs and $1.2 million of nonrecurring expense related to the fair value adjustments to acquisition-date inventories. For all periods presented, historical depreciation and amortization expense of the acquired companies was adjusted to reflect the acquisition date fair value amounts of the related assets. No other material pro forma adjustments were deemed necessary, either to conform the acquisitions to Headwaters' accounting policies or for any other situation. The pro forma information is not necessarily indicative of the results that would have been achieved had the transactions occurred on the dates indicated or that may be achieved in the future.

Non-controlling Interest in Consolidated Subsidiary—As described above, Headwaters acquired 80% of the equity interests of Entegra, and the non-controlling owners have the right to require Headwaters to acquire the non-controlling 20% equity interest. This put right is not deemed to be a freestanding financial instrument and because it is not solely within the control of Headwaters, the non-controlling interest does not qualify as permanent equity and has been reported outside the stockholders' equity section of the balance sheet as temporary, or mezzanine, equity. The value of the non-controlling interest was affected by the lack of control as well as the estimated fair values of the put and call rights.

Because there is no fixed or probable redemption date for the put right, Headwaters adjusts quarterly the carrying value of the non-controlling interest to reflect its estimated redemption value at each period end. Estimated redemption value is calculated primarily using the EBITDA formula described previously for determining the price that would be paid if the put right were to have been exercised at the end of the reporting period, except that the adjusted carrying amount cannot be decreased below the original acquisition date redemption amount.

The following table summarizes the activity of the non-controlling interest during 2014.

	(in thousands)
Estimated fair value as of acquisition date	$	13,252
Net income attributable to non-controlling interest		774
Dividends		(950	)
Adjustment of estimated redemption value		176

Balance as of September 30, 2014	$	13,252