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Article by DailyStocks_admin    (09-19-11 02:35 AM)

Description

Headwaters Inc. Director RAYMOND J WELLER bought 17300 shares on 5-13-2011 at $ 1.73

BUSINESS OVERVIEW

General Development of Business

Headwaters Incorporated (“Headwaters”) provides products, technologies and services in the building products, construction materials and energy industries. We generate revenue by selling building products such as manufactured architectural stone, siding accessory products and concrete blocks; managing and marketing coal combustion products (“CCPs”), which are used as a replacement for portland cement in concrete; and reclaiming waste coal. We intend to continue expanding our business through growth of existing operations and commercialization of new technologies and products.

We conduct our business primarily through the following three reporting segments: light building products, heavy construction materials, and energy technology.

Light Building Products. We compete in the light building products industry, which is currently our largest reporting segment based on revenue. We have leading positions in several light building products categories.

We are a leading designer, manufacturer and marketer of siding accessories used in residential home improvement and construction. Our siding accessories include decorative window shutters, gable vents, and mounting blocks for exterior fixtures, roof ventilation, window and door trim products. We also market functional shutters and storm protection systems, specialty siding products, specialty roofing products and window wells. Last year we introduced an innovative cellular foam polyvinyl chloride, or PVC, trim board product. Our sales are primarily driven by the residential repair and remodeling construction market and, to a lesser extent, by the new residential construction market.

We are a leading producer of manufactured architectural stone. Our Eldorado Stone product line is designed and manufactured to be one of the most realistic manufactured architectural stone products in the world. We utilize two additional brands to segment the manufactured architectural stone market and sell at lower price points than the Eldorado Stone product line, allowing us to compete across a broad spectrum of customer profiles. Our manufactured stone sales are primarily driven by new residential construction demand and, to a lesser extent, by the residential repair and remodeling, as well as commercial construction markets.

We are the largest manufacturer of concrete block in the Texas market, which we believe to be one of the largest concrete block markets in the United States. We offer a variety of concrete based masonry unit products and employ a regional branding and distribution strategy. A large portion of our concrete block sales are generated from the institutional construction markets in Texas, including school construction, allowing us to benefit from positive demographic trends.

We have a large customer base for our building products, represented by approximately 4,600 non-retail ship-to locations and approximately 4,750 retail ship-to locations across the country. Sales are broadly diversified by serving a large variety of customers in various distribution channels. We believe we attract a large base of customers because we continually upgrade our product offerings through product extensions and new products and brands.

Heavy Construction Materials. We compete in the heavy construction materials industry. We are the national leader in the management and marketing of CCPs, procuring CCPs from coal-fueled electric generating utilities and supplying them to our customers in a variety of concrete infrastructure and building projects. CCPs, such as fly ash and bottom ash, are the non-carbon components of coal that remain after coal is burned. CCPs have traditionally been an environmental and economic burden for power generators but can be a source of value when properly managed.

Fly ash is principally used as a substitute for a portion of the portland cement used in concrete. Concrete made with fly ash has better performance characteristics than concrete made only from portland cement, including improved durability, decreased permeability and enhanced corrosion-resistance. Further, concrete made with CCPs is easier to work with than concrete made only with portland cement, due in part to its better pumping and forming properties. Because fly ash is generally less expensive per ton than portland cement, the manufacturing cost of concrete made with fly ash can be lower than the manufacturing cost of concrete made with portland cement.

In order to ensure a steady and reliable supply of CCPs, we enter into long-term and exclusive management contracts with coal-fueled electric generating utilities, maintain 22 stand-alone CCP distribution terminals across North America and support approximately 100 plant-site supply facilities. We own or lease approximately 1,100 rail cars and approximately 175 trucks, in addition to contracting with other carriers in order to meet transportation needs for the marketing and disposal of CCPs. Our extensive distribution network allows us to transport CCPs across the nation, including into states that represent important construction markets but that have a low production of CCPs.

We plan to grow with the expanded commercial use of CCPs and support market recognition of the performance, economic and environmental benefits of CCPs. According to American Coal Ash Association 2008 estimates, fly ash replaced approximately 15.5% of the portland cement that otherwise would have been used in concrete manufactured in the United States.

Energy Technology. We are a leader in coal cleaning and coal upgrading. We own and operate coal cleaning facilities that separate ash from waste coal to provide a refined coal product that is higher in Btu value and lower in impurities than the feedstock coal. The cleaned coal is sold primarily to electric power plants and other industrial users. We also sell cleaned coal product into metallurgical coal markets. This technology for cleaned coal allows mining companies to reclaim waste coal sites and return them to a state of beneficial use. By December 2008, we had completed construction and operation of eleven coal cleaning facilities. In response to current market conditions, we are currently operating nine of these facilities. These facilities produce coal that results in reduced sulfur oxides, nitrogen oxides and mercury emissions during the combustion process, greatly increasing cleanliness and usability. The cleaned coal product is comparable in energy content and ash to run-of-mine coal products. We believe that our sales of cleaned coal products generate refined coal tax credits under IRS Code Section 45 when the coal is sold into the steam market. In addition to coal cleaning, we are also involved in heavy oil upgrading processes, liquefaction of coal into liquid fuels and production of ethanol.

Headwaters was incorporated in Delaware in 1995. Our stock trades under the New York Stock Exchange symbol “HW.”

As used herein, “Headwaters,” “combined company,” “we,” “our” and “us” refer to Headwaters Incorporated and its consolidated subsidiaries, including Tapco International Corporation and Headwaters Construction Materials, Inc. and its subsidiaries, including Eldorado Stone LLC, and its subsidiaries and affiliates (operating in our light building products segment); Headwaters Resources, Inc. and its subsidiaries (operating in our heavy construction materials segment); Headwaters Energy Services Corp. and its subsidiaries (operating in our energy technology segment); Headwaters Heavy Oil, LLC and Headwaters Technology Innovation Group, Inc. (“HTI,” operating in our energy technology segment); unless the context otherwise requires. As used in this report, Headwaters Building Products or “HBP” refers to Tapco International Corporation and its subsidiaries and to Headwaters Construction Materials, Inc., together with its subsidiaries including “Eldorado”, which refers to Eldorado Stone LLC and its subsidiaries and affiliates); “HRI” refers to Headwaters Resources, Inc. and its consolidated subsidiaries; “HES” refers to Headwaters Energy Services Corp., together with its consolidated subsidiaries and affiliates; and “HTI” refers to Headwaters Heavy Oil, LLC and Headwaters Technology Innovation Group, Inc.; unless the context otherwise requires.

Light Building Products

We produce light building products that minimize waste, conserve natural resources, and/or use less energy in manufacturing or application. We operate leading businesses in siding accessories, manufactured architectural stone and concrete blocks. We manufacture and distribute nationally siding accessories (such as window shutters, gable vents, mounting blocks, simulated wood shake siding, and composite roofing), and professional tools used in exterior residential remodeling and construction. Our manufactured architectural stone and building accessories products have a national presence in commercial, residential and remodeling markets. We also are a leading supplier of concrete blocks and specialty blocks in Texas. We believe our traditional building products and new product offerings position us for significant growth after the end of the current downturn in residential construction.

Principal Products and their Markets

Siding and Exterior Siding Accessories . We are a leading designer, manufacturer and marketer of resin-based siding accessories and professional tools used in exterior residential home improvement and construction under the Tapco brands. These products, which are either injection-molded or extruded, enhance the appearance of homes and include decorative window shutters, gable vents, and mounting blocks for exterior fixtures, roof ventilation, window and door trim products, specialty siding products, synthetic roofing tiles, and window well systems. Professional tools include portable cutting and shaping tools used by contractors, on-site, to fabricate customized aluminum shapes that complement the installation of exterior siding.

Brands include “Tapco Integrated Tool Systems,” “Mid-America Siding Components,” “Builders Edge,” “Atlantic Premium Shutters,” “Vantage,” “The Foundry,” “InSpire,” and “WellCraft.” We market our injection-molded building product accessories to retailers and mass merchandisers through our Builders Edge and Vantage brands and to the manufactured housing market through the MHP brand. In addition, we market tools through the Tapco brand, functional shutters and storm protection systems through the Atlantic Premium Shutters brand, specialty siding product through the Foundry brand, specialty roofing products through the InSpire brand, and window wells under the WellCraft brand. Last year we introduced IQM, an innovative cellular foam trimboard product, into our distribution system.

These building products serve the needs of the siding, roofing, and window and door installation industries. Our injection-molded products are designed to enhance the exterior appearance of the home while delivering durability at a lower cost compared to similar aluminum, wood and plastic products while the functional shutters enhance the exterior appearance of the home and can be manufactured to meet certain hurricane codes.

Manufactured Architectural Stone . Under the Eldorado Stone, StoneCraft and Dutch Quality Stone brands, we offer a wide variety of high-quality manufactured architectural stone products to meet a variety of design needs. Our manufactured architectural stone siding incorporates several key features, including high aesthetic quality, ease of installation, durability, low maintenance, attractive cost relative to other siding materials and widespread availability in the marketplace. The Eldorado Stone product line is designed and manufactured to be one of the most realistic manufactured architectural stone products in the world. Our manufactured architectural stone siding is a lightweight, adhered siding product used by national, regional and local architectural firms, real estate developers, contractors, builders and homeowners. Our stone products are used in construction projects ranging from large-scale residential housing developments and commercial projects to do-it-yourself home improvement jobs. In addition, the Eldorado Stone product line is used in a variety of external and internal home applications such as walls, archways, fireplaces and landscaping. We continually introduce new products in order to improve our offering, such as our volcanic stone for the Hawaii market. We believe that our focus on product quality, breadth and innovation, combined with a geographically diversified manufacturing platform, provides us with significant marketing advantages over traditional materials such as natural stone, brick or stucco.

Concrete Block . We are one of the largest manufacturers and sellers of concrete block in the Texas market, one of North America’s largest markets. We offer a variety of concrete-based masonry products and employ a regional branding and distribution strategy. A large portion of our concrete block sales are generated from institutional construction markets in Texas, including school construction, allowing us to benefit from positive demographic trends. Fly ash is used in the manufacturing process for concrete block, brick and foundation blocks.

Manufacturing

We conduct manufacturing, distribution and sales operations for resin-based siding accessories and ancillary products through five facilities. Manufacturing assets include more than 100 injection molding presses, almost all of which are automated through robotics or conveyor systems which have reduced cycle times and have helped to reduce waste. Nonconforming output is reused as raw material, further minimizing waste.

Our manufactured architectural stone brands are currently manufactured through a network of six plants strategically situated in proximity to customers. These siding accessory and architectural stone manufacturing locations allow for a high level of customer service, shorter lead times and lower freight costs.

We operate six of the most modern concrete block and brick manufacturing facilities in the industry. Our block and brick operations are located to provide coverage of all the key metropolitan areas in Texas.

Distribution

Resin-based siding accessories and our ancillary products are distributed throughout the United States and Canada through four primary distribution channels: one-step distributors that sell directly to contractors, two-step distributors that sell our products to lumberyards and one-step distributors, retail home centers/mass merchandisers, and manufactured housing.

Manufactured architectural stone is distributed throughout the United States and Canada primarily on a wholesale basis through a network of distributors, including masonry and stone suppliers, roofing and siding materials distributors, fireplace suppliers and other contractor specialty stores. Distribution for Eldorado Stone branded products is conducted at its manufacturing facilities and at three distribution centers.

We seek to be a leader in each meaningful distribution channel for our products by providing the broadest selection coupled with high levels of customer service. We have plans to continue to introduce new products which can be incorporated into our national distribution system supply chain. New products and brands represented over $70 million or 22% of our total building products sales in 2010, and we expect the ongoing introduction of new products and brands to allow for entry into and increased presence in new markets.

Sales and Marketing

Our resin-based siding products’ sales and marketing organization supports the one-step, two-step distribution, and retail channels through various networks of sales support that include over 160 independent sales representatives and a group of business development managers, regional sales managers and sales executives.

We have a small direct sales force for manufactured architectural stone products. This sales force works closely with architects and contractors to provide information concerning the attributes and ease of installation of our manufactured stone product and to promote market acceptance over traditional building materials.

We maintain relationships with local contractors, professional builders, and other end-users by participating in over 2,000 local shows and five to seven national shows annually. Local shows, sponsored by local distributors, enable us to promote our products through hands-on comparisons to competing products. These shows enable us to receive useful feedback from local contractors, which leads to new product ideas as well as significant goodwill within the trade.

CEO BACKGROUND

Kirk A. Benson has served as a Director of Headwaters since January 1999 and as Chairman and CEO since April 1999. Mr. Benson was Senior Vice President of Foundation Health Systems, Inc., one of the nation’s largest publicly traded managed healthcare companies. Mr. Benson was with Foundation Health Systems and its predecessors for approximately ten years, holding various positions including president and chief operating officer for commercial operations, general counsel, and senior vice president for development with responsibility for merger and acquisition activity. He also holds a Master of Laws in Taxation from the University of Denver, and a Master of Accountancy and Juris Doctorate from Brigham Young University.

Experience, Qualifications, Attributes, and Skills: Mr. Benson’s long tenure as CEO of Headwaters has provided him with detailed knowledge of the Company. He has overseen its growth and transformation from a $5 million alternative energy company to a $650 million construction products business. He has insightful relationships with all the senior managers at Headwaters, as well as other stakeholders of Headwaters, including institutional investors. These leadership experiences allow Mr. Benson to communicate relevant information about Headwaters to the Board efficiently and effectively. He has extensive operational experience that provides the Board with timely and valuable insights into Company financial reports, opportunities, and risks. Mr. Benson’s broad education and experience in business, tax, accounting, and law allow him to contribute to a wide variety of Board processes and decisions.

E. J. “Jake” Garn has served as a Director of Headwaters since January 2002. Mr. Garn is a former United States Senator from the state of Utah. From 1993 to 1999, Mr. Garn served as Vice Chairman of Huntsman Corporation, a large Utah-based chemical company. From 1993 until December 2006, Mr. Garn served as a director of Morgan Stanley Funds and at the present time serves as a director of the following entities: United Space Alliance, Franklin Covey, NuSkin International, BMW Bank of NA and Escrow Bank, USA. Mr. Garn had a long and distinguished career in national politics. Mr. Garn entered politics in 1967 when he was elected to the Salt Lake City (Utah) Commission. He was elected mayor of Salt Lake City in 1971 and to the United States Senate in 1974. He served as chairman of the Senate Banking, Housing and Urban Affairs Committee and as a member of the Senate Appropriations Committee. Senator Garn was re-elected to the Senate in 1980 and again in 1986, retiring in 1992.

Experience, Qualifications, Attributes, and Skills: Mr. Garn has broad experience as a director of public companies and in legislative, regulatory, and policy processes. Mr. Garn has served on boards of several public companies, including experience with banking and financial institutions, which complements his service as chairman of the United States Senate Banking, Housing, and Urban Affairs Committee. Mr. Garn regularly reviews corporate strategies and contributes his public policy and finance knowledge to the deliberative process of Headwaters’ Board of Directors.

Raymond J. Weller has served as a Director of Headwaters since July 1991 and served as Chairman of the Board from January 1997 through July 1998. Since 1991, Mr. Weller has been President of WanSutter Employee Benefits LLC, a Utah-based insurance brokerage firm. From 1985 to 1991, Mr. Weller was an agent with the insurance brokerage of Galbraith, Benson, and McKay.

Experience, Qualifications, Attributes, and Skills: Mr. Weller has 19 years’ experience as a director for Headwaters and has participated in every major Board decision over that period of time. His longevity on the Board provides historical context to decisions and contributes to the effectiveness of the Board’s overview of management, particularly in periods of management change. Mr. Weller’s competence in compensation matters, specifically in employer medical plans has provided Headwaters with valuable insight into the design and implementation of benefit plans that have saved the Company millions of dollars, while insuring excellent care for our employees. He is well positioned to contribute to the Board’s view of long term stockholder value and is a frequent challenger of management assumptions.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Consolidation and Segments. The consolidated financial statements include the accounts of Headwaters, all of our subsidiaries, and other entities in which we have a controlling interest. All significant intercompany transactions and accounts are eliminated in consolidation.

We currently operate in three industries: light building products, heavy construction materials and energy technology. In the light building products segment, we design, manufacture, and sell manufactured architectural stone, exterior siding accessories (such as shutters, mounting blocks, and vents), concrete block and other building products. Revenues consist of product sales to wholesale and retail distributors, contractors and other users of building products. Revenues in the heavy construction materials segment consist primarily of CCP product sales along with a smaller amount from services. We are the nationwide leader in the management and marketing of CCPs, including fly ash used as a replacement for portland cement. In the energy technology segment, we are focused on reducing waste and increasing the value of energy-related feedstocks, primarily in the areas of low-value coal and oil. Revenues for the energy technology segment consist primarily of coal sales, equity earnings in joint ventures and catalyst sales.

Operations and Strategy. During the past several years, we have executed our two-fold plan of maximizing cash flow from our existing operating business units and diversifying away from our historical reliance on the legacy energy technology Section 45K business. Our past acquisition strategy targeted businesses that were leading companies in their respective industries and that had strong operating margins, thus providing additional cash flow that complements the financial performance of our existing businesses. With the addition and expansion of our CCP management and marketing business through acquisitions beginning in 2002, and the growth of our light building products business through several acquisitions beginning in 2004, we have achieved revenue growth and diversification in three business segments. In 2005 and subsequent years, we focused on the integration of our large 2004 acquisitions, including the marketing of diverse kinds of building products through our national distribution network. In 2006, we began to acquire small companies in the light building products industry with innovative products that could be marketed using the extensive distribution channels we have developed over many years.

During 2008 and 2009, our primary focus was on the development of our coal cleaning business in the energy technology segment and our use of cash consisted primarily of growth capital expenditures, a major portion of which related to coal cleaning facilities. In late 2008 and in 2009 and 2010, as the economy deteriorated, we focused on operational efficiency improvements and cost reductions in order to strengthen our balance sheet. We engaged in significant cost savings efforts in our light building products segment by reducing advertising, employee, transportation and other expenses. Our continuous improvement initiatives within our heavy construction materials segment focused on reducing our cost structure through process improvements, headcount reductions, lower maintenance spending and improved terms on operating leases. We consolidated our coal cleaning business under our heavy construction materials management to reduce overhead. We also significantly reduced corporate and research and development spending.

In 2010, we issued new senior secured notes aggregating approximately $328.3 million, for net proceeds of approximately $316.2 million. We used approximately $260.0 million of the proceeds to repay all of our obligations under the former senior secured credit facility and virtually all of our outstanding 2.875% convertible senior subordinated notes. We also entered into a $70.0 million asset based revolving loan facility (ABL Revolver), which is currently undrawn, and retired high-interest convertible debt and increased our cash balance with proceeds from the sale of our interest in the South Korean hydrogen peroxide joint venture and a federal income tax refund.

Light Building Products Segment. The key strategic element of our building products strategy is to introduce new products into our extensive distribution system, providing us a means to rapidly increase geographic coverage for new products. Our light building products segment has been significantly affected by the depressed new housing and residential remodeling markets. Accordingly, we have significantly reduced operating costs to be positively positioned to take advantage of a sustained industry turnaround when it occurs. We continue to develop new building products and to leverage our robust distribution system which we believe is a competitive advantage for us.

There has been a severe slowing in the years 2007 through 2010 of new housing starts and in home sales generally. Bank foreclosures have put a large number of homes into the market for sale, effectively limiting some of the incentives to build new homes. The homebuilding industry continues to experience a decline in demand for new homes and an oversupply of new and existing homes available for sale. Because our light building products business relies on the home improvement and remodeling markets as well as new construction, we experienced a further slowdown in sales activity but believe some stabilization has occurred during the latter part of 2010 with small increases in our year over year comparables. Limits on credit availability, further home foreclosures, home price depreciation, and an oversupply of homes for sale in the market may adversely affect homeowners’ and/or homebuilders’ ability or desire to engage in construction or remodeling, resulting in an extended period of low new construction starts and slow increases in remodeling and repair activities.

We, like many others in the light building products industry, experienced a large drop in orders and a reduction in our margins in 2008 and 2009 relative to prior years. In 2007, 2008 and 2009, we recorded significant goodwill impairments associated with our light building products business. None of the impairment charges in these years affected our cash position, cash flow from operating activities or debt covenant compliance. Weakness continued into 2010 and it is not possible to know when improved market conditions and a housing recovery will become sustainable. We can provide no assurances that the light building products market will improve in the near future.

The financial crisis affecting the banking system and financial markets and the going concern threats to banks and other financial institutions resulted in a tightening of the credit markets and a low level of liquidity in many financial markets. While mortgage and home equity loan rates have decreased, volatility continues to exist in credit and equity markets, increased borrowing requirements prevent many potential buyers from qualifying for home mortgages and equity loans and there exists a continued lack of consumer confidence. Continued tightness of mortgage lending or mortgage financing requirements could adversely affect the availability of credit for purchasers of our products and thereby reduce our sales. There could be a number of follow-on effects from the credit crisis on our business, including the inability of prospective homebuyers or remodelers to obtain credit for financing the purchase of our building products. These and other similar factors could cause decisions to delay or forego new home construction or improvement projects, cause our customers to delay or decide not to purchase our building products, or lead to a decline in customer transactions and our financial performance.

Heavy Construction Materials Segment. Our business strategy in the heavy construction materials industry is to negotiate long-term contracts with suppliers, supported by investment in transportation and storage infrastructure for the marketing and sale of CCPs. We are also continuing our efforts to expand the use of high-value CCPs, develop more uses for lower-value CCPs, and expand our CCP disposal services. While all of our businesses have been affected by the current recession, the impact on our heavy construction materials segment has been somewhat less severe than on our other segments. We anticipate that if the federal government expands the funding of roads, bridges, and other infrastructure projects as a part of economic stimulus programs, demand for CCPs could improve. Finally, a key element of our strategy is to increase our site service revenue generated from CCP management.

Energy Technology Segment. We own and operate newly-constructed and recently-renovated coal cleaning facilities that remove impurities from waste coal, resulting in higher-value, marketable coal. Construction of these facilities was our largest single investment of cash during 2008 and 2009, but is now complete. Capital expenditures in 2008 and 2009 were financed primarily with available cash from operations and lease financing. Capital expenditures in 2010 were significantly lower than prior years and this trend will continue into the future.

For 2010, coal sales were $56.4 million, compared to $58.1 million for 2009. The decrease in 2010 is partially due to the decline in demand and pricing for coal. As of September 30, 2010, we have temporarily curtailed operations at two of our coal cleaning facilities and reduced staffing at other facilities to better match coal production with current demand. As of September 30, 2010, the coal cleaning facilities were operating at less than 40% of projected capacity.

We continue to invest in research and development activities focused on energy-related technologies and nanotechnology, but at decreased levels compared to earlier years. We participate in a joint venture that operates an ethanol plant located in North Dakota. We also participated in a joint venture that owns a hydrogen peroxide plant in South Korea but we sold our interest in that joint venture during 2010. We are also investing in other energy projects such as the refining of heavy crude oils into lighter transportation fuels, and in October 2010 we announced a successful multi-week plant trial of our HCAT catalyst.

Seasonality and Weathe r . Both our light building products and our heavy construction materials segments are greatly impacted by seasonality. Revenues, profitability and EBITDA are generally highest in the June and September quarters. Further, both segments are affected by weather to the extent it impacts construction activities.

Debt and Liquidity. We incurred indebtedness in prior years to make strategic acquisitions, but were also able to increase cash flows and utilize that cash to reduce debt levels. We became highly leveraged as a result of acquisitions, but reduced our outstanding debt significantly through 2008 by using cash generated from operations, from underwritten public offerings of common stock and from proceeds from settlement of litigation. During 2005 through 2008, we made several early repayments of our long-term debt. In 2008 and 2009, early repayments of long-term debt decreased as compared to earlier years primarily due to our investments of available cash in the development of our coal cleaning business in the energy technology segment. During 2010, we repaid approximately $29.0 million of our 16% convertible senior subordinated notes leaving a balance of approximately $19.3 million. We now have no debt maturities prior to 2014, unless the holders of the remaining 16% convertible senior subordinated notes exercise their put option in 2012. Cash needs for capital expenditures were significantly lower in 2010 than in 2009 which allowed us to focus on liquidity and enabled us to continue implementing our overall operational strategy and the early repayment of debt. We currently have approximately $91.0 million of cash on hand and additional cash flow is expected to be generated from operations over the next 12 months.

In summary, our strategy for 2011 and subsequent years is to continue capital expenditures at reduced levels, continue activities to improve operations and reduce operating and general overhead costs, and to reduce our outstanding debt levels using cash on hand and cash flow from operations to the extent possible.

Critical Accounting Policies and Estimates

Our significant accounting policies are identified and described in Note 2 to the consolidated financial statements. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect i) the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and ii) the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.

We continually evaluate our policies and estimation procedures. Estimates are often based on historical experience and on assumptions that are believed to be reasonable under the circumstances, but which could change in the future. Some of our accounting policies and estimation procedures require the use of substantial judgment, and actual results could differ materially from the estimates underlying the amounts reported in the consolidated financial statements. Such policies and estimation procedures have been reviewed with our Audit Committee. The following is a discussion of critical accounting policies and estimates.

Valuation of Long-Lived Assets, including Property, Plant and Equipment, Intangible Assets and Goodwill . Long-lived assets consist primarily of property, plant and equipment, intangible assets and goodwill. Intangible assets consist primarily of identifiable intangible assets obtained in connection with acquisitions. Intangible assets are being amortized using the straight-line method, our best estimate of the pattern of economic benefit, over their estimated useful lives. Goodwill consists of the excess of the purchase price for businesses acquired over the acquisition date fair value of identified assets, net of liabilities assumed.

In accordance with the requirements of ASC Topic 350 Intangibles—Goodwill and Other, we do not amortize goodwill. ASC Topic 350 requires us to periodically test for goodwill impairment, at least annually, or sooner if indicators of possible impairment arise. We perform our annual goodwill impairment testing as of June 30, using the two-step process described in Note 5 to the consolidated financial statements. Long-lived assets other than goodwill are evaluated for impairment only when indicators of potential impairment arise.

We evaluate, based on current events and circumstances, the carrying value of all long-lived assets, as well as the related amortization periods, to determine whether adjustments to these amounts or to the estimated useful lives are required. Changes in circumstances such as technological advances, or changes in our business model or capital strategy could result in the actual useful lives differing from our current estimates. In those cases where we determine that the useful lives of property, plant and equipment or intangible assets should be changed, we amortize the net book value in excess of salvage value over the revised remaining useful life, thereby prospectively adjusting depreciation or amortization expense as necessary. No significant changes have been made to estimated useful lives during the periods presented.

As described in Note 5 to the consolidated financial statements, goodwill is tested primarily using discounted expected future cash flows. The carrying value of a long-lived asset other than goodwill is considered impaired when the anticipated cumulative undiscounted cash flow from the use and eventual disposition of that asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Indicators of impairment include such things as a significant adverse change in legal factors or in the general business climate, a history of operating or cash flow losses, a decline in operating performance, a significant change in competition, or an expectation that significant assets will be sold or otherwise disposed of.

Material goodwill impairments were recorded in 2008 and 2009 and a material impairment of property plant and equipment was recorded in 2010. In connection with the goodwill impairment testing for the light building products and energy technology reporting units in 2009, we also performed an analysis for potential impairments of other long-lived assets in those reporting units, including all intangible assets and property, plant and equipment. The results of that analysis did not result in any significant impairment of any other long-lived assets.

It is possible that some of our tangible or intangible long-lived assets or goodwill could be impaired in the future and that any resulting write-downs could be material.

Property, plant and equipment —As disclosed in Note 5, in 2010, we recorded an asset impairment in our energy technology segment. Many of our coal cleaning assets were idled or have produced coal at low levels of capacity over the last two years, primarily because of market conditions, and were cash flow negative for these or other reasons. Using assumptions in a forecast of future cash flows that were based primarily on historical operating conditions, we determined that a coal cleaning asset impairment existed at September 30, 2010 and recorded a non-cash impairment charge of $34.5 million.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview

Consolidation and Segments. The consolidated financial statements include the accounts of Headwaters, all of our subsidiaries, and other entities in which we have a controlling interest. All significant intercompany transactions and accounts are eliminated in consolidation.

We currently operate in three industries: light building products, heavy construction materials and energy technology. In the light building products segment, we design, manufacture, and sell manufactured architectural stone, exterior siding accessories (such as shutters, mounting blocks, and vents), concrete block and other building products. Revenues consist of product sales to wholesale and retail distributors, contractors and other users of building products. Revenues in the heavy construction materials segment consist primarily of CCP product sales, including fly ash used as a replacement for portland cement, along with a smaller amount from services. In the energy technology segment, we are focused on reducing waste and increasing the value of energy-related feedstocks, primarily in the areas of low-value coal and oil. Revenues for the energy technology segment consist primarily of coal sales, with smaller amounts of catalyst sales and equity earnings in joint ventures.

Operations and Strategy. During the past several years, we have executed our two-fold plan of maximizing cash flow from our existing operating business units and diversifying away from our historical reliance on the legacy energy technology Section 45K business. Our past acquisition strategy targeted businesses that were leading companies in their respective industries and that had strong operating margins, thus providing additional cash flow that complemented the financial performance of our existing businesses. With the addition and expansion of our CCP management and marketing business through acquisitions beginning in 2002, and the growth of our light building products business through several acquisitions beginning in 2004, we achieved revenue growth and diversification in three business segments. In 2005 and subsequent years, we focused on the integration of our large 2004 acquisitions, including the marketing of diverse kinds of building products through our national distribution network. In 2006, we began to acquire small companies in the light building products industry with innovative products that could be marketed using the distribution channels we developed over many years.

During 2008 and 2009, our primary focus was on the development of our coal cleaning business in the energy technology segment and our use of cash consisted primarily of growth capital expenditures, a major portion of which related to coal cleaning facilities. In late fiscal 2008 and subsequent years, as the economy deteriorated, we focused on operational efficiency improvements and cost reductions in order to strengthen our balance sheet. We engaged in significant cost savings efforts in our light building products segment by reducing advertising, employee, transportation and other expenses. Our continuous improvement initiatives within our heavy construction materials segment focused on reducing our cost structure through process improvements, headcount reductions, lower maintenance spending and improved terms on operating leases. We consolidated our coal cleaning business under our heavy construction materials management to reduce overhead. We also significantly reduced corporate and research and development spending.

Light Building Products Segment. A key strategic element of our building products strategy has been to introduce new products into our nation-wide distribution system, providing us a means to increase geographic coverage for new products. Our light building products segment has been significantly affected by the depressed new housing and residential remodeling markets. Accordingly, we have significantly reduced operating costs to be positively positioned to take advantage of a sustained industry turnaround when it occurs.

There has been a severe slowing in the calendar years 2007 through 2010 of new housing starts and in home sales generally, which has continued into 2011. Bank foreclosures have put a large number of homes into the market for sale, effectively limiting some of the incentives to build new homes. During fiscal 2011, the homebuilding industry continued to experience a decline in demand for new homes and an oversupply of new and existing homes available for sale. In addition to new construction, our light building products business also relies on the home improvement and remodeling markets. Limits on credit availability, further home foreclosures, home price depreciation, and an oversupply of homes for sale in the market may adversely affect homeowners’ and/or homebuilders’ ability or desire to engage in construction or remodeling, resulting in an extended period of low new construction starts and reduced remodeling and repair activities.

We, like many others in the light building products industry, experienced a large drop in orders and a reduction in our margins in fiscal 2008 and 2009 relative to prior years. In fiscal 2007, 2008 and 2009, we recorded significant goodwill impairments associated with our light building products business. None of the impairment charges in those years affected our cash position, cash flow from operating activities or debt covenant compliance. Weakness continued in fiscal 2010 and in 2011. It is not possible to know when improved market conditions and a housing recovery will become sustainable. We can provide no assurances that the light building products market will improve in the near future.

The financial crisis affecting the banking system and financial markets and the going concern threats to banks and other financial institutions resulted in a tightening of the credit markets and a low level of liquidity in many financial markets. While mortgage and home equity loan rates have decreased, volatility continues to exist in credit and equity markets, increased borrowing requirements prevent many potential buyers from qualifying for home mortgages and equity loans and there exists a continued lack of consumer confidence. Continued tightness of mortgage lending or mortgage financing requirements could adversely affect the availability of credit for purchasers of our products and thereby reduce our sales. There could be a number of follow-on effects from the credit crisis on our business, including the inability of prospective homebuyers or remodelers to obtain credit for financing the purchase of our building products. These and other similar factors could continue to cause decisions to delay or forego new home construction or improvement projects, cause our customers to delay or decide not to purchase our building products, or lead to a decline in customer transactions and our financial performance.

Heavy Construction Materials Segment. Our business strategy in the heavy construction materials industry is to negotiate long-term contracts with suppliers, supported by investment in transportation and storage infrastructure for the marketing and sale of CCPs. Demand for CCPs is somewhat dependent on federal and state funding of infrastructure projects, which has decreased in recent years as compared to earlier periods. We are continuing our efforts to expand the demand for high-value CCPs, develop more uses for lower-value CCPs, and expand our CCP disposal services and site service revenue generated from CCP management. While all of our businesses have been affected by the current recession, the impact on our heavy construction materials segment has been somewhat less severe than on our light building products segment.

Energy Technology Segment. We own and operate coal cleaning facilities that remove impurities from waste coal, resulting in higher-value, marketable coal. Construction of these facilities was our largest single investment of cash during fiscal 2008 and 2009, which construction was completed as of December 31, 2009. Capital expenditures in fiscal 2008 and 2009 were financed primarily with available cash from operations and lease financing.

A number of our coal cleaning facilities have produced coal at low levels and during the March 2011 quarter the facilities operated at less than 25% of aggregate capacity. These low production levels resulted in a forecast of future cash flows (based primarily on historical operating conditions) that indicated an impairment existed at March 31, 2011. Accordingly, a non-cash impairment charge of $37.0 million was recorded in the March 2011 quarter. We also recorded a non-cash impairment charge of $34.5 million in fiscal 2010. If assumptions regarding future cash flows related to the coal cleaning assets prove to be incorrect, we may be required to record additional impairment charges in future periods.

We may sell some or all of the coal cleaning facilities in the future and we are marketing our coal cleaning facilities to potential buyers. We currently estimate that the process of selling the facilities could take up to two years, but it is not possible to predict the final proceeds or ultimate success of this effort. The requirements for classification of the facilities as “held for sale,” which requirements include a relatively high degree of probability and specificity as to how and when the assets will be sold, have not been met.

We continue to invest in research and development activities focused on energy-related technologies and nanotechnology, but at decreased levels compared to earlier years. We participate in a joint venture that operates an ethanol plant located in North Dakota. We also participated in a joint venture that owns a hydrogen peroxide plant in South Korea, but we sold our interest in that joint venture during fiscal 2010. We are also investing in other energy projects such as the refining of heavy crude oils into lighter transportation fuels. In January 2011, we announced the decision by a refinery to commercially implement our HCAT® technology following a lengthy evaluation of the technology.

Seasonality and Weather. Both our light building products and our heavy construction materials segments are greatly impacted by seasonality. Revenues, profitability and EBITDA are generally highest in the June and September quarters. Further, both segments are affected by weather to the extent it impacts construction activities.

Debt and Liquidity. We incurred indebtedness in prior years to make strategic acquisitions, but were also able to increase cash flows and utilize that cash to reduce debt levels. We became highly leveraged as a result of acquisitions, but reduced our outstanding debt significantly through 2008 by using cash generated from operations, from underwritten public offerings of common stock and from proceeds from settlement of litigation. During 2005 through 2008, we made several early repayments of our long-term debt. In subsequent years, early repayments of long-term debt decreased as compared to earlier years primarily due to our investments of available cash in the development of our coal cleaning business in the energy technology segment.

In fiscal 2010, we issued 11-3/8% senior secured notes aggregating approximately $328.3 million, for net proceeds of approximately $316.2 million. We used approximately $260.0 million of the proceeds to repay all of our obligations under the former senior secured credit facility and our outstanding 2.875% convertible senior subordinated notes. We also entered into a $70.0 million asset based revolving loan facility (ABL Revolver) which is currently undrawn. During fiscal 2010 and 2011, we repaid most of our 16% convertible senior subordinated notes and a portion of our 14.75% convertible senior subordinated notes, largely with proceeds from the sale of our interest in the South Korean hydrogen peroxide joint venture and a 2010 federal income tax refund. In March 2011, we again restructured our long-term debt by issuing $400.0 million of 7-5/8% senior secured notes for net proceeds of approximately $392.8 million. We used most of those net proceeds to repay the 11-3/8% senior secured notes issued in fiscal 2010 and the related early repayment premium of approximately $59.0 million. The 7-5/8% senior secured notes mature in April 2019. We now have no debt maturities prior to 2014, unless the holders of the remaining 16% convertible senior subordinated notes exercise their put option on June 1, 2012.

Capital expenditures in fiscal 2010 and 2011 were significantly lower than prior years and this trend is currently expected to continue. This has allowed us to focus on liquidity and the early repayment of debt and enabled us to continue implementing our overall operational strategy. We currently have approximately $34.9 million of cash on hand and additional cash flow is expected to be generated from operations over the next 12 months.

In summary, our strategy for 2011 and subsequent years is to continue capital expenditures at reduced levels, continue activities to improve operations and reduce operating and general overhead costs, and to reduce our outstanding debt levels to the extent possible using cash on hand, cash flow from operations and cash from the sale of non-core assets. We also may review strategic acquisitions of products or entities that expand our current operating platform when opportunities arise.

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

The information set forth below compares our operating results for the quarter ended June 30, 2011 (2011) with operating results for the quarter ended June 30, 2010 (2010).

Summary . Our total revenue for the June 2011 quarter was $172.3 million, down 10% from $192.2 million for the June 2010 quarter. Gross profit decreased 26%, from $55.0 million in 2010 to $40.5 million in 2011. Operating income decreased from $13.4 million in 2010 to $8.9 million in 2011, and the 2011 net loss was $(6.3) million, or a diluted loss per share of $(0.10), compared to net income of $1.5 million, or $0.03 per diluted share, in 2010.

Revenue and Gross Margins . The major components of revenue, along with gross margins, are discussed in the sections below, by segment.

Light Building Products Segment . Sales of light building products in 2011 were $91.6 million with a corresponding gross profit of $25.5 million. Sales of light building products in 2010 were $95.1 million with a corresponding gross profit of $29.9 million. The decrease in our sales of light building products in 2011 was due primarily to a weather-related slow start to the construction season. Sales in the June 2010 quarter were also favorably impacted by the government home purchase incentive programs. There were lower sales from our siding accessory and manufactured architectural stone categories, where sales decreased approximately 6% in the quarter, but sales in our regional concrete block category increased approximately 6% in 2011. The gross margin decreased primarily because of increases in transportation, materials, production costs and higher depreciation.

The significant weakness in the new housing and residential remodeling market which began several years ago has continued in fiscal 2011. We believe our niche strategy and our focus on productivity improvements and cost reductions have tempered somewhat the impact of the severe slowdown in the housing market; however, the recession has resulted in high unemployment, adding to the high level of home foreclosures, putting additional homes on the market and further reducing the demand for new construction.

New housing starts according to the National Association of Home Builders were 0.6 million and 0.5 million units in calendar 2009 and 2010, respectively. Through June 2011, housing starts were at a seasonally adjusted annual rate of 0.6 million units. These numbers compare to 10- and 50-year averages of 1.4 million and 1.5 million units, respectively. Our light building products business relies on the home improvement and remodeling market as well as new construction. The U.S. Census Bureau’s Value of Private Residential Construction Spending Put in Place data on homeowner improvement activity shows that the four-quarter moving average peaked at $146.2 billion in the second quarter of calendar 2007 and fell to $110.8 billion in the first quarter of calendar 2011. The Leading Indicator of Remodeling Activity estimate issued by the Joint Center for Housing Studies at Harvard University has estimated that the four-quarter moving average will be $118.3 billion in the third quarter of calendar 2011, before falling to $106.5 billion in the first quarter of calendar 2012, a level not experienced since mid calendar 2004.

CONF CALL

Tricia Ross

Good morning, everyone, and thank you for joining us for the Headwaters Incorporated Third Quarter 2011 Conference Call. There are slides accompanying today's presentation that can be found on the webcast link at Headwaters Incorporated under the Investor Relations section of Conferences and Presentations. Please go there to follow along with the slides. I would now like to turn the call over to Sharon Madden, Vice President of Investor Relations at Headwaters.

Sharon Madden

Thank you, Tricia. Good morning, everyone, and thank you for joining us as we report Headwaters' fiscal 2011 Q3 results.

Today's call will be conducted by Kirk Benson, who is Headwaters' Chairman and Chief Executive Officer; and Don Newman, who is Headwaters' Chief Financial Officer. Also joining us will be Bill Gehrmann, who is President of Headwaters Resources and Heavy Construction Materials segment; along with Dave Ulmer, who is President of Tapco International.

Before we get started, I'd like to remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the SEC Act of 1934.

Forward-looking statements by their nature address matters that are, to different degrees, uncertain. These uncertainties, which are described in more detail in Headwaters' annual and quarterly reports filed with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statements, and could be a result of new information, further events or otherwise, except as what may be required by law. You can find Headwaters' annual report on Form 10-K, quarterly report on Form 10-Q and other SEC filings readily available from the SEC's website, from Headwaters' website or directly from the company.

I'll now turn the call over to Kirk Benson. Kirk?

Kirk Benson

Thank you, Sharon. Good morning, everyone. Thank you for joining us on our quarterly conference call. All of us on the call this morning would like to express appreciation for your interest in Headwaters.

The same for the quarter in construction materials was the April cold weather that pushed back the start of the construction season by at least 30 days. Examining the consolidated adjusted EBITDA of our heavy and light construction units, we had a negative variance compared to last year's adjusted EBITDA in the month of April of $5 million. But by June, we had a combined positive adjusted EBITDA variance, which was very small but nevertheless positive. Although there are multiple variables in the quarter impacting adjusted EBITDA, most, if not all, of our decline in light and heavy construction materials combined adjusted EBITDA to be attributed to the slow start of the construction season.

The other notable performance issue was the lack of revenue from our coal cleaning operations. Multiple events contributed to the overall decline including operational issues at the Cleveland Cliff's mine, changing facilities at Walter's [ph] site and a shortage of feedstock at the Utah facility. We anticipate some improvement in the fourth quarter revenue from coal cleaning. We do not believe the decline in coal cleaning will have an impact on our efforts to sell one or all of the coal cleaning facilities. There were no new issues with the operating model and the prospective purchases continue to do their work.

Reviewing Slide 2, we have repaid $6.9 million of our 14 3/4% convertible debt. A portion of the purchase was in the quarter and $2.4 million was repurchased in July. These repurchases will reduce future cash interest expense by over $1 million per year.

Our efforts last quarter to reduce cost are starting to show through lower SG&A in the current quarter. There were also savings in cost of goods sold, but the savings were offset by increased materials and manufacturing costs. But even with the increase in cost, we had an improvement in June's light building products' EBITDA margins compared to last year by 180 basis points.

The lack of imminent recovery in our end markets has caused us to reexamine our manufacturing capacity and SG&A support cost. We commenced in the quarter to create a plan for 2012 that should improve our free cash flow and accelerate the repayment of debt. We will begin implementing the plan in August and September.

After Don is finished a review of the financials, Dave Ulmer, President of Tapco, will talk about light building products and Bill Gehrmann will talk about coal combustion products and coal cleaning. Don?

Donald Newman

Thank you, Kirk. Good morning and thank you for joining us. Before discussing Slide 3, I wanted to mention that we'll be filing our Form 10-Q later this week. My comments will be directed to the slides that were sent out this morning and to a lesser extent the condensed consolidated balance sheet and statement of operations that were attached to the press release.

Year-to-date, the revenue, our revenue, is $454 million, a 1% decrease from the prior year revenue of $460 million. Year-to-date adjusted EBITDA is $50 million, down 21% from prior year EBITDA of $63 million. Revenue for the third quarter was $172 million, a 10% decline from $192 million in 2010. Adjusted EBITDA for the third quarter was $28 million, down from $36 million in 2010. We'll add color regarding the year-to-date and Q3 performance as we progress through the presentations.

Our liquidity remains strong with $35 million of cash and $53 million availability under the ABL revolver at the end of the quarter. The June quarter reflects the low point in our annual cash generation cycle.

We saw our cash balances increase roughly $15 million in July, despite repaying $2.4 million of subordinated debt during the month. Net debt to adjusted EBITDA was approximately 6.2:1 at the end of the current quarter, which is higher than the ratio at the end of Q3 2010 and last quarter. The increase from Q3 2010 reflects the senior debt refinancing, the lower seasonal cash balance and decrease in LTM-adjusted EBITDA.

In the past 90 days, we retired $7 million of face value 14.75% notes, at a cash cost of roughly $8 million. As you know, unlike the 16% notes, the 14.75% and 2.5% notes do not have a call provision. As a result, in the past quarter, we negotiated the purchase of non-callable notes when approached by sellers of the notes. The 16% notes can be called at par in June of 2012.

Our plan for reducing debt remains the same as discussed previously. Our goal is to reduce debt through the sale of non-core assets and through free cash flows. We continue to execute our plan to sell non-core assets including the coal cleaning portfolio, which Bill will talk about. Additionally, we continue to improve our cost structures and working capital management, all of which should improve free cash flow and will enable us to continue to pay down debt.

Let's move to Slide 4. Slide 4 reflects year-to-date earnings. Year-to-date financial results were significantly impacted by the non-routine charges in Q2. As you recall, the Q2 results included $127 million of special charges, including $69 million associated with the refinancing of the senior secured notes, $37 million of coal cleaning asset impairments, $15 million related to the Boynton litigation and $6 million of restructuring charges.

Year to date, our revenue was $454 million, a 1% decline from prior year revenues of $460 million. The $6 million decrease reflects a $3 million revenue decline for each of the heavy construction materials and light building products business lines.

Year-to-date gross profit was $91 million, down 19% from $112 million in 2010. The decrease in gross profit reflects the impact of higher raw materials and other costs, higher depreciation expense, restructuring activities, as well as lower revenue and sales mix. 2010 also includes $5 million of gross profit from the hydrogen peroxide joint venture which was sold in late 2010. Price increases have been instituted in light building products, which should largely offset the increases in commodity prices we've experienced in fiscal 2011.

Year to date, adjusted EBITDA is $50 million, down 21% from $63 million in 2010, which also reflects the impact of higher raw material costs and other costs, as well as lower revenues, restructuring activities and sales mix.

Now let's move to Slide 5 for a closer look at the third quarter results.

Revenue for the third quarter was $172 million, down 10% from $192 million in 2010. In last quarter's earnings call, we noted that April sales in our light building products segment were largely flat to March, which is unusual in our business. The spring construction season was slow to gain momentum this year due in part to inclement weather as well as a rash of tornadoes in Central U.S. In contrast, spring selling in 2010 was more vibrant due in part to the pending expiration of government home buyer incentive programs. Although the 2011 season got off to a slow start, by June sales had returned to a more normal, seasonal pace, with June 2011 sales exceeding June 2010 sales by roughly 4%.

Price increases implemented in Q3 added roughly $1 million of revenue or approximately 1% in the quarter. Overall, light building products revenue was down $3 million or 4% year over year.

Heavy construction materials was down $8 million year over year. Product sales were $47 million and site services were $15 million of revenue, down $3 million and $5 million, respectively, from 2010.

The current quarter's revenue reflects the impact of severe weather in April, flooding in June, as well as ample hydropower in the Northwest due to high water levels, which of course negatively impacted the supply of fly ash. Additionally, 2010 included $3 million of site services revenue for the Prairie State [ph] generating station project, which is anticipated to be commercial in the December 2011 quarter.

Last quarter, we noted a services customer had filed for bankruptcy protection. That plan was idled in Q3, but may be operational again in the December 2011 quarter.

Energy Technology revenue declined 9% largely due to coal cleaning. The decline was impacted by several items: First, we're shifting production from our Alabama 5 facility to our Alabama 7 facility, and the operational startup was not completed in Q3. Second, we had anticipated an increase in coal sales from the Pinnacle facility, but operating issues at the Cleveland Cliff's coal mine disrupted mine production and our ability to blend product with run-of-mine coal. Also, other coal cleaning plants were impacted in the quarter by lower recovery rates and a feedstock disruption at the Utah facility.

Consolidated adjusted EBITDA for the third quarter was $28 million, down from $36 million in 2010. I'll draw your attention to the bridge in the lower right corner of Slide 5. The bridge highlights some key drivers in the year-over-year decrease in EBITDA. Declines in corporate SG&A, compensation and professional services spend favorably impacted EBITDA roughly $3 million year-over-year. EBITDA for the light building products was negatively impacted roughly $1 million, due to revenue declines and was negatively impacted roughly $2 million due to increases in material and other cost. Decreases in Heavy Construction Material revenue negatively impacted EBITDA $5 million, and decreases in energy revenue, largely due to coal cleaning, negatively impacted EBITDA $3 million.

Additionally, 2010 energy segment results included roughly $2 million of nonrecurring favorable items.

Dave and Bill will talk more about these dynamics in their presentations, and starting on Slide 6, Dave will cover light building products.

David Ulmer

Thanks, Don. Good morning, everybody. As you can see on Slide 6, revenues from our light building products segment in the June 2011 quarter were $91.6 million, a decrease of $3.5 million or 4% compared to the June 2010 quarter. Revenue in the quarter started out slow in comparison to the prior year. I will discuss the revenue trend within the quarter on the next slide.

Revenue from our regional block and brick business was up 6% from the June 2010 quarter, while revenue from our national business was down 6%. The decrease in our national business, which is made up of our stone veneer and siding accessory product lines, was down from the prior year primarily as a result of severe weather conditions in April 2011 and continued softness in the new construction and remodeling markets.

Per the Census Bureau, the unadjusted total housing starts for the 3 months ended June 2011 were down 4% from the 3 months ended June 2010. Comparisons for 2011 through the June quarter have been difficult because of the 2010 government home buyer incentive programs. Year-to-date light building products revenue of $224 million was below June 2010 year-to-date revenue by approximately $3.5 million, the entire difference coming in the June quarter and, specifically, in the month of April.

Quarterly revenue in our regional concrete block category increased by $1.1 million year over year. This was the third consecutive quarterly increase for this product category, pointing to a stabilization of the Texas market. We are excited about our opportunities in the concrete block category, as the Texas market returns to a cycle of growth. New business recently developed with the big box companies and our new retail location for the sale of brick and stone veneer.

In addition, our vinyl siding tool category, which is heavily dependent upon remodeling, was up 3% year-over-year. Historically, remodeling has led the housing industry out of many of its past down cycles and it is expected that remodeling once again will play that role.

Gross profit margins for the quarter in the light building products grew -- decreased from 31% in 2010 to 28% in the June 2011 quarter, due to higher material, production and freight cost. Cost on our primary resin material increased roughly 15% year over year. Most of our other resin materials have also experienced similar cost pressures over the prior 12 months. We have been successful in mitigating some of the upward pressures through sourcing new suppliers, improving manufacturing processes and instituting targeted price increases. We will continue to pursue cost reductions in all of our raw inputs through improved sourcing and alternative materials.

Higher material, production, freight and other cost have had the combined effect of reducing our adjusted EBITDA by $2.5 million to $16.6 million in the June 2011 quarter. Adjusted EBITDA showed improvement in each successive month of the quarter. The June 2011 year-to-date adjusted EBITDA of $25.2 million decreased $10.5 million from the June 2010 year-to-date results primarily for the same reasons as previously noted.

During the second quarter, we announced a price increase to all of our siding accessory customers, which took effect in the early part of the quarter ended June 2011. As a result of continued cost pressures from our raw materials, specifically resins, we announced a second price increase in the June 2011 quarter, which will be effective in the quarter ending September 2011.

On Slide 7, you can see that our April revenue was severely impacted compared to 2010 due to the inclement April weather. However, revenue increased relative to last year in May and June. April's year-over-year revenue was down 13%, May's revenue was down 2%, but June's revenue was up 4% year-over-year.

Adjusted EBITDA for the quarter followed a very similar pattern. April adjusted EBITDA was 46% below last year, May was 4% lower, but June's adjusted EBITDA was 14% higher than last year.

Now turning to Slide 8, you can see each quarter, comparing 2011 to the prior year. We are clearly trailing last year in revenue and adjusted EBITDA, but our price increases and cost control measures should have a positive impact in future quarters.

Now, I'll turn the presentation over to Bill.

William Gehrmann

Thanks, Dave, and good morning, everyone. Starting on Slide 9, revenue for the June 2011 quarter in our coal combustion products business was $62.4 million compared to $70.3 million for the June 2010 quarter. Headwaters' client services provides site services to many of its utility clients. These services include constructing and managing landfill operations, operating and maintaining material handling systems, and equipment maintenance. While these services typically have lower operating margins than our product sales, they are not as seasonal and are as not as impacted by declines in construction spending.

Site services revenue for the June quarter were down $4.6 million on a year-over-year basis. The decline was primarily due to the completion earlier in the year of work being done to install the material handling systems at Prairie State [ph] generating station in anticipation of commercial startup later in the year.

We anticipate that Prairie State [ph] will begin commercial operation in the December 2011 quarter, and we will begin providing long-term site services, so the decline in the June quarter is temporary. Also, as mentioned by Don, a client where we provide site services declared bankruptcy has idled the plan. Site services revenue was 24% of our overall revenue for the quarter.

Overall product revenues for the quarter were down 6% year over year. Flooding in the Midwest impacted our ability to transport fly ash to the market, and our supply of quality fly ash was negatively impacted by hydropower in the Northwest and utility maintenance issues in the Northeast. Product revenues also continue to be impacted by lower cement consumption in the 3 largest cement consuming regions of the United States, with the largest weakness coming from the California, Arizona and Nevada markets. We are beginning to see signs that we may be nearing the bottom of the fly ash market in California, and are cautiously optimistic that we may begin to see some market stabilization as we move into 2012.

Gross profit for the June quarter was $15.2 million compared to $19.1 million for the June 2010 quarter. The year-over-year drop in gross profit was driven by the impact of the abnormal weather, short-term disruptions as I have explained, and the loss of service revenue.

Adjusted EBITDA for the June 2011 quarter was $11.3 million compared to $15.7 million for the June 2010 quarter, again due to the decline in revenue related to flooding and the short-term disruptions and the site services client bankruptcy.

On Slide 10, you can see the quarterly comparisons of revenue and adjusted EBITDA. As I have said, the comparisons have been impacted by events at specific sites, such as the completion of work at Prairie State [ph] and the softness in end markets in the Western United States.

Moving to Slide 11, development of proposals by the U.S. Environmental Protection Agency to regulate coal ash disposal continues at a slow pace. More than 450,000 public comments on the proposals were submitted to the EPA during 2010. The significant portion of those comments, including comments from other federal agencies, oppose the Subtitle C approach because of the implied hazardous-waste designation under that subtitle could create barriers to beneficial use.

The EPA has since stated that the agency needs time to consider those comments and does not anticipate proposing a final rule before 2012 at the earliest and more likely in early 2013. The agency has also indicated that it may request additional comments on information received during the previous public comment period.

The House Energy and Commerce Committee approved legislation HR 2273 on a bipartisan basis to regulate coal combustion products. HR 2273 calls for national standards for the management of coal ash and creates a primary role for states to manage the disposal of coal ash with supervision from the EPA. It is anticipated that HR 2273 will be presented to the full House after the August recess, although the exact timing is unknown.

Moving to Slide 12, I will now update you on our coal cleaning business. June 2011 quarter revenues were $9.9 million compared to $18.3 million for the June 2010 quarter. The drop in revenues was primarily the result of the decrease in tons sold. Headwaters sold 271,000 tons of coal in the June 2011 quarter compared to 487,000 tons in the June 2010 quarter.

207,000 tons of the variance came from steam coal sales. The drop in steam coal sales was primarily due to reduced supply for the quarter at our Wellington plant and weather-related production issues due to tornadoes in Alabama and excessive rainfall at other sites. The average revenue per ton for the non-tolling [ph] coal sold in the June quarter was $36 per ton, an increase of $1 per ton year-over-year. Adjusted EBITDA was a loss of $2.2 million.

As we have discussed before, we continue to focus our sales efforts on the metallurgical coal market at all of the plants that have access to reserves that meet metallurgical coal specifications. We also continue to lower our ash content in order to improve quality and increase value.

During the quarter, a project involving the impoundment at Alabama 7 was completed, giving us more flexibility and allowing us to increase production. As we discussed on our last call, we have idled Alabama 5 and have started operating Alabama 7. Our production increased 25% from April to June at Alabama 7, and we expect to see a continued increase.

During the June 2011 quarter, we filled remaining orders in Alabama on some older priced contracts and we'll now be in a position to fill new higher-priced contracts. We continue to work closely with our site host to increase the value of our metallurgical coal product by blending it with the coals being produced by them. The completion of the overburden removal project in our Pinnacle plant has been slowed due to some engineering changes that have been made on that project, and we now anticipate completion of that project near the end of the fiscal year.

Our site host at Pinnacle is dealing with a problem at their mine that has limited the ability to blend our coal with their metallurgical coal. We are currently marketing our Pinnacle coal into other opportunities and sales remain firm with higher year-over-year pricing.

On the steam coal side of the business, we continue to reduce our cost structure. We are matching production to sales in order to manage inventory. We continue to look for opportunities to introduce new utility customers to our refined coal, so that we are positioned when the market for steam coal rebounds.

During the quarter, we were able to amend a supply agreement at Chinook that will increase the price in tons sold. We also expect to see an increase in the feedstock for the Wellington plant. Section 45 tax credits continue to be a focus of our steam coal operations. While the domestic steam coal market remains soft, we anticipate that the continued acceptance of our refined coal in the thermal markets will create additional sales opportunities. We remain committed to selling our coal cleaning assets and focusing on light and Heavy construction materials.

During the quarter, we have shown the facilities to multiple parties, some interested in 1 or 2 facilities, and we've had discussions with multiple parties that expressed interest in the entire 11-plant portfolio. We anticipate selling the facilities in due course and using the proceeds from the sale to reduce debt.

You can see the quarterly comparison of revenue and adjusted EBITDA on Slide 13. We do expect some improvements in the fourth calendar quarter in our coal cleaning business.

Now Kirk will discuss the overall energy segment beginning on Slide 14.

Kirk Benson

Thank you, Bill. The decline in revenue in the energy segment is mostly attributable to coal cleaning as Bill has discussed, although we did sell our South Korean hydrogen peroxide plant and the RINS ethanol credits expired. Our HCAT revenue increased enough to make up most of the loss in revenue from sale of the South Korean plant and the loss of the RINS credit. The decline in EBITDA is attributable to coal cleaning, sale of the South Korean plant and the expiration of the RINS credit. The revenue from South Korea and RINS credit were nearly 100% margin EBITDA, so the loss of revenue also impacted EBITDA in the amount almost equal to the revenue decline.

Coal sales represent high-margin EBITDA because of its high fixed cost structure and a corresponding high contribution margin. Some of the loss in EBITDA was made up by the increase in HCAT sales. HCAT sales grew from $3 million in June 2010 quarter to $5 million in the June 2011 quarter. We are in the process of seeking additional refining customers and currently have proposals outstanding to 2 different refineries. A number of other refineries are interested. However, looking forward, we don't anticipate large revenue increases in 2012 due to the time needed to negotiate agreements and put in the -- put in place the technology for the -- to run the -- to put in place the equipment to run the technology.

Slide 15 summarizes the revenue and equity by quarter for the energy segment. We expect HCAT revenue to be lower in the fourth quarter, but improvement from coal cleaning, and so there should be some overall improvement in the energy segment in revenue in the fourth quarter.

In summary, on Slide 16, we again affirm our adjusted EBITDA guidance at the low end of the range. We should have some benefits from our light building products price increases and reduction in costs that we have already put in place. Restructuring efforts will continue in the fourth quarter as we prepare for 2012 adjusted EBITDA improvements. We have reduced debt by almost $7 million, improving our free cash flow by approximately $1 million. We set aside cash to repay the $9 million of 16% debt in the June quarter of next year, reducing cash interest expense by $1.5 million. We'll continue to focus on the repayment of debt.

So I'd now like to turn the time back to the operator for the question-and-answer period.

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