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Preparing for the headwinds…

Is alternative energy provider and coal combuster Headwaters Inc. (HW) preparing to face some headwinds? The stock has enjoyed a nice run over the last two years, though it’s slumped since reaching near $45/share in August.

The proxy Headwaters filed after the bell on Friday disclosed some interesting arrangements, most notably with CEO Kirk Benson. In August 2005, the company approved issuing up to 25,000 shares of common stock to Benson, with the shares vesting in March 2010 if the market value of a share of Headwaters’ Common Stock meets or exceeds stipulated thresholds. The entire 25,000 shares would be issued if the stock price is at least $60.00 as of March 31, 2010. (And they’d be worth $1.5 million!)

I’m always skeptical of companies who use stock price as the sole metric for executive compensation, but doubly so for a serial acquirer like Headwaters. In the most recent 10-K, Headwaters takes up four pages with its acquisitions footnote. In the footnote, the Company notes that it acquired four companies for a total of $1B in fiscal 2005 and allocated 70% of the purchase price to goodwill! It may not turn out to be the case for Headwaters, but other companies have used purchase accounting adjustments to create income long into the future. This will certainly be interesting to watch.

Of course, even if Benson doesn’t get the shares to $60 by March 2010, he’s got a nice bailout plan that will pay him $500K a year for the next three years and provides full vesting of his stock options and restricted shares, which basically means he either wins some or wins more.