Acquisition of Kleer Lumber

3 Months Ended

Dec. 31, 2012

Acquisition of Kleer Lumber

Acquisition of Kleer Lumber

11. Acquisition of Kleer Lumber

On December 31, 2012, 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 will be included with Headwaters’ consolidated results beginning January 1, 2013; however, no results of operations for Kleer Lumber were included in Headwaters’ results for the December 2012 quarter.

Kleer Lumber is a manufacturer of high quality and eco-friendly cellular PVC trim board and moulding products. The acquisition of Kleer Lumber will add a full range of cellular PVC products to Headwaters’ light building products offerings, including trim boards, millwork, sheet stock, paneling, and moulding, as well as recently introduced decking and railing products. 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. Headwaters intends to introduce Kleer Lumber’s product offerings into its large, national distribution network, expanding point of sale locations. In addition, Kleer Lumber primarily distributes its products into independent lumber yards and home improvement centers located in the Northeast and Mid-Atlantic states.

Headwaters’ access to Kleer Lumber’s distribution channel may expand the light building products distribution network for existing Headwaters’ products.

Total consideration paid for Kleer Lumber, all of which was cash, was approximately $43.0 million; however, the purchase price is subject to adjustment for the final calculation of acquisition-date working capital, which calculation is currently expected to be finalized in the March 2013 quarter. 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 December 2012 statement of operations.

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, 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, particularly the third-party valuations of the fair value of acquired intangible assets; therefore, the provisional measurements shown in the table are subject to change.

(in thousands)	(Preliminary)
Current assets	$	5,520
Property, plant and equipment	4,100
Goodwill and intangible assets	36,330
Current liabilities	(3,000		)
Net assets acquired	$	42,950

The process of identifying and valuing the intangible assets that were acquired is in the early stages and all intangible assets have been included with goodwill in the December 31, 2012 balance sheet and in the above table. When the intangible assets have been identified and valued, and estimated useful lives are determined, amortization of those intangible assets will begin effective as of January 1, 2013.

The following represents the pro forma consolidated revenue and net loss for Headwaters for the periods indicated as if Kleer Lumber had been included in Headwaters’ consolidated results of operations beginning October 1, 2011.

	Three months ended December 31,
(in thousands)	2011			2012
Revenue	$	145,128		$	156,979
Net loss	(23,982		)	(5,739		)

The above pro forma results have been calculated by combining the historical results of Headwaters and Kleer Lumber as if the acquisition had occurred on October 1, 2011, and to adjust the income tax provision as if it had been calculated on the resulting, combined results. No other material pro forma adjustments were deemed necessary, either to conform Kleer Lumber to Headwaters’ accounting policies or for any other situation; however, the above pro forma results do not reflect any amortization of intangible assets for either period. Future reported pro forma results will include estimated intangible asset amortization once the intangible assets have been identified and valued and estimated useful lives have been determined. The pro forma information is not necessarily indicative of the results that would have been achieved had the transaction occurred on October 1, 2011 or that may be achieved in the future.