3.Acquisitions

Roofing Businesses – On November 13, 2015, Headwaters 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. On December 3, 2015, Headwaters 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. These acquisitions are expected to expand Headwaters’ presence in the niche roofing products sector.

Combined consideration paid for the two acquisitions, net of cash acquired, was approximately $57.0 million. Direct acquisition costs were not material. Results of operations are being reported within the building products segment and have been included with Headwaters’ consolidated results beginning November 13, 2015 and December 3, 2015, respectively.

Metro is a manufacturer of stone-coated metal roofing materials in the U.S., selling products with an aesthetic resemblance to tile, shake, slate, or asphalt, but which offer the strength and durability of steel. Metro sells to both distributors and contractors. Enviroshake engineers composite roofing products that replicate the look of cedar shake, cedar shingle and slate and uses a direct distribution model to market and sell its products to customers. The acquisitions of Metro and Enviroshake increase the number of specialty niche roofing products that Headwaters provides to its core customers and is an area of continuing focus for Headwaters.

The roofing acquisitions have been accounted for as business combinations in accordance with the requirements of ASC 805 Business Combinations. The following table sets forth the combined estimated fair values of assets acquired and liabilities assumed for both acquisitions as of the acquisition dates, 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	$	7,610
Current liabilities		(1,059)
Property, plant and equipment		1,411
Intangible assets:
Customer relationships ( 12-year life)		8,040
Tradenames (indefinite life)		5,566
Intellectual property (indefinite life)		9,800
Goodwill		25,627
Net assets acquired		56,995

The process of identifying and valuing the intangible assets that were acquired is in the early stages. When those intangible assets have been identified and valued, and estimated useful lives are determined, amortization of the intangible assets will be adjusted effective as of the acquisition dates. Future growth attributable to such things as new customers, geographic presence and assembled workforce are additional assets that are not separable and which contributed to recorded goodwill, most of which expected to be tax deductible over a 15-year period.

Synthetic Materials – On March 17, 2016, Headwaters acquired 100% of the equity interests in a synthetic gypsum processing and marketing business known as Synthetic Materials, LLC (SynMat), with operations in several locations in the Eastern U.S. This acquisition is expected to expand Headwaters' presence in the CCP industry.

Consideration paid on the date of acquisition, net of cash acquired, was approximately $33.1 million, which is subject to adjustment for the final calculation of acquisition-date working capital. The working capital adjustment is currently expected to be finalized in the June 2016 quarter. In addition to the net cash paid as of the acquisition date, approximately $12.0 million of liabilities have been recorded for future estimated payments, all of which are expected to be made within 12 months from the acquisition date. Direct acquisition costs were not material. Results of operations are being reported within the construction materials segment and have been included with Headwaters' consolidated results beginning March 17, 2016.

Synthetic gypsum is used as a substitute for mined gypsum with application in the manufacture of wallboard and cement and as an agricultural soil amendment, among other uses. SynMat is a leading processor of synthetic gypsum and Headwaters expects marketing and operational synergies in the combination of Headwaters' current CCP operations with those of SynMat.

The SynMat 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	$	4,210
Current liabilities		(2,588)
Property, plant and equipment		3,258
Goodwill and intangible assets		40,243
Net assets acquired		45,123

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 March 31, 2016 balance sheet. When those intangible assets have been identified and valued, and estimated useful lives are determined, amortization of the intangible assets will be adjusted effective as of the acquisition date. Future growth attributable to such things as new customers, geographic presence and assembled workforce are additional assets that are not separable and which contributed to recorded goodwill, all of which is expected to be tax deductible over a 15-year period.

Other -- During the March 2016 quarter, Headwaters acquired certain decking manufacturing assets for cash consideration of approximately $6.3 million. The assets are being relocated to one of Headwaters’ current manufacturing sites. This acquisition provides an opportunity to expand distribution to existing customers, develop additional decking related products, and increase Headwaters' product and manufacturing expertise.

Subsequent to March 31, 2016, Headwaters completed the acquisition of a small concrete roof tile company with operations in Florida and Texas. This acquisition is expected to expand Headwaters’ existing customer base in niche concrete roofing products.

Combined Financial Information – No revenue or earnings from the acquired businesses described above are included in Headwaters’ Statements of Operations for the 2015 periods. The actual revenue from the acquired businesses included in Headwaters’ Statements of Operations for the three and six months ended March 31, 2016 was approximately $3.4 million and $5.4 million, respectively. The actual earnings (loss) from the acquired businesses included in Headwaters' Statements of Operations for the three and six months ended March 31, 2016 was approximately $(1.0) million and $(1.4) million, respectively.

The following unaudited information presents the pro forma consolidated revenue and net income for Headwaters for the periods indicated as if the 2016 acquisitions had been included in Headwaters’ consolidated results of operations beginning October 1, 2014.


		Three months ended				Six months ended
		March 31,				March 31,
Unaudited (in thousands)	2015		2016		2015		2016

Pro forma revenue	$	190,466	$	207,224	$	402,340	$	435,713
Pro forma net income (loss)	$	(24,272)	$	3,337	$	(16,569)	$	17,247

The above unaudited pro forma results have been calculated by combining the historical results of Headwaters and the acquired businesses as if all acquisitions had occurred as of the beginning of the fiscal year prior to the acquisition dates, 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 for some but not all acquisitions and therefore will change when the final intangible asset values and useful lives have been determined.

The pro forma results reflect elimination of the following expenses that were incurred in the six months ended March 31, 2016 (since for purposes of the pro forma presentation they have been reflected in 2015 instead of in 2016): $0.5 million of direct acquisition costs and $0.5 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 tangible 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 date indicated or that may be achieved in the future.

Non-controlling Interest in Consolidated Subsidiary – In fiscal 2014, 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 redemption date for the put right, Headwaters compares the carrying value of the non-controlling interest to its estimated redemption value. The estimated redemption value is calculated based on a prescribed EBITDA formula to determine the price that would be paid if the put right were to have been exercised at the end of the reporting period. If applicable, the carrying amount is increased, but not decreased, to the estimated redemption value. The following table summarizes the activity of the non-controlling interest during the six months ended March 31, 2016:


	(in thousands)
Balance as of September 30, 2015	$	12,431
Net income attributable to non-controlling interest		579
Dividends paid to non-controlling interest		(735)
Balance as of March 31, 2016	$	12,275