3.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 boards, but also millwork, sheet stock, railing, 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 primarily distributes its products into independent lumber yards located 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 the December 2012 quarter.

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. All of Headwaters’ goodwill plus the indefinite-lived trade name are tested for impairment annually, and all acquired goodwill and intangible assets are subject to review for impairment if indicators of impairment develop in the future.

Entegra — On December 12, 2013, Headwaters acquired 80% of the equity interests of Roof Tile, Inc., 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 high quality 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 strong 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 the third fastest growing state 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 the nine months ended June 30, 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, 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 values of the acquired intangible assets; therefore, the provisional measurements shown in the table are subject to change.

	(in thousands)

Current assets	$	8,260
Current liabilities	(3,422		)
Property, plant and equipment	10,589
Intangible assets:
Customer relationships (15 year life)	18,600
Trade name (indefinite life)	6,600
Goodwill	30,089
Net assets acquired	70,716

Less non-controlling interest	(13,239		)
Net assets attributable to Headwaters	$	57,477

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. All of Headwaters’ goodwill plus the indefinite-lived trade name are tested for impairment annually, and all acquired goodwill and intangible assets are subject to review for impairment if indicators of impairment develop in the future.

Gerard — On May 16, 2014, Headwaters acquired certain assets and assumed certain liabilities of the roofing products business of Metals USA Building Products, 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 the second largest manufacturer of stone coated metal roofing materials in the U.S. and sells seven primary metal profiles. These niche roofing products combine aesthetically pleasing 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 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 $28.0 million, all of which was cash; 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 September 2014 quarter. Direct acquisition costs, consisting primarily of fees for legal services, totaled approximately $0.2 million and were included in selling, general and administrative expense in the statement of operations for the quarter ended June 30, 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	$	9,358
Current liabilities	(5,637		)
Property, plant and equipment	6,617
Goodwill and intangible assets	17,664
Net assets acquired	$	28,002

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 June 30, 2014 condensed consolidated 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 be adjusted effective as of May 16, 2014.

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. Subsequent to June 30, 2014, 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.

Combined Financial Information — No revenue or earnings from the 2014 acquired businesses are included in Headwaters’ statements of operations for the 2013 periods. The actual revenue from the 2014 acquisitions included in Headwaters’ statements of operations for the three- and nine-month periods ended June 30, 2014 was approximately $15.2 million and $26.0 million, respectively, and the actual earnings including non-controlling interest from the 2014 acquisitions included in Headwaters’ statements of operations for the three- and nine-month periods ended June 30, 2014 was approximately $1.7 million and $2.6 million, respectively. The following represents the pro forma consolidated revenue and net income (loss) for Headwaters for the periods indicated as if the 2014 acquisitions had been included in Headwaters’ consolidated results of operations beginning October 1, 2012.

	Three months ended June 30,				Nine months ended June 30,
(in thousands)	2013		2014		2013			2014

Revenue	$	212,890	$	227,360	$	531,472		$	572,310
Net income (loss)	11,728		11,309		(1,440		)	1,945

The above pro forma results have been calculated by combining the historical results of Headwaters and the 2014 acquisitions as if the acquisitions had occurred on October 1, 2012, and adjusting the income tax provision as if it had been calculated on the resulting, combined results. The pro forma results include an estimate for all periods for intangible asset amortization (which is subject to change when the final asset values have been determined) and also reflect the following 2014 expenses in fiscal 2013 instead of in 2014: $0.6 million of direct acquisition costs and $1.2 million of nonrecurring expense related to the fair value adjustment to acquisition-date inventory. No other material pro forma adjustments were deemed necessary, either to conform the 2014 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 October 1, 2012 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 considered to be redeemable and because the redemption feature is not deemed to be a freestanding financial instrument and 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 fair value at each quarter end. Fair value is estimated based on the EBITDA formula described previously for determining the price that would be paid if the put right were to have been exercised at quarter end, except that the adjusted carrying amount cannot be decreased below the original acquisition date fair value amount.

The following table summarizes the activity of the non-controlling interest during the nine-month period ended June 30, 2014.

	(in thousands)

Estimated fair value as of acquisition date	$	13,239
Net income attributable to non-controlling interest	619
Dividend	(318		)
Fair value adjustment	158
Balance as of June 30, 2014	$	13,698