<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 August 31, 1998
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 51,838,860 shares of common stock of the registrant outstanding at
September 30, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
August 31, May 31,
1998 1998
(unaudited) (audited)
----------- ---------
ASSETS (in thousands)
<S> <C> <C>
Cash and cash equivalents $ 47,955 $ 54,709
Short-term investments, restricted 136,414 247,463
Marketable securities 40,334 39,064
Instalment notes receivable 4,215,093 4,238,745
Less - Allowance for possible losses (26,049) (26,221)
Unearned time charges (2,881,439) (2,894,459)
Trade and other receivables, less allowance for possible
losses of $7,136 and $7,133, respectively 214,131 224,691
Inventories, at lower of cost (first in, first out
or average) or market:
Finished goods 177,564 205,516
Goods in process 33,836 36,876
Raw materials and supplies 59,197 53,509
Houses held for resale 3,493 3,153
Prepaid expenses 13,472 12,156
Property, plant and equipment, at cost 1,168,118 1,149,707
Less - Accumulated depreciation and depletion (496,541) (477,359)
Deferred income taxes 77,019 84,409
Investments and other long-term assets 51,049 51,800
Unamortized debt expense 29,775 31,215
Goodwill, net 517,187 527,696
----------- -----------
$ 3,380,608 $ 3,562,670
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Book overdrafts $ 23,633 $ 24,867
Accounts payable 122,430 145,476
Accrued expenses 108,834 126,022
Income taxes payable 61,784 60,098
Short-term notes payable 10,200 5,800
Long-term senior debt
Mortgage-backed/asset-backed notes 1,737,897 1,886,167
Other senior debt 594,151 589,450
Accrued interest 24,092 27,147
Accumulated postretirement benefits obligation 287,644 283,708
Other long-term liabilities 55,053 54,848
Stockholders' equity
Common stock - 200,000,000 authorized, $.01 par value
Issued - 55,292,852 shares and 55,283,686 shares 553 553
Capital in excess of par value 1,169,213 1,169,052
Retained earnings (accumulated deficit) (775,466) (784,503)
Cumulative foreign currency translation adjustment 26 (52)
Treasury stock - 2,570,592 and 1,398,092 shares, at cost (35,524) (21,841)
Excess of additional pension liability over
unrecognized prior years service cost (4,122) (4,122)
Net unrealized appreciation (depreciation)
in marketable securities 210 -
----------- -----------
Total stockholders' equity 354,890 359,087
----------- -----------
$ 3,380,608 $ 3,562,670
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
1
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
August 31,
--------------------------
1998 1997
(in thousands, except per share amounts)
<S> <C> <C>
Sales and revenues:
Net sales $422,600 $334,878
Time charges 64,231 57,824
Miscellaneous 6,303 6,631
-------- --------
493,134 399,333
-------- --------
Cost and expenses:
Cost of sales 348,528 260,483
Depreciation and depletion 20,033 17,568
Selling, general and administrative 43,109 35,110
Postretirement benefits 5,873 5,566
Provision for possible losses 85 319
Interest and amortization of debt expense 47,485 44,863
Amortization of goodwill 10,609 8,416
-------- --------
475,722 372,325
-------- --------
17,412 27,008
Income tax expense:
Current (985) (1,046)
Deferred (7,390) (11,897)
-------- --------
Net income $ 9,037 $ 14,065
======== ========
Net income per share:
Basic $ .17 $ .26
======== ========
Diluted $ .17 $ .26
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
2
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Retained Accumulated
Earnings Other
Comprehensive (Accumulated Comprehensive Common Capital in Treasury
Total Income Deficit) Income Stock Excess Stock
-------- ------------- ------------ ------------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1998 $359,087 $(784,503) $(4,174) $553 $1,169,052 $(21,841)
Comprehensive income
Net income 9,037 $9,037 9,037
Other comprehensive income, net of tax
Net unrealized appreciation in
marketable securities 210 210
Foreign currency translation adjustment 78 78
------
Other comprehensive income 288 288
------
Comprehensive income $9,325
======
Stock issued from options exercises 161 161
Purchase of treasury stock (13,683) (13,683)
-------- --------- ------- ---- ---------- --------
Balance at August 31, 1998 $354,890 $(775,466) $(3,886) $553 $1,169,213 $(35,524)
======== ========= ======= ==== ========== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
August 31,
--------------------------
1998 1997
--------- ---------
OPERATING ACTIVITIES (in thousands)
<S> <C> <C>
Net income $ 9,037 $ 14,065
Charges to income not affecting cash:
Depreciation and depletion 20,033 17,568
Provision for deferred income taxes 7,390 11,897
Accumulated postretirement benefits obligation 3,936 3,495
Provision for other long-term liabilities 205 (379)
Amortization of goodwill 10,609 8,416
Amortization of debt expense 1,440 1,756
--------- ---------
52,650 56,818
Decrease (increase) in assets, net of effects from acquisition:
Short-term investments, restricted 111,049 (9,798)
Marketable securities (1,060) 2,634
Instalment notes receivable, net (a) 10,460 (2,010)
Trade and other notes and accounts receivable, net 10,560 (8,287)
Inventories 24,964 21,713
Prepaid expenses (1,316) 2,735
Increase (decrease) in liabilities, net of effects from acquisition:
Book overdrafts (1,234) (1,746)
Accounts payable (23,046) (15,095)
Accrued expenses (17,188) (20,463)
Income taxes payable 1,686 505
Accrued interest (3,055) 3,125
--------- ---------
Cash flows from operating activities 164,470 30,131
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment, net of
retirements and effects from acquisition (19,262) (18,686)
Decrease (increase) in investments and other assets, net 651 (142)
Acquisition, net of cash acquired - (1,893)
--------- ---------
Cash flows used in investing activities (18,611) (20,721)
--------- ---------
FINANCING ACTIVITIES
Issuance of short-term notes payable and long-term senior debt 53,701 566,150
Retirement of short-term notes payable and long-term senior debt (192,870) (550,018)
Additions to unamortized debt expense - (12,124)
Purchases of treasury stock (13,683) (21,799)
Exercise of employee stock options 161 318
--------- ---------
Cash flows used in financing activities (152,691) (17,473)
--------- ---------
EFFECT OF EXCHANGE RATE ON CASH 78 -
--------- ---------
Net decrease in cash and cash equivalents (6,754) (8,063)
Cash and cash equivalents at beginning of period 54,709 35,782
--------- ---------
Cash and cash equivalents at end of period $ 47,955 $ 27,719
========= =========
</TABLE>
(a) Consists of sales and resales, net of repossessions and provision for
possible losses, of $40,944 and $43,662 and cash collections on account and
payouts in advance of maturity of $51,404 and $41,652, respectively.
See accompanying Notes to Consolidated Financial Statements
4
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1998
(In Thousands, Except Per Share Data)
Note 1 - Principles of Consolidation
Walter Industries, Inc. (the "Company") is a diversified holding company with
five operating segments: Homebuilding and Financing, Water Transmission
Products, Natural Resources, Industrial Products and Energy Services. Through
its operating segments, the Company offers a diversified line of products and
services primarily including home construction and financing, ductile iron
pressure pipe, coal, methane gas, furnace and foundry coke, chemicals, slag
fiber, aluminum foil and sheet products, petroleum coke and distribution and
refinery outsourcing services. 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 results could differ
from those estimates. All significant intercompany balances have been
eliminated. All of the August 31, 1998 and 1997 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 months ended August 31, 1998 and 1997 are not necessarily indicative
of results for a full fiscal year. These financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto in the Company's Annual Report on Form 10-K for the year ended May
31, 1998. Unless otherwise specified, capitalized terms used herein are as
defined in the aforementioned Form 10-K.
Note 2 - Acquisition of AIMCOR
On October 15, 1997, the Company completed the acquisition of AIMCOR, which,
through its Carbon Group, is a leading international provider of products, and
outsourcing services to the petroleum, steel, foundry and aluminum industries.
Through its Metals Group, AIMCOR is also a leading supplier of ferrosilicon in
the southeastern United States. The purchase price was approximately $400.0
million, including direct acquisition costs of $4.8 million and is subject to
certain indemnity obligations of the parties as required by the Stock Purchase
Agreement. The acquisition was accounted for using the purchase method of
accounting and had an effective date of September 30, 1997.
Note 3 - Cash and Cash Equivalents, Restricted Short-Term Investments and
Marketable Securities
Cash and cash equivalents include short-term deposits and highly liquid
investments which have original maturities of three months or less 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 book overdrafts.
Restricted short-term investments at August 31, 1998 and May 31, 1998 include
temporary investment of reserve funds and collections on instalment notes
receivable owned by Mid-State Trusts II, III, IV, V and VI (the "Trust") ($121.5
million and $125.3 million, respectively) which are available only to pay
expenses of the Trusts and principal and interest on indebtedness of the Trusts,
miscellaneous other segregated accounts restricted to specific uses ($14.9
million and $15.3 million, respectively) and certain funds held by Trust II that
are in excess of the interest on the Trust II Mortgage-Backed Notes, but which
were subject to retention at May 31, 1998 ($106.9 million). In June 1998, an
agreement was reached with Financial Security Assurance, Inc. to release
approximately $121.6 million of funds held by Trust II which were subject to
retention at July 1, 1998. These funds were utilized to pay down Trust IV
indebtedness.
5
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Investments with original maturities greater than three months are classified as
marketable securities. In accordance with Statement of Financial Accounting
Standards No. 115 - "Accounting for Certain Investments in Debt and Equity
Securities," the Company's marketable securities are classified as available for
sale and are carried at estimated fair values which approximate cost. The net
unrealized appreciation in marketable securities is shown as a separate
component of stockholders' equity.
Note 4 - Instalment Notes Receivable and Mortgage-Backed/Asset-Backed Notes
Mid-State Trusts II, III, IV and VI are business trusts organized by Mid-State
Homes, Inc. ("Mid-State Homes"), which owns all of the beneficial interest in
Trusts III, IV and VI. Trust IV owns all of the beneficial interest in Trust
II. The Trusts were organized for the purpose of purchasing instalment notes
receivable from Mid-State Homes with the net proceeds from the issuance of
mortgage or asset backed notes. The assets of Trusts II, III, IV and VI,
including the instalment 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, IV and VI for their publicly issued debt are to be
satisfied solely from the proceeds of the underlying instalment notes and are
non-recourse to the Company and its subsidiaries.
Mid-State Trust V ("Trust V"), a business trust in which Mid-State Homes holds
all the beneficial interest, was organized to hold instalment notes receivable
as collateral for borrowings to provide temporary financing to Mid-State Homes
for its current purchases of instalment notes and mortgages from Jim Walter
Homes.
The gross amount of instalment notes receivable, the economic balance and
long-term debt outstanding by trust are as follows (in thousands):
<TABLE>
<CAPTION>
August 31, 1998
-------------------------------------------------------
Gross Balance Economic Balance Debt Outstanding
------------- ---------------- ----------------
<S> <C> <C> <C>
Trust II $ 737,714 $ 473,397 $ 306,850
Trust III 295,071 163,720 75,863
Loan & Security Agreement - - 80,300
Trust IV 1,365,772 616,918 637,526
Trust V 794,582 309,798 245,000
Trust VI 1,018,493 409,293 392,358
Unpledged 3,461 1,516 -
---------- ---------- ----------
Total $4,215,093 $1,974,642 $1,737,897
========== ========== ==========
</TABLE>
Note 5 - Stockholders' Equity
As of August 31, 1998, the Company has repurchased 1,172,500 shares of its
common stock under a share repurchase program authorized by its board of
directors in July 1998. In September 1998, the Company's board of directors
authorized an increase, from two to four million, in the number of shares of the
Company's common stock which may be repurchased under the share repurchase
program.
Note 6 - Earnings Per Share
In February 1997, Statement of Financial Accounting Standards No. 128 -
"Earnings Per Share" ("FAS 128"), was issued. FAS 128 became effective for both
interim and annual periods ending after December 15, 1997 and required a
restatement of previously reported earnings per share. Under FAS 128, "basic"
earnings per share
6
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
replaced the reporting of "primary" earnings per share. Basic earnings per
share is calculated by dividing the income available to common stockholders by
the weighted average number of common shares outstanding for the period, without
consideration of common stock equivalents. "Fully diluted" earnings per share
was replaced by "diluted" earnings per share under FAS 128. The calculation of
diluted earnings per share is similar to that of fully diluted earnings per
share under previous accounting pronouncements. Diluted earnings per share
includes the number of shares issuable on the exercise of dilutive employee
stock options less the number of shares of common stock that could have been
purchased with the proceeds from the exercise of such options.
A reconciliation of the basic and diluted per share computations for the three
months ended August 31, 1998 and 1997 are as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Three Months Ended August 31,
-------------------------------------
1998 1997
----------------- -----------------
Basic Diluted Basic Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 9,037 $ 9,037 $14,065 $14,065
======= ======= ======= =======
Shares of common stock outstanding:
Average number of common shares (a) 53,458 53,458 54,134 54,134
Effect of diluted securities:
Stock options (b)(c) - 404 - 715
------- ------- ------- -------
Average common shares and dilutive effect 53,458 53,862 54,134 54,849
======= ======= ======= =======
Per share:
Net income $ .17 $ .17 $ .26 $ .26
======= ======= ======= =======
</TABLE>
(a) For the three months ended August 31, 1998 and 1997, includes 3,880,140
additional shares issued to an escrow account on September 13, 1995
pursuant to the Consensual Plan, but does not include 2,570,592 and
1,395,992 shares, respectively, held in treasury.
(b) Represents the number of shares of common stock issuable on the exercise of
dilutive employee stock options less the number of shares of common stock
which could have been purchased with the proceeds from the exercise of such
options. These 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.
(c) For the three months ended August 31, 1998 and 1997, does not include
717,500 and 329,000 shares respectively, subject to options because such
options would have an anti-dilutive effect in such period.
Note 7 - Comprehensive Income
Effective in the first quarter ended August 31, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130 - "Reporting Comprehensive
Income" ("FAS 130"). FAS 130 requires that all items of comprehensive income be
classified separately and the accumulated balance of comprehensive income be
reported in the equity section of the financial statements. The adoption of FAS
130 did not have a material effect on the Company's financial condition.
7
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 8 - Segment Information
Information relating to the Company's operating segments is set forth below (in
thousands):
<TABLE>
<CAPTION>
Three months ended
August 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Sales and revenues:
Homebuilding and Financing $111,850 $110,838
Water Transmission Products 120,720 108,859
Natural Resources 87,710 101,629
Industrial Products 84,841 77,663
Energy Services 87,973 -
Corporate 40 344
-------- --------
Consolidated sales and revenues $493,134 $399,333
======== ========
Operating income (a) :
Homebuilding and Financing (b) $ 27,934 $ 19,687
Water Transmission Products 7,078 5,348
Natural Resources (3,356) 13,543
Industrial Products 6,221 4,755
Energy Services 3,544 -
-------- --------
Operating income 41,421 43,333
Less-General corporate expense (b) (2,004) (1,717)
Senior debt interest expense (b) (10,552) (5,936)
Intercompany interest expense (b) (11,453) (8,672)
-------- --------
Income before tax expense 17,412 27,008
Income tax expense (8,375) (12,943)
-------- --------
Net income $ 9,037 $ 14,065
======== ========
</TABLE>
(a) - Operating income amounts are after deducting amortization of goodwill. A
breakdown by segment is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended
August 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Homebuilding and Financing $ 6,899 $ 6,816
Water Transmission Products 3,079 3,081
Natural Resources (335) (335)
Industrial Products 162 161
Energy Services 2,111 -
Corporate (1,307) (1,307)
------- -------
$10,609 $ 8,416
======= =======
</TABLE>
8
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(b) - Interest and amortization of debt expense incurred by the Homebuilding and
Financing segment and Corporate is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended
August 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Homebuilding and Financing:
Gross interest $ 36,933 $38,927
Less: Intercompany interest income (11,453) (8,672)
-------- -------
Net interest 25,480 30,255
Corporate:
Senior debt interest 10,552 5,936
Intercompany interest 11,453 8,672
-------- -------
$ 47,485 $44,863
======== =======
</TABLE>
The general corporate expense, senior debt interest expense and inter-
company interest expense are attributable to all groups, but cannot be
reasonably allocated to specific groups.
Note 9 - Subsequent Events
On October 1, 1998 the Company sold the window balance operations of JW Window
Components, Inc. ("JWWC") to The Amesbury Group, Inc. ("Amesbury"), an affiliate
of The Laird Group plc, in an all cash transaction for $10 million. The
business acquired by Amesbury consists of JWWC's block and tackle jambliner
assembly plant in Sioux Falls, South Dakota together with the spiral balance
business in Elizabethton, Tennessee and jambliner operations in Merrill,
Wisconsin.
Effective October 1, 1998, Jim Walter Homes, Inc. the Company's homebuilding
subsidiary acquired Texas-based builder Dream Homes, Inc. in an all cash
transaction.
At May 31, 1998, the Company had forward-interest rate lock agreements which
fixed the interest rate on a portion of asset-backed long-term debt anticipated
to be issued in October 1999. The lock agreements in effect at May 31, 1998
were terminated on October 9, 1998. The losses incurred ($24.0 million) have
been deferred and will be amortized to interest expense over the life of the
asset-backed long-term debt anticipated to be issued in fiscal 1999.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company completed the acquisition of Applied Industrial Materials
Corporation ("AIMCOR") on October 15, 1997. AIMCOR is a leading international
provider of products and outsourcing services to the petroleum, steel, foundry
and aluminum industries. AIMCOR is also a leading supplier of ferrosilicon in
the southeastern United States (see Note 2 of "Notes to Consolidated Financial
Statements"). Sales and revenues and operating income for AIMCOR are reflected
in the Company's new business segment, the Energy Services Group.
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 1998 AND 1997
Net sales and revenues for the three months ended August 31, 1998 were $93.8
million above the prior year period representing a 23.5% increase of which 22.0%
was attributable to AIMCOR. In addition to the contribution from AIMCOR, the
increase was the result of improved performances from all other operating
segments except the Natural Resources Group.
Homebuilding and Financing Group sales and revenues were $1.0 million, or
.9%, above the prior year period. This performance reflects a 4.8% increase
in the average net selling price, from $47,700 in the 1997 period to $50,000
in 1998, which was more than offset by a decrease in the number of units
sold, from 979 units in the 1997 period to 844 units in 1998. The higher
average selling price is primarily attributable to price increases instituted
to compensate for higher building material and labor costs. The decrease in
unit sales resulted from continuing intense competition from local and
regional homebuilders as well as labor shortages due to high demand for
subcontractors and construction crews. Jim Walter Homes' backlog at August
31, 1998 was 2,143 units compared to 2,128 units at August 31, 1997. Time
charge income (revenues received from Mid-State Homes' instalment note
portfolio) increased from $57.8 million in the 1997 period to $64.2 million
in 1998. 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. The aggregate amount of instalment notes receivable having at
least one payment 90 or more days delinquent was 3.21% of the total
instalment notes receivable in the 1998 period as compared to the prior year
period of 2.74%. The allowance for possible losses as a percentage of net
instalment notes receivable was approximately 2.0% for both periods, which
reflects management's assessment of the amount necessary to provide against
future loss in the portfolio. Operating income of $27.9 million (net of
interest expense) was $8.2 million greater than the prior year period
reflecting higher time charge income, the increase in the average net selling
price per home sold, greater payoffs received in advance of maturity and
lower interest expense in the 1998 period ($25.5 million) as compared to the
prior year period ($30.3 million), partially offset by the decrease in the
number of homes sold.
Water Transmission Products Group sales and revenues were $11.9 million, or
10.9%, above the prior year period. The increase was the result of greater
sales volumes for ductile iron pressure pipe, fittings, valves and hydrants,
partially offset by lower selling prices for all of these products. Ductile
iron pressure pipe shipments at 159,700 tons were 9.7%, greater than the prior
year period. The order backlog at August 31, 1998 was 131,005 tons, which
represents approximately three months shipments compared with 135,788 tons at
August 31, 1997. Operating income of $7.1 million was $1.7 million above the
prior year period. This performance was the result of the previously mentioned
factors as well as improved gross profit margins.
Natural Resources Group sales and revenues were $13.9 million, or 13.7%, below
the prior year period. The decrease was the result of reduced coal shipments
due to unexpected geological problems in two of the Group's four coal mines, a
five-week work stoppage in one mine early in the quarter and curtailed
production resulting from scheduled mining equipment moves. A total of 1.82
million tons of coal was sold at an average selling price per ton of $43.07 in
the current year period compared with 2.23 million tons at $42.25 in 1997. The
increase in the average
10
<PAGE>
selling price was the result of a greater percentage of tonnage sold to Alabama
Power Company at above market prices. Methane gas sales volumes were 2.2
billion cubic feet in the 1998 period versus 1.9 billion cubic feet in 1997.
The average selling price per thousand cubic feet was $3.18 in the 1998 period
versus $3.46 in 1997. Both periods include a monthly reservation fee of $.7
million. The Group's operating loss of $3.4 million was below the prior year
period by $16.9 million. This performance was the result of lower coal
shipments and methane gas selling prices combined with decreased coal
productivity which contributed to greater production costs ($44.39 per ton in
the 1998 period versus $35.46 in 1997), partially offset by the higher coal
selling prices and methane gas sales volumes. Prior year results included a
$4.0 million credit from settlement of an insurance claim relating to a
production hoist accident at Blue Creek Mine No. 3 in fiscal 1993.
Industrial Products Group sales and revenues were $7.2 million, or 9.2%, greater
than the prior year period. The improved performance was the result of
increased shipments of aluminum foil and sheet products, furnace and foundry
coke and slag fiber, partially offset by lower selling prices for aluminum foil
and sheet products. Operating income of $6.2 million exceeded the prior year
period by $1.5 million. The improved performance primarily resulted from sales
increases and higher gross profit margins realized on aluminum foil and sheet
products and furnace coke.
Cost of sales, exclusive of depreciation, of $348.5 million was 82.5% of net
sales in the 1998 period versus $260.5 million and 77.8% in 1997. The
percentage increase reflected lower gross profit margins realized on coal and
methane gas.
Selling, general and administrative expenses of $43.1 million were 8.7% of net
sales and revenues in the 1997 period versus $35.1 million and 8.8% in 1997.
Interest and amortization of debt expense was $47.5 million in the 1998 period
versus $44.9 million in 1997 reflecting higher average outstanding debt balances
primarily resulting from the AIMCOR acquisition, partially offset by lower
interest rates. The average rate of interest in the 1998 period was 7.6% as
compared to 8.2% in 1997. The prime rate of interest was 8.5% in both periods.
The Company's effective tax rate in the 1998 and 1997 periods differed from the
statutory tax rate primarily due to amortization of goodwill (excluding such
amounts related to the AIMCOR acquisition), which is not deductible for tax
purposes and percentage depletion.
The net income in the 1998 period was $9.0 million compared to net income of
$14.1 million in the 1997 period reflecting all of the previously mentioned
factors as well as the income contribution from the Energy Services Group.
Financial Condition
Since May 31, 1998, total debt decreased $139.2 million. Scheduled payments on
the mortgage backed/asset backed notes amounted to $175.2 million. Scheduled
retirements of other long-term debt amounted to $.3 million. Also, during the
current three month period borrowings under the Mid-State Trust V Variable
Funding Loan Agreement and the Credit Facilities totaled $27.0 million and $9.4
million, respectively.
At August 31, 1998 borrowings under the Credit Facilities totaled $600.2 million
(including swingline advances of $10.2 million). The Revolving Credit Facility
includes a sub-facility for trade and other standby letters of credit in an
amount up to $75.0 million at any time outstanding. At August 31, 1998 there
were $24.1 million face amount of letters of credit outstanding thereunder.
The Credit Facilities contain a number of significant covenants that, among
other things, restrict the ability of the
11
<PAGE>
Company and its subsidiaries to dispose of assets, incur additional
indebtedness, pay dividends, create liens on assets, enter into capital 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
fixed charge coverage ratios and maximum leverage ratios. The borrowers are
required to maintain a leverage ratio (the ratio of indebtedness to consolidated
EBITDA (as defined in the Credit Facilities)) of not more than 3.75-to-1 for the
measurement period commencing May 31, 1998 and ending May 30, 1999 and 3.25-to-1
thereafter. The borrowers' fixed charge coverage ratio (the ratio of (a) EBITDA
minus capital expenditures to (b) the sum of all required principal payments on
outstanding indebtedness, interest expense and dividends paid) is required to be
at least 1.25-to-1 at the end of each Four Quarter Period (as defined in the
Credit Facilities) for the duration of the Credit Facilities. The Company was
in compliance with these covenants at August 31, 1998.
The Trust V Variable Funding Loan Agreement's covenants, among other things,
restrict the ability of Trust V to dispose of assets, create liens and engage in
mergers or consolidations. The Company was in compliance with these covenants
at August 31, 1998.
The Loan and Security Agreement contains a number of covenants that, among other
things, restrict the ability of Mid-State Homes to dispose of assets, create
liens on assets, engage in mergers, incur any unsecured or recourse debt, or
make changes to their credit and collection policy. In addition, Mid-State
Homes is required to maintain specified net income and net worth levels. The
Company was in compliance with these covenants at August 31, 1998.
Liquidity and Capital Resources
At August 31, 1998, cash and cash equivalents, net of book overdrafts, were
approximately $24.3 million. Operating cash flows for the three months ended
August 31, 1998 together with issuance of long-term debt under the Mid-State
Trust V Variable Funding Loan Agreement, borrowings under the Credit Facilities
and the use of available cash balances were primarily used for retirement of
long-term senior debt, interest payments, capital expenditures and the purchase
of approximately 1.2 million shares of common stock during the quarter. In
September 1998, the Company's Board of Directors authorized an increase, from
two to four million, in the number of shares of the Company's common stock which
may be repurchased under its stock repurchase program.
Working capital is required to fund adequate levels of inventories and accounts
receivable. Commitments for capital expenditures at August 31, 1998 were not
significant; however, it is estimated that gross capital expenditures of the
Company and its subsidiaries for the balance of the year ending May 31, 1999
will approximate $80.0 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 instalment 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 instalment notes and mortgages generated by Jim Walter Homes. It is
anticipated that one or more permanent financings similar to the previous
Mid-State Homes asset-backed 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 cash flow will be generated to make all required interest and
principal payments on its indebtedness, to make all its planned capital
expenditures and meet substantially all operating needs. It is further expected
that amounts under the Revolving Credit Facility will be sufficient to meet peak
operating needs of the Company and to repurchase up to an additional 2.8 million
shares of the Company's common stock.
12
<PAGE>
YEAR 2000
The Company is currently working to resolve the potential impact of the Year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures.
The Company has established a Corporate Steering Committee (the "Committee") to
coordinate solutions to Year 2000 issues for its information systems. The
Committee includes a representative from each subsidiary as well as two members
of the Company's Law Department, the Director of Information Technology and the
Chief Financial Officer. Each subsidiary also has a steering committee
consisting of the representative on the Committee and other members from all
functional areas of the respective subsidiary. The Committee has identified
systems and applications that require modification and has evaluated alternative
solutions. The Committee also developed a Year 2000 Standard that was issued to
all subsidiaries and must be followed for Year 2000 compliance. Status
conference calls are held monthly and on-site progress reviews are held
quarterly. The Company has two data centers which have installed Year 2000
compliant mainframe equipment, operating systems and system software. Separate
virtual machines within a computer have been installed for the purpose of
testing. Testing has already commenced on systems which have been converted.
In early calendar 1999, a detailed internal review will be conducted with each
subsidiary to ascertain progress on supporting documentation, vendor compliance
testing which includes responses from vendors to a questionnaire developed by
the Committee regarding Year 2000 status, software conversion and testing and
progress of contingency plans. Contingency plan guidelines have been developed
by the Committee and provided to each subsidiary. On-site reviews of written
contingency plans will be conducted throughout calendar 1999.
Based on information currently available, estimated Year 2000 costs of
approximately $12.2 million are not expected to have a material adverse impact
on the Company's financial position, results of operations or cash flows in
future periods. However, if the Company, its customers or vendors are unable to
resolve such processing issues in a timely manner, there is no assurance that it
would not result in a material financial risk. Accordingly, the Company plans to
devote the necessary resources to resolve all significant Year 2000 issues in a
timely manner.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 131 - "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131"), was issued in
June 1997 and became effective for annual periods beginning after December 15,
1997 (fiscal 1999 for the Company), but does not require compliance with interim
reporting requirements until the second year of implementation. FAS 131
establishes standards for reporting information about operating segments in
financial statements. In addition, it establishes standards for related
disclosures about products and services, geographic areas and major customers.
In February 1998, Statement of Financial Accounting Standards No. 132 -
"Employers' Disclosures about Pensions and Other Postretirement Benefits" ("FAS
132") was issued. FAS 132 becomes effective for fiscal years beginning after
December 15, 1997 (fiscal 1999 for the Company). This statement revises
employers' disclosures about pension and other postretirement benefit plans.
In June 1998, Statement of Financial Accounting Standards No. 133 - "Accounting
for Derivative Instruments and Hedging Activities" ("FAS 133") was issued. FAS
133 becomes effective for all fiscal quarters of fiscal years beginning after
June 15, 1999 (fiscal 2000 for the Company). This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. FAS 133 requires that all derivatives
and hedging activities be recognized as either assets or liabilities in the
statement of financial position and be measured at fair
13
<PAGE>
value. Currently, the Company has no derivative instruments outstanding.
The Company believes that the adoption of the above standards will not
materially affect its financial performance or reporting.
Private Securities Litigation Reform Act Safe Harbor Statement
This Form 10-Q contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to the Company that is based on the beliefs of the management of the
Company, as well as assumptions made by and information currently available to
the management of the Company. When used in this Form 10-Q, the words
"estimate," "project," "believe," "anticipate," "intend," "expect," and similar
expressions are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. Among those factors which could cause actual results to differ
materially are market demand, competition, interest rate fluctuations, weather
and other risk factors listed from time to time in the Company's filings with
the Securities and Exchange Commission. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company does not undertake any obligation to publicly release
any revisions to these forward looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
A substantial controversy exits with regard to federal income taxes
allegedly owed by the Company. See "Note 7 - Income Taxes" of Notes
to Consolidated Financial Statements contained in the Company's Annual
Report on Form 10-K for the year ended May 31, 1998.
The Company and its subsidiaries are parties to a number of other
lawsuits arising in the ordinary course of their businesses. Most of
these cases are in a preliminary stage and the Company is unable to
predict a range of possible loss, if any. The Company provides for
costs relating to these matters when a loss is probable and the amount
is reasonably estimable. The effect of the outcome of these matters
on the Company's future results of operations cannot be predicted
because any such effect depends on future results of operations and
the amount and timing of the resolution of such matters. While the
results of litigation cannot be predicted with certainty, the Company
believes that the final outcome of such other litigation will not have
a materially adverse effect on the Company's consolidated financial
condition.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) None
15
<PAGE>
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, Controller and
Principal Financial Officer Principal Accounting Officer
Date: October 15, 1998
------------------
16
<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> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 47,955
<SECURITIES> 176,748
<RECEIVABLES> 1,554,921
<ALLOWANCES> (33,185)
<INVENTORY> 274,090
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,168,118
<DEPRECIATION> (496,541)
<TOTAL-ASSETS> 3,380,608
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 2,342,248
0<F1>
0<F1>
<COMMON> 553
<OTHER-SE> 354,337
<TOTAL-LIABILITY-AND-EQUITY> 3,380,608
<SALES> 422,600
<TOTAL-REVENUES> 493,134
<CGS> 348,528
<TOTAL-COSTS> 63,142
<OTHER-EXPENSES> 16,482
<LOSS-PROVISION> 85
<INTEREST-EXPENSE> 47,485
<INCOME-PRETAX> 17,412
<INCOME-TAX> (8,375)
<INCOME-CONTINUING> 9,037
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> 9,037
<EPS-PRIMARY> .17
<EPS-DILUTED> .17<F1>
<FN>
<F1>This line item is not presented on the Consolidated Financial Statements.
</FN>
</TABLE>
