<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1996
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-20537
WALTER INDUSTRIES, INC.
Incorporated in Delaware IRS Employer Identification No. 13-3429953
1500 North Dale Mabry, Tampa, Florida 33607
Telephone Number 813-871-4811
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X . No .
--- ---
There were 54,868,335 shares of common stock of the registrant outstanding
at December 31, 1996.
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PART I - FINANCIAL INFORMATION
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
November 30, May 31,
1996 1996
------------ ------------
(in thousands)
ASSETS
Cash (includes short-term investments of
$42,077,000 and $64,338,000) (Note 3) $ 56,763 $ 81,881
Short-term investments, restricted (Note 3) 184,809 175,432
Installment notes receivable (Note 4) 4,234,551 4,206,252
Less - Provision for possible losses ( 26,284) ( 26,138)
Unearned time charges (2,875,566) (2,851,961)
Trade and other receivables, less $8,060,000
and $8,180,000 provision for possible losses 185,173 191,722
Inventories, at lower of cost (first in,
first out or average) or market:
Finished goods 105,945 124,456
Goods in process 36,001 32,798
Raw materials and supplies 50,490 51,674
Houses held for resale 3,468 2,517
Prepaid expenses 10,437 11,937
Property, plant and equipment, at cost 930,351 888,991
Less - Accumulated depreciation,
depletion and amortization ( 378,601) ( 347,455)
Investments and other assets 51,799 51,617
Deferred income taxes 114,910 155,171
Unamortized debt expense 26,128 29,548
Excess of purchase price over net
assets acquired (Note 2) 293,103 310,935
------------ ------------
$ 3,003,477 $ 3,091,377
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank overdrafts (Note 3) $ 21,582 $ 28,194
Accounts payable and accrued expenses 181,273 $ 194,807
Income taxes payable 54,475 56,238
Long-term senior debt:
Mortgage-backed /asset backed notes (Note 4) 1,762,343 1,791,946
Other senior debt 357,750 419,350
Accrued interest 25,804 28,819
Accumulated postretirement health
benefits obligation 258,634 247,827
Other long-term liabilities 47,182 47,502
Stockholders' equity (Note 6):
Common stock 549 549
Capital in excess of par value 1,159,327 1,159,332
Retained earnings (deficit) ( 860,116) ( 877,861)
Excess of additional pension liability over
unrecognized prior years service cost ( 5,326) ( 5,326)
------------ ------------
Total stockholders' equity 294,434 276,694
------------ ------------
$ 3,003,477 $ 3,091,377
------------ ------------
------------ ------------
2
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WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the three months ended
November 30,
-----------------------------
1996 1995
--------- ---------
(in thousands except
per share amounts)
Sales and revenues:
Net sales $ 332,375 $ 310,527
Time charges 57,353 55,566
Miscellaneous 8,168 12,043
--------- ---------
397,896 378,136
--------- ---------
Costs and expenses:
Cost of sales 264,412 249,794
Depreciation, depletion and amortization 19,195 18,925
Selling, general and administrative 35,847 33,492
Postretirement health benefits 6,425 6,843
Provision for possible losses 819 722
Interest and amortization of debt expense 45,733 54,912
Amortization of excess of purchase price
over net assets acquired (Note 2) 8,830 9,744
--------- ---------
381,261 374,432
16,635 3,704
Income tax expense:
Current ( 493) ( 739)
Deferred ( 8,617) ( 4,059)
--------- ---------
Net income (loss) $ 7,525 $( 1,094)
--------- ---------
--------- ---------
Net income (loss) per share:
Primary $ .13 $( .02)
--------- ---------
--------- ---------
Fully diluted $ .13 $( .02)
--------- ---------
--------- ---------
3
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WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the six months ended
November 30,
-----------------------------
1996 1995
--------- ---------
(in thousands except
per share amounts)
Sales and revenues:
Net sales $ 638,604 $ 626,634
Time charges 114,943 111,921
Miscellaneous 14,012 19,729
--------- ---------
767,559 758,284
--------- ---------
Costs and expenses:
Cost of sales 499,372 499,627
Depreciation, depletion and amortization 36,777 37,442
Selling, general and administrative 69,110 66,596
Postretirement health benefits 12,872 13,522
Provision for possible losses 1,558 1,660
Interest and amortization of debt expense 92,267 109,493
Amortization of excess of purchase price
over net assets acquired (Note 2) 17,832 19,969
--------- ---------
729,788 748,309
--------- ---------
37,771 9,975
Income tax expense:
Current ( 1,176) ( 1,500)
Deferred ( 18,850) ( 9,328)
--------- ---------
Net income (loss) $ 17,745 $( 853)
--------- ---------
--------- ---------
Net income (loss) per share:
Primary $ .32 $( .02)
--------- ---------
--------- ---------
Fully diluted $ .32 $( .02)
--------- ---------
--------- ---------
4
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WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the six months ended
November 30,
-----------------------------
1996 1995
--------- ---------
(in thousands except
per share amounts)
OPERATIONS
Net income (loss) $ 17,745 $( 853)
Charges to income not affecting cash:
Depreciation, depletion and amortization 36,777 37,442
Provision for deferred income taxes 18,850 9,328
Accumulated postretirement health
benefits obligation 10,807 10,207
Provision for other long-term liabilities ( 320) ( 560)
Amortization of excess purchase price
over net assets acquired 17,832 19,969
Amortization of debt expense 3,579 3,841
--------- ---------
105,270 79,374
Decrease (increase) in:
Short-term investments, restricted ( 9,377) ( 22,124)
Installment notes receivable, net (Note 4) ( 2,548) 13,821
Trade and other receivables, net 6,549 16,145
Inventories 15,541 ( 545)
Prepaid expenses 1,500 170
Deferred income taxes 21,411 -
Increase (decrease) in:
Bank overdrafts (Note 3) ( 6,612) ( 17,356)
Accounts payable and accrued expenses ( 12,439) ( 16,125)
Income taxes payable ( 1,763) 451
Accrued interest ( 3,015) ( 876)
--------- ---------
Cash flows from operations 114,517 52,935
--------- ---------
FINANCING ACTIVITIES
Issuance of long-term debt 62,000 65,000
Retirement of long-term senior debt (153,203) ( 80,218)
Additions to unamortized debt expense ( 159) ( 183)
Payment of liabilities subject to
Chapter 11 proceedings (Note 2) ( 1,095) ( 56,429)
Fractional share payments ( 5) ( 2)
--------- ---------
Cash flows used in financing activities ( 92,462) ( 71,832)
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant and
equipment, net of normal retirements ( 46,991) ( 30,445)
Decrease (increase) in investments
and other assets ( 182) 176
--------- ---------
Cash flows used in investing activities ( 47,173) ( 30,269)
--------- ---------
Net decrease in cash and cash equivalents ( 25,118) ( 49,166)
Cash and cash equivalents at beginning of period 81,881 128,007
--------- ---------
Cash and cash equivalents at
end of period (Note 3) $ 56,763 $ 78,841
--------- ---------
--------- ---------
5
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WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(Unaudited)
Note 1 - Principles of Consolidation
Walter Industries, Inc.(the "Company") through its direct and indirect
subsidiaries currently offers a diversified line of products and services for
homebuilding, water and waste water transmission, coal mining and related
degasification, residential and non-residential construction, and industrial
markets. The consolidated financial statements include the accounts of the
Company and all of its subsidiaries. Preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements. Actual amounts could differ from those
estimates. All significant intercompany balances have been eliminated. All of
the amounts are unaudited but in the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation have been made. The results for the three and six months ended
November 30, 1996 and 1995 are not necessarily indicative of results for a full
fiscal year. These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto in the Company's
Annual Report on Form 10-K for the year ended May 31, 1996. Unless otherwise
specified, capitalized terms used herein are as defined in the aforementioned
Form 10-K.
Note 2 - Recent History
The Company was organized in 1987 for the purpose of acquiring Jim Walter
Corporation ("Original Jim Walter"). The Company's financial statements reflect
the allocation of the purchase price of Original Jim Walter based upon the fair
value of the assets acquired and the liabilities assumed. On December 27,
1989, the Company and most of its subsidiaries each filed a voluntary petition
for reorganization under Chapter 11 of Title 11 of the United States Code in the
United States Bankruptcy Court for the Middle District of Florida, Tampa
Division (the "Bankruptcy Court"). The Company emerged from bankruptcy on March
17, 1995 (the "Effective Date") pursuant to the Amended Joint Plan of
Reorganization Dated as of December 9, 1994, as modified on March 1, 1995 (as so
modified the "Consensual Plan"). Despite the confirmation and effectiveness of
the Consensual Plan, the Bankruptcy Court continues to have jurisdiction over,
among other things, the resolution of disputed prepetition claims against the
Company and other matters that may arise in connection with or relate to the
Consensual Plan.
Note 3 - Cash and Restricted Short-Term Investments
Cash includes short-term investments with original maturities of less than one
year. These investments are readily convertible into cash and are stated at
cost which approximates market. The Company's cash management system provides
for the reimbursement of all major bank disbursement accounts on a daily basis.
Checks issued but not yet presented to the banks for payment are classified as
bank overdrafts.
Restricted short-term investments (i) include temporary investment of reserve
funds and collections on installment notes receivable owned by Mid-State Trusts
II, III, IV and V ($99,955,000) which are available only to pay expenses of the
6
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WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
Trusts and principal and interest on indebtedness of the Trusts (ii) certain
funds held by Trust II that are in excess of the amount required to be paid for
expenses, principal and interest on the Trust II Mortgage-Backed Notes but which
are subject to retention ($64,525,000) and (iii) miscellaneous other segregated
accounts restricted to specific uses ($20,329,000).
Note 4 - Installment Notes Receivable
The net increase in installment notes receivable for the six month period ended
November 30, 1996 and the net decrease for the six month period ended November
30, 1995 consists of sales and resales, net of repossessions and provision for
possible losses, of $86,860,000 and $75,616,000 and cash collections on account,
payouts in advance of maturity (and reductions in account balances in the six
months ended November 30, 1995 resulting from settlement agreements entered into
with South Carolina and Texas homeowners) of $84,312,000 and $89,437,000,
respectively.
Mid-State Trusts II, III, and IV are business trusts organized by Mid-State
Homes, Inc. ("Mid-State"), which owns all of the beneficial interest in Trust
III and Trust IV. Trust IV owns all of the beneficial interest in Trust II.
The Trusts were organized for the purpose of purchasing installment notes
receivable from Mid-State with the net proceeds from the issuance of the Trust
II Mortgage-Backed Notes, the Trust III Asset Backed Notes and the Trust IV
Asset Backed Notes with outstanding balances at November 30, 1996 of
$453,500,000, $131,443,000, and $870,400,000, respectively. The assets of Trust
II, Trust III and Trust IV, including the installment notes receivable, are not
available to satisfy claims of general creditors of the Company and its
subsidiaries. The liabilities of Mid-State Trusts II, III and IV for their
publicly issued debt are to be satisfied solely from the proceeds of the
underlying installment notes and are non-recourse to the Company and its
subsidiaries. Of the gross amount of installment notes receivable at November
30, 1996 of $4,234,551,000 with an economic balance of $2,018,660,000,
receivables owned by Trust II had a gross book value of $1,062,115,000 and an
economic balance of $664,397,000, receivables owned by Trust III had a gross
book value of $390,344,000 and an economic balance of $206,333,000, and
receivables owned by Trust IV had a gross book value of $1,700,634,000 and an
economic balance of $732,533,000. Mid-State Trust V, a business trust in which
Mid-State holds all the beneficial interest, was organized to hold installment
notes receivable as collateral for borrowings to provide temporary financing to
Mid-State for its current purchases of installment notes and mortgages from Jim
Walter Homes, Inc. At November 30, 1996, receivables owned by Mid-State Trust V
had a gross book value of $1,078,477,000 and an economic balance of
$414,192,000, with outstanding borrowings of $307,000,000.
Note 5 - Litigation and Other Matters
VEIL PIERCING LITIGATION
The Modified Plan of Reorganization (the "Modified Plan") filed October 8, 1996
by Celotex and others in its Chapter 11 proceeding was approved by a vote of the
Celotex creditors, and on December 6, 1996 the Celotex Bankruptcy Court entered
an Order (the "Celotex Confirmation Order") confirming the Modified Plan. The
Modified Plan contains a provision for an injunction, pursuant to Section 524(g)
of the Bankruptcy Code, as to all asbestos-related claimants and affording to
various non-debtor third parties, including the Company, protection from current
and future asbestos-related claims. Pursuant to procedures previously approved
by the District Court, the Celotex Confirmation Order will be subject to review
7
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
by the District Court. Additionally, one party to the Celotex bankruptcy has
appealed to the District Court certain aspects of the Celotex Confirmation
Order. The Modified Plan sets forth various requirements for the plan to become
effective, including that the Celotex Confirmation Order shall have been
affirmed by the District Court and shall have become a final Order (unless
waived in accordance with certain provisions of the Modified Plan). Although
the Company believes that the Modified Plan will be affirmed on appeal and will
be made effective, the Company cannot predict when such events will occur.
SUIT BY THE COMPANY AND JIM WALTER RESOURCES, INC.
FOR BUSINESS INTERRUPTION LOSSES
In December 1996, one of the defendant-insurers tendered to the Company
$687,500, the face amount of one primary insurance policy at issue in the
litigation. Settling insurance carriers have paid approximately $12.4 million
to date, reducing the contract claim in the lawsuit to approximately $12
million. The Company and Jim Walter Resources, Inc. continue to pursue the
litigation against the remaining carriers and a trial is tentatively scheduled
for mid-1997.
LITIGATION RELATED TO CHAPTER 11 DISTRIBUTIONS TO CERTAIN
HOLDERS OF SUBORDINATED NOTES AND/OR DEBENTURES
On November 14, 1996, the District Court entered an order granting the Company's
motion to dismiss and dismissing as moot all appeals in this matter. No appeal
of the District Court's Order was taken and that Order is now final.
FEDERAL INCOME TAX
A substantial controversy exists with regard to federal income taxes allegedly
owed by the Company. Proofs of claim have been filed in the Bankruptcy Court by
the Internal Revenue Service for taxes, interest and penalties in the amounts of
$110,560,883 with respect to fiscal years ended August 31, 1980 and August 31,
1983 through August 31, 1987, $31,468,189 with respect to fiscal years ended May
31, 1988 (nine months) and May 31, 1989 and $44,837,693 with respect to fiscal
years ended May 31, 1990 and May 31, 1991. These proofs of claim represent total
adjustments to taxable income of approximately $360 million for all tax periods
at issue. Objections to the proofs of claim have been filed by the Company and
the various issues are being litigated in the Bankruptcy Court. Included in the
proofs of claim is an adjustment to taxable income disallowing a deduction of
approximately $51 million for hedging losses incurred during fiscal year 1988.
This issue was conceded by the Internal Revenue Service pursuant to a joint
stipulation of parties approved by the Bankruptcy Court by an Order dated
January 3, 1997. The Company believes that the balance of such proofs of claim
are substantially without merit and intends to defend vigorously such claims,
but there can be no assurance as to the ultimate outcome.
Note 6 - Stockholders' Equity
The Company is authorized to issue 200,000,000 shares of common stock, $.01 par
value. As of November 30, 1996, there were 54,868,335 shares of common stock
outstanding. Pursuant to the Consensual Plan, 3,880,140 shares of common stock
were issued to an escrow account on September 13, 1995. To the extent that
certain federal income tax matters of the Company are resolved satisfactorily,
up to a maximum 3,880,140 of the escrowed shares will be distributed to all
former stockholders of the Company as of the Effective Date. To the extent such
matters are not resolved satisfactorily, the escrowed shares will be returned to
the Company and canceled.
8
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WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
Note 7 - Stock Options
Under the Walter Industries, Inc. Long-Term Incentive Stock Plan approved by
stockholders in October 1995, options totaling 1,219,000 shares were granted to
certain officers and employees to purchase shares of the Company's common stock
at an option price of $12.3125 per share in July 1996.
Note 8 - Segment Information
Information relating to the Company's business segments is set forth on the
following two pages.
9
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WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
Three months ended
November 30,
-----------------------------
1996 1995
--------- ---------
(in thousands)
Sales and Revenues:
Homebuilding and related financing $110,284 $102,702
Water and waste water transmission products 122,336 110,108
Natural resources 91,661 97,998
Industrial and other products 73,275 66,827
Corporate 340 501
-------- ---------
Consolidated sales and revenues $397,896 $378,136
-------- ---------
-------- ---------
Contributions to Operating Income (a):
Homebuilding and related financing $ 19,008 $ 13,644
Water and waste water transmission products 8,269 7,367
Natural resources 4,547 5,953
Industrial and other products 5,396 3,062
-------- ---------
37,220 30,026
Less-Unallocated corporate interest and
other expense (b) (20,585) (26,322)
Income tax expense ( 9,110) ( 4,798)
-------- ---------
Net income (loss) $ 7,525 $( 1,094)
-------- ---------
-------- ---------
(a) - Operating income amounts are after deducting amortization of excess of
purchase price over net assets acquired (goodwill) of $8,830,000 in 1996 and
$9,744,000 in 1995. A breakdown by segment is as follows:
Three months ended
November 30,
-----------------------------
1996 1995
--------- ---------
(in thousands)
Homebuilding and related financing $ 7,249 $ 7,670
Water and waste water transmission products 3,045 3,046
Natural resources ( 332) ( 331)
Industrial and other products 161 654
Corporate (1,293) (1,295)
-------- ---------
$ 8,830 $ 9,744
-------- ---------
-------- ---------
(b) - Excludes interest expense incurred by the Homebuilding and Related
Financing Group of $29,767,000 in 1996 and $32,596,000 in 1995. The
balance of unallocated expenses consisting of unallocated interest and
corporate expenses are attributable to all groups and cannot be reasonably
allocated to specific groups.
10
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WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
Six months ended
November 30,
-----------------------------
1996 1995
--------- ---------
(in thousands)
Sales and Revenues:
Homebuilding and related financing $ 221,213 $ 203,466
Water and waste water transmission products 234,031 229,556
Natural resources 166,054 187,513
Industrial and other products 145,640 136,386
Corporate 621 1,363
--------- ---------
Consolidated sales and revenues $ 767,559 $ 758,284
--------- ---------
--------- ---------
Contributions to Operating Income (a):
Homebuilding and related financing $ 38,161 $ 27,528
Water and waste water transmission products 15,227 16,184
Natural resources 14,336 13,077
Industrial and other products 9,872 4,929
--------- ---------
77,596 61,718
Less-Unallocated corporate interest and
other expense (b) ( 39,825) ( 51,743)
Income tax expense ( 20,026) ( 10,828)
--------- ---------
Net income (loss) $ 17,745 $( 853)
--------- ---------
--------- ---------
(a)- Operating income amounts are after deducting amortization of excess of
purchase price over net assets acquired (goodwill) of $17,832,000 in 1996
and $19,969,000 in 1995. A breakdown by segment is as follows:
Six months ended
November 30,
-----------------------------
1996 1995
--------- ---------
(in thousands)
Homebuilding and related financing $14,658 $15,795
Water and waste water transmission products 6,124 6,125
Natural resources ( 666) ( 666)
Industrial and other products 319 1,318
Corporate (2,603) (2,603)
-------- ---------
$17,832 $19,969
-------- ---------
-------- ---------
(b)- Excludes interest expense incurred by the Homebuilding and Related
Financing Group of $60,372,000 in 1996 and $64,249,000 in 1995. The
balance of unallocated expenses consisting of unallocated interest and
corporate expenses are attributable to all groups and cannot be reasonably
allocated to specific groups.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
THREE MONTHS ENDED NOVEMBER 30, 1996 AND 1995
Net sales and revenues for the three months ended November 30, 1996 were $19.8
million, or 5.2%, above the prior year. The higher performance resulted from a
4.5% increase in pricing and/or mix and a .7% increase in volume. The increase
in sales and revenues was due to higher sales and revenues in the Homebuilding
and Related Financing, Water and Waste Water Transmission Products and
Industrial and Other Products Groups, partially offset by lower sales and
revenues from the Natural Resources Group.
Homebuilding and Related Financing sales and revenues were $7.6 million, or
7.4%, greater than the prior year period. The performance reflects a 14.1%
increase in the average net selling price per home sold, from $40,900 in the
1995 period to $46,700 in 1996, partially offset by a 1.2% decrease in the
number of homes sold, from 1,016 units in 1995 to 1,004 units in 1996. The
higher average net selling price principally reflects a greater percentage of
"90% complete" homes sold in the current year period and a price increase
instituted effective August 17, 1996 to compensate for increased lumber costs.
The decrease in unit sales was attributable to the greater percentage of "90%
complete" homes sold which requires longer construction time than homes finished
to lesser stages of completion, coupled with competition for sub-contractors as
the nation's homebuilders accelerated their production schedules prior to the
winter season. Jim Walter Homes' backlog at November 30, 1996 was 2,052 units
compared to 1,589 units at November 30, 1995, a 29.1% increase. Time charge
income (revenues received from Mid-State Homes' installment note portfolio)
increased from $55.6 million in the 1995 period to $57.4 million in 1996. The
increase is attributable to increased payoffs received in advance of maturity
and to an increase in the average balance per account in the portfolio,
partially offset by a reduction in the total number of accounts. Operating
income of $19.0 million (net of interest expense) was $5.4 million greater than
the prior year period. The performance was due to the increase in the average
net selling price, the higher time charge income and lower interest expense in
the 1996 period ($29.8 million) as compared to that incurred in 1995 ($32.6
million), partially offset by the lower number of homes sold, slightly lower
homebuilding gross profit margins (due primarily to higher lumber and labor
costs) and higher selling, general and administrative expenses resulting from
changes to the base salary and commission structure at Jim Walter Homes to
reward and retain higher caliber sales people.
Water and Waste Water Transmission Products Group sales and revenues were $12.2
million, or 11.1%, above the prior year period. The increase was the result of
higher sales prices and volume for ductile iron pressure pipe and higher sales
prices for fittings, valves and hydrants. The order backlog at November 30,
1996 was 113,210 tons, which represents approximately three months shipments
compared with 115,360 tons at November 30, 1995. Operating income of $8.3
million was $.9 million above the prior year period. This performance resulted
from the previously mentioned increases in sales prices and volumes, partially
offset by slightly lower gross profit margins and an increase in general and
administrative expenses due to the utilization of outside consultants who are
working with management to improve manufacturing processes and further reduce
costs through plant modifications and better management of raw materials.
12
<PAGE>
Industrial and Other Products Group sales and revenues were $6.4 million, or
9.6%, greater than the prior year period. Increased sales volumes for aluminum
foil products, furnace coke, slag wool and window components combined with
higher sales prices for furnace and foundry coke and window components were
partially offset by lower sales prices for aluminum foil and sheet products.
Operating income of $5.4 million exceeded the prior year period by $2.3 million.
The improved performance resulted from profitability of the window components
business which absorbed losses last year stemming from a major consolidation of
its manufacturing operations and improved gross profit margins realized on
furnace and foundry coke, slag wool and aluminum foil and sheet products.
Natural Resources Group sales and revenues were $6.3 million, or 6.5%, below the
prior year period. The decrease resulted from reduced production levels at two
of the Group's coal mines, especially at Blue Creek Mine No. 5 ("Mine No. 5"),
where development of a new mining area is in progress, and a $3.7 million gain
from the sale of gas royalty interests in certain mineral properties in the 1995
period, partially offset by higher average selling prices for coal and methane
gas and greater methane gas sales volume. A total of 1.78 million tons of coal
was sold in the 1996 period versus 2.02 million tons in the 1995 period, an
11.9% decline. The decrease in tonnage sold reflected lower shipments to
certain export customers. The average price per ton of coal sold increased
$2.64, from $42.42 in the 1995 period to $45.06 in 1996, due to higher prices
realized in the worldwide metallurgical market and a greater percentage of the
tonnage sold going to Alabama Power Company ("Alabama Power") at above-market,
contract prices. Longwall production on the east side of Mine No. 5 is expected
to commence in the fourth quarter of fiscal 1997. While in development, the
mine's costs are being capitalized. Total development costs at Mine No. 5 for
the three months ended November 30, 1996 were $8.8 million. Jim Walter
Resources' three other operating mines remain in full production. The Group's
operating income of $4.5 million was $1.4 million lower than the prior year
period. The decrease in operating income was a result of the gain from the sale
of gas royalty interests in the prior year period, reduced coal sales volumes
and slightly higher costs per ton of coal produced ($39.89 in the 1996 period
versus $39.52 in the 1995 period), partially offset by higher selling prices for
coal and methane gas and greater methane gas sales volume.
Cost of sales, exclusive of depreciation, of $264.4 million was 79.6% of net
sales in the 1996 period versus $249.8 million and 80.4% in 1995. The cost of
sales percentage decrease was primarily the result of improved gross profit
margins for window components, furnace and foundry coke, slag wool and aluminum
foil and sheet products, partially offset by reduced profit margins on home
sales, pipe and coal.
Selling, general and administrative expenses of $35.8 million were 9.0% of net
sales and revenues in the 1996 period versus $33.5 million and 8.9% in 1995.
The increases principally reflect higher expenses at Jim Walter Homes and U.S.
Pipe previously discussed.
Interest and amortization of debt expense was $45.7 million in the 1996 period
versus $54.9 million in 1995 reflecting lower outstanding debt balances and
reduced interest rates resulting from the refinancing completed January 22,
1996. The average rate of interest in the 1996 period was 8.14% as compared to
9.53% in 1995. The prime rate of interest was 8.25% in the 1996 period compared
to 8.75% in 1995.
13
<PAGE>
The Company's effective tax rate in the 1996 and 1995 periods differed from the
statutory tax rate due primarily to amortization of excess of purchase price
over net assets acquired (goodwill) which is not deductible for tax purposes.
The net income in the 1996 period was $7.5 million compared to a net loss of
$1.1 million in the 1995 period reflecting all of the previously mentioned
factors as well as the impact of lower goodwill amortization and postretirement
health benefits in 1996.
SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1995
Net sales and revenues for the six months ended November 30, 1996 were $9.3
million, or 1.2%, above the prior year. The higher performance resulted from a
4.0% increase in pricing and/or mix, partially offset by a 2.8% decrease in
volume. The increase in sales and revenues was due to higher sales and revenues
from the Homebuilding and Related Financing, Water and Waste Water Transmission
Products and Industrial and Other Products Groups, partially offset by lower
sales and revenues from the Natural Resources Group.
Homebuilding and Related Financing sales and revenues were $17.7 million, or
8.7%, greater than the prior year period. The performance reflects a 12.7%
increase in the average net selling price per home sold, from $41,400 in the
1995 period to $46,600 in 1996, combined with a 4.2% increase in the number of
homes sold, from 1,941 units in 1995 to 2,023 units in 1996. The higher average
net selling price reflects a greater percentage of "90% complete" homes sold in
the current year period and a price increase instituted August 17, 1996 to
compensate for higher lumber costs. The increase in unit sales reflects the
decision by Jim Walter Homes in December 1995 to reduce its financing rate to
8.5% from 10% for its "90% complete" homes on a trial basis to generate
additional unit sales. In March 1996 the lower rate was formally advertised.
Time charge income (revenues received from Mid-State Homes' installment note
portfolio) increased from $111.9 million in the 1995 period to $114.9 million in
1996. The increase is attributable to increased payoffs received in advance of
maturity and to an increase in the average balance per account in the portfolio,
partially offset by a reduction in the total number of accounts. Operating
income of $38.2 million (net of interest expense) was $10.6 million greater than
the prior year period. The performance was due to the increase in the average
net selling price and number of homes sold, the higher time charge income and
lower interest expense in the 1996 period ($60.4 million) as compared to that
incurred in 1995 ($64.2 million), partially offset by slightly lower
homebuilding gross profit margins (due to higher lumber and labor costs) and
higher selling, general and administrative expenses resulting from changes to
the base salary and commission structure at Jim Walter Homes to reward and
retain higher caliber sales people.
Water and Waste Water Transmission Products Group sales and revenues were $4.5
million, or 1.9%, above the prior year period. The increase was principally the
result of higher sales prices, but lower sales volumes, for ductile iron
pressure pipe and fittings. Operating income of $15.2 million was $1.0 million
below the prior year period. This performance was the result of the lower sales
volumes, lower gross profit margins, and an increase in general and
administrative expenses principally due to the utilization of outside
consultants previously discussed, partially offset by the higher sales prices.
14
<PAGE>
Industrial and Other Products Group sales and revenues were $9.3 million, or
6.8%, greater than the prior year period. Increased sales volumes for aluminum
foil and sheet products, furnace coke, slag wool, metal building and foundry
products and window components coupled with improved sales prices for furnace
and foundry coke and window components were partially offset by lower chemical
sales volumes and lower sales prices for aluminum foil and sheet products.
Operating income of $9.9 million exceeded the prior year period by $4.9 million.
The improved performance resulted from a return to profitability of the window
components business which absorbed losses last year stemming from a major
consolidation of its manufacturing operations. In addition, improved gross
profit margins were realized on furnace and foundry coke, slag wool, and metal
building and foundry products.
Natural Resources Group sales and revenues were $21.5 million, or 11.4%, below
the prior year period. The decrease resulted from reduced production levels,
especially at Mine No. 5, where development of a new mining area is in progress,
reduced coal royalty income and a $3.7 million gain from the sale of gas royalty
interests in certain mineral properties in the 1995 period, partially offset by
higher average selling prices for coal and methane gas and greater methane gas
sales volume. A total of 3.27 million tons of coal was sold in the 1996 period
versus 3.94 million tons in the 1995 period, a 17.0% decline. The decrease in
tonnage sold reflected lower shipments to export customers. The average price
per ton of coal sold increased $2.32, from $42.46 in the 1995 period to $44.78
in 1996, due to higher prices realized in the worldwide metallurgical market and
a greater percentage of the tonnage sold going to Alabama Power at above-market,
contract prices. Longwall production on the east side of Mine No. 5 is expected
to commence in the fourth quarter of fiscal 1997. While in development, the
mine's costs are being capitalized. Total development costs at Mine No. 5 for
the six months ended November 30, 1996 were $12.0 million. Jim Walter
Resources' three other operating mines remain in full production. The Group's
operating income of $14.3 million exceeded the prior year period by $1.3
million. This performance was due to a $4.7 million settlement of a legal claim
relating to a theft of coal inventory from the Port of Mobile, Alabama
(settlement was reached with one party under a confidentiality agreement, but
there is still an action pending against other parties in Alabama State Court)
combined with the higher selling prices for coal and methane gas and greater
methane gas sales volume, partially offset by the reduced coal sales volume and
lower mining productivity which resulted in higher costs per ton of coal
produced ($39.42 in the 1996 period versus $37.00 in 1995) and the $3.7 million
gain (in 1995) from the sale of certain gas royalty interests.
Cost of sales, exclusive of depreciation, of $499.4 million was 78.2% of net
sales in the 1996 period versus $499.6 million and 79.7% in 1995. The cost of
sales decrease was primarily the result of improved gross profit margins for
window components, furnace and foundry coke, slag wool, and metal building and
foundry products, combined with the $4.7 million coal inventory theft
settlement, partially offset by lower gross profit margins on home sales, pipe
products and coal.
Depreciation, depletion and amortization expense of $36.8 million was $.7
million below the 1995 period.
Selling, general and administrative expenses of $69.1 million were 9.0% of net
sales and revenues in the 1996 period versus $66.6 million and 8.8% in 1995.
The increase principally reflects higher expenses at Jim Walter Homes and U.S.
Pipe previously discussed.
15
<PAGE>
Interest and amortization of debt expense was $92.3 million in the 1996 period
versus $109.5 million in 1995 reflecting lower outstanding debt balances and
reduced interest rates resulting from the refinancing completed January 22,
1996. The average rate of interest in the 1996 period was 8.14% as compared to
9.50% in 1995. The prime rate of interest was 8.25% in the 1996 period compared
to a range of 8.75% to 9.0% in 1995.
The Company's effective tax rate in the 1996 and 1995 periods differed from the
statutory tax rate due to amortization of excess of purchase price over net
assets acquired (goodwill) which is not deductible for tax purposes.
The net income in the 1996 period was $17.7 million compared to net loss of
$853,000 in the 1995 period reflecting all of the previously mentioned factors
as well as the impact of lower goodwill amortization and post retirement health
benefits in 1996.
Financial Condition
On March 17, 1995, the Company and its subsidiaries emerged from bankruptcy
pursuant to the Consensual Plan. Despite the confirmation and effectiveness of
the Consensual Plan, the Bankruptcy Court continues to have jurisdiction over
among other things, the resolution of disputed prepetition claims against the
Company and other matters that may arise in connection with or relate to the
Consensual Plan.
A substantial controversy exists with regard to federal income taxes allegedly
owed by the Company. Proofs of claim have been filed in the Bankruptcy Court by
the Internal Revenue Service for taxes, interest and penalties in the amounts of
$110,560,883 with respect to fiscal years ended August 31, 1980 and August 31,
1983 through August 31, 1987, $31,468,189 with respect to fiscal years ended May
31, 1988 (nine months) and May 31, 1989 and $44,837,693 with respect to fiscal
years ended May 31, 1990 and May 31, 1991. These proofs of claim represent total
adjustments to taxable income of approximately $360 million for all tax periods
at issue. Objections to the proofs of claim have been filed by the Company and
the various issues are being litigated in the Bankruptcy Court. Included in the
proofs of claim is an adjustment to taxable income disallowing a deduction of
approximately $51 million for hedging losses incurred during fiscal year 1988.
This issue was conceded by the Internal Revenue Service pursuant to a joint
stipulation of parties approved by the Bankruptcy Court by an Order dated
January 3, 1997. The Company believes that the balance of such proofs of claim
are substantially without merit and intends to defend vigorously such claims but
there can be no assurance as to the ultimate outcome.
Since May 31, 1996, total debt has decreased $91.2 million resulting from early
repayment on the Revolving Credit Facility ($53.0 million), quarterly principal
payments on Term Loan A and Term Loan B ($8.0 million), Mid-State Trust II
Mortgage-Backed Notes ($43.5 million), Mid-State Trust III Asset Backed Notes
($16.2 million) Mid-State Trust IV Asset Backed Notes ($31.9 million)and
scheduled retirements of other long-term debt ($.6 million), partially offset by
the issuance of long-term debt under the Mid-State Trust V Variable Funding Loan
Agreement ($62.0 million).
The Credit Facilities contain a $365 million revolving credit facility which
includes a sub-facility for trade and other standby letters of credit in an
amount up to $40 million at any time outstanding and a sub-facility for
swingline advances in an amount not in excess of $15 million at any time
outstanding. At
16
<PAGE>
November 30, 1996, $32.5 million of letters of credit were outstanding under
this facility.
The Credit Facilities and the Mid-State Trust V Variable Funding Loan Agreement
contain a number of significant covenants that, among other things, restrict the
ability of the Company and its subsidiaries to dispose of assets, incur
additional indebtedness, pay dividends, create liens on assets, enter into
leases, make investments or acquisitions, engage in mergers or consolidations or
engage in certain transactions with subsidiaries and affiliates and otherwise
restrict corporate activities (including change of control and asset sale
transactions). In addition, under the Credit Facilities, the Company is
required to maintain specified financial ratios and comply with certain
financial tests, including interest coverage, fixed charge coverage ratios and
maximum leverage ratios, some of which become more restrictive over time. The
Company was in full compliance with these covenants at November 30, 1996 and
believes it will meet these financial tests over the remaining terms of these
debt agreements.
Liquidity and Capital Resources
At November 30, 1996, cash and short-term investments, net of bank overdrafts
were approximately $35.2 million. Operating cash flows for the six months ended
November 30, 1996 together with issuance of long-term debt under the Mid-State
Trust V Variable Funding Loan Agreement and the use of available cash balances
were primarily used for retirement of long-term senior debt, interest payments
and capital expenditures.
Working capital is required to fund adequate levels of inventories and accounts
receivable. Commitments for capital expenditures at November 30, 1996 were not
material; however, it is estimated that gross capital expenditures of the
Company and its subsidiaries for the balance of the year ending May 31, 1997
will approximate $50.0 million.
Because the Company's operating cash flow is significantly influenced by the
general economy and, in particular, the level of construction, current results
should not necessarily be used to predict the Company's liquidity, capital
expenditures, investment in installment notes receivable or results of
operations. The Company believes that the Mid-State Trust V Variable Funding
Loan Agreement will provide Mid-State Homes with the funds needed to purchase
the installment notes and mortgages generated by Jim Walter Homes. It is
contemplated that one or more permanent financings similar to the Mid-State
Trusts II, III and IV financings will be required over the next several years to
repay borrowings under the Mid-State Trust V Variable Funding Loan Agreement.
The Company believes that under present operating conditions sufficient
operating cash flow will be generated to make all required interest and
principal payments and planned capital expenditures and meet substantially all
operating needs and that amounts available under the Credit Facilities will be
sufficient to meet peak operating needs.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 5 of Notes to Consolidated Condensed Financial Statements
contained in Part I - Financial Information
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held September 17,
1996, the following proposal was approved:
Affirmative Negative Votes
VOTES VOTES WITHHELD
------------ -------- --------
Ratify the appointment of
Price Waterhouse LLP as
independent certified public
accountants for the fiscal
year ending May 31, 1997. 51,732,560 19,421 1,328
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11(a) - Earnings per share calculation for the three
months ended November 30, 1996 and 1995
Exhibit 11(b) - Earnings per share calculation for the six months
ended November 30, 1996 and 1995
Exhibit 27 - Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the
six months ended November 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WALTER INDUSTRIES, INC.
/s/ D. M. FJELSTUL /s/ F. A. HULT
- ------------------------- ------------------------------
D. M. Fjelstul F. A. Hult
Senior Vice President and Vice President and Controller
Principal Financial Officer and Principal Accounting
Officer
Date: JANUARY 13, 1997
-----------------------
18
<PAGE>
Exhibit 11(a)
NET INCOME PER SHARE CALCULATION
(in thousands, except per share amounts)
Three months ended Three months ended
NOVEMBER 30, 1996 NOVEMBER 30, 1995
----------------- -----------------
DOLLARS SHARES DOLLARS SHARES
------- ------ ------- ------
Net income (loss) $7,525 $(1,094)
------
------
Primary weighted average
shares of common stock
outstanding:
Common stock (a) 54,868 50,989
Employee stock options (b)(d) 94 -
------ ------
54,962 50,989
------ ------
------ ------
Fully diluted weighted
average shares of common
stock outstanding:
Common stock (a) 54,868 50,989
Employee stock options (c)(d) 94 -
------ ------
54,962 50,989
------ ------
------ ------
Per share (primary) $ .13 $(.02)
------ ------
Per share (fully diluted) $ .13 $(.02)
------ ------
------ ------
(a) For the three months ended November 30, 1995, does not include 3,880,140
additional shares issued to an escrow account on September 13, 1995
pursuant to the Consensual Plan because such issuance is contingent on
future events and would be anti-dilutive in such period.
(b) For the three months ended November 30, 1996, represents the number of
shares of common stock issuable on the exercise of dilutive employee stock
options granted in July 1996 less the number of shares of common stock
which could have been purchased with the proceeds from the exercise of such
options. These purchases were assumed to have been made at the average
market price of the common stock during the period.
(c) Same as (b) except that purchases of common stock were assumed to have been
made at the higher of either the market price of the common stock at the
end of the period or the average market price for the period.
(d) For the three months ended November 30, 1996 and 1995, does not include
1,485,000 shares and 1,500,000 shares, respectively, subject to options
granted in July 1995 at an average price of $14.120 per share because such
options would have an anti-dilutive effect in such period.
19
<PAGE>
Exhibit 11(b)
NET INCOME PER SHARE CALCULATION
(in thousands, except per share amounts)
Six months ended Six months ended
NOVEMBER 30, 1996 NOVEMBER 30, 1995
DOLLARS SHARES DOLLARS SHARES
Net income (loss) $17,745 $( 853)
------- -------
------- -------
Primary weighted average
shares of common stock
outstanding:
Common stock (a) 54,868 50,989
Employee stock options (b)(d) 68 -
------ ------
54,936 50,989
------ ------
------ ------
Fully diluted weighted
average shares of common
stock outstanding:
Common stock (a) 54,868 50,989
Employee stock options (c)(d) 68 -
------ ------
54,936 50,989
------ ------
------ ------
Per share (primary) $ .32 $( .02)
------- -------
------- -------
Per share (fully diluted) $ .32 $( .02)
------- -------
------- -------
(a) For the six months ended November 30, 1995, does not include 3,880,140
additional shares issued to an escrow account on September 13, 1995
pursuant to the Consensual Plan because such issuance is contingent on
future events and would be anti-dilutive in such period.
(b) For the six months ended November 30, 1996, represents the number of shares
of common stock issuable on the exercise of dilutive employee stock options
granted in July 1996 less the number of shares of common stock which could
have been purchased with the proceeds from the exercise of such options.
These purchases were assumed to have been made at the average market price
of the common stock during the period.
(c) Same as (b) except that purchases of common stock were assumed to have been
made at the higher of either the market price of the common stock at the
end of the period or the average market price for the period.
(d) For the six months ended November 30, 1996 and 1995, does not include
1,485,000 shares and 1,500,000 shares, respectively, subject to options
granted in July 1995 at an average price of $14.120 per share because such
options would have an anti-dilutive effect in such period.
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
RELATED NOTES.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 56,763
<SECURITIES> 184,809
<RECEIVABLES> 1,552,218
<ALLOWANCES> (34,344)
<INVENTORY> 195,904
<CURRENT-ASSETS> 0<F1>
<PP&E> 930,351
<DEPRECIATION> (378,601)
<TOTAL-ASSETS> 3,003,477
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 2,120,093
0<F1>
0<F1>
<COMMON> 549
<OTHER-SE> 293,885
<TOTAL-LIABILITY-AND-EQUITY> 3,003,477
<SALES> 638,604
<TOTAL-REVENUES> 767,559
<CGS> 499,372
<TOTAL-COSTS> 105,887
<OTHER-EXPENSES> 30,704
<LOSS-PROVISION> 1,558
<INTEREST-EXPENSE> 92,267
<INCOME-PRETAX> 37,771
<INCOME-TAX> (20,026)
<INCOME-CONTINUING> 17,745
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> 17,745
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
<FN>
<F1>This line item is not presented on the Consolidated Financial Statements.
</FN>
</TABLE>
