<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 February 28, 1999
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 50,671,492 shares of common stock of the registrant outstanding at
March 31, 1999.
<PAGE>
PART I - FINANCIAL INFORMATION
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 28, May 31,
1999 1998
(unaudited) (audited)
----------- -----------
(in thousands, except share amounts)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 58,057 $ 54,647
Short-term investments, restricted 140,511 244,173
Marketable securities 22,534 39,064
Instalment notes receivable 4,188,391 4,238,745
Less - Allowance for possible losses (25,830) (26,221)
Unearned time charges (2,869,284) (2,894,459)
Trade and other receivables, less allowance for possible
losses of $4,773 and $3,933, respectively 177,639 197,747
Inventories, at lower of cost (first in, first out
or average) or market:
Finished goods 164,361 158,276
Goods in process 43,194 36,876
Raw materials and supplies 39,867 45,539
Houses held for resale 3,584 3,153
Prepaid expenses 15,187 8,117
Property, plant and equipment, at cost 739,387 722,905
Less - Accumulated depreciation (345,974) (326,565)
Deferred income taxes 47,451 59,581
Investments and other long-term assets 44,852 44,740
Unamortized debt expense 51,706 31,215
Goodwill, net 527,591 543,896
Assets held for disposition 324,695 381,241
----------- -----------
$ 3,347,919 $ 3,562,670
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Book overdrafts $ 29,336 $ 24,867
Accounts payable 117,600 145,476
Accrued expenses 129,758 126,022
Income taxes payable 53,069 60,098
Short-term notes payable 5,400 5,800
Long-term senior debt:
Mortgage-backed/asset-backed notes 1,723,422 1,886,167
Other senior debt 598,000 589,450
Accrued interest 28,235 27,147
Accumulated postretirement benefits obligation 268,582 283,708
Other long-term liabilities 60,135 54,848
Stockholders' equity
Common stock - 200,000,000 authorized, $.01 par value
Issued - 55,304,184 and 55,283,686 shares, respectively 553 553
Capital in excess of par value 1,169,377 1,169,052
Retained earnings (accumulated deficit) (766,657) (784,503)
Cumulative foreign currency translation adjustment (46) (52)
Treasury stock - 4,371,092 and 1,398,092 shares, at cost (64,700) (21,841)
Excess of additional pension liability over
unrecognized prior years service cost (4,122) (4,122)
Net unrealized depreciation in marketable securities (23) --
----------- -----------
Total stockholders' equity 334,382 359,087
----------- -----------
$ 3,347,919 $ 3,562,670
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
February 28,
--------------------------
1999 1998
----------- -----------
(in thousands, except per share amounts)
<S> <C> <C>
Sales and revenues:
Net sales $ 287,024 $ 311,069
Time charges 59,958 59,243
Miscellaneous 5,595 6,647
--------- ---------
352,577 376,959
--------- ---------
Cost and expenses:
Cost of sales 228,315 252,155
Depreciation 11,278 11,493
Selling, general and administrative 39,362 41,881
Postretirement benefits 1,929 1,661
Provision for possible losses 565 593
Interest and amortization of debt expense 45,754 50,903
Amortization of goodwill 10,243 10,515
--------- ---------
337,446 369,201
--------- ---------
15,131 7,758
Income tax benefit (expense):
Current (13,588) 991
Deferred 5,363 (7,253)
--------- ---------
Income from continuing operations 6,906 1,496
Income (loss) from discontinued operation (net of income tax
benefit (expense) of $14,597 and ($1,920), respectively) (17,832) 6,212
--------- ---------
Net income (loss) $ (10,926) $ 7,708
========= =========
Basic earnings per share:
Income from continuing operations $ .14 $ .03
Income (loss) from discontinued operation (.35) .11
--------- ---------
Net income (loss) $ (.21) $ .14
========= =========
Diluted earnings per share:
Income from continuing operations $ .14 $ .03
Income (loss) from discontinued operation (.35) .11
--------- ---------
Net income (loss) $ (.21) $ .14
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended
February 28,
--------------------------
1999 1998
----------- -----------
(in thousands, except per share amounts)
<S> <C> <C>
Sales and revenues:
Net sales $ 983,188 $ 841,636
Time charges 185,130 177,331
Miscellaneous 19,144 18,666
----------- -----------
1,187,462 1,037,633
----------- -----------
Cost and expenses:
Cost of sales 789,947 678,642
Depreciation 33,746 31,504
Selling, general and administrative 122,096 112,431
Postretirement benefits 5,839 4,984
Provision for possible losses 660 (19)
Interest and amortization of debt expense 139,234 143,737
Amortization of goodwill 32,341 29,578
Loss on sale of subsidiary 3,849 --
----------- -----------
1,127,712 1,000,857
----------- -----------
59,750 36,776
Income tax benefit (expense):
Current (15,873) 6,161
Deferred (6,329) (29,163)
----------- -----------
Income from continuing operations 37,548 13,774
Income (loss) from discontinued operation
(net of income tax benefit (expense)
of $18,005 and ($6,095), respectively) (19,702) 20,640
Extraordinary item - Loss on early extinguishment of
debt (net of income tax benefit of $1,434) -- (2,663)
----------- -----------
Net income $ 17,846 $ 31,751
=========== ===========
Basic earnings per share:
Income from continuing operations $ .72 $ .26
Income (loss) from discontinued operation (.38) .38
Extraordinary item -- (.05)
----------- -----------
Net income $ .34 $ .59
=========== ===========
Diluted earnings per share:
Income from continuing operations $ .72 $ .25
Income (loss) from discontinued operation (.38) .38
Extraordinary item -- (.05)
----------- -----------
Net income $ .34 $ .58
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<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 17,846 17,846 17,846
Other comprehensive income,
net of tax:
Net unrealized depreciation in
marketable securities (23) (23)
Foreign currency translation
adjustment 6 6
-------
Other comprehensive income (17) (17)
-------
Comprehensive income $17,829
=======
Stock issued from options exercises 325 325
Purchases of treasury stock (42,859) (42,859)
-------- --------- ------- ---- ---------- --------
Balance at February 28, 1999 $334,382 $(766,657) $(4,191) $553 $1,169,377 $(64,700)
======== ========= ======= ==== ========== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended
February 28,
--------------------------
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 17,846 $ 31,751
Charges to income not affecting cash:
Depreciation 33,746 31,504
Provision for deferred income taxes 6,329 29,163
Accumulated postretirement benefits obligation (15,126) 11,460
Provision for (benefit from) other long-term liabilities 5,287 (720)
Amortization of goodwill 32,341 29,578
Amortization of debt expense 5,207 5,084
Net unrealized depreciation in marketable securities (23) --
Loss on sale of subsidiary 3,849 --
Extraordinary item - Loss on early extinguishment of
debt (net of income tax benefit) -- 2,663
----------- -----------
89,456 140,483
Decrease (increase) in assets, net of effects from acquisitions:
Short-term investments, restricted 103,662 (29,750)
Marketable securities 16,530 2,412
Instalment notes receivable, net (a) 24,788 3,099
Trade and other notes and accounts receivables, net 21,420 28,120
Inventories (13,070) (12,196)
Prepaid expenses (7,596) (8,627)
Assets held for disposition (b) 56,546 12,062
Increase (decrease) in liabilities, net of effects from acquisitions:
Book overdrafts 4,469 (7,016)
Accounts payable (30,618) (7,882)
Accrued expenses 1,282 (10,972)
Income taxes payable (1,775) (101)
Accrued interest 1,088 2,084
----------- -----------
Cash flows from operating activities 266,182 111,716
----------- -----------
INVESTING ACTIVITIES
Additions to property, plant and equipment, net of retirements (35,663) (35,403)
(Increase) decrease in investments and other assets, net (213) 2,250
Proceeds from sale of subsidiary 14,878 --
Acquisitions, net of cash acquired (18,953) (403,006)
----------- -----------
Cash flows used in investing activities (39,951) (436,159)
----------- -----------
FINANCING ACTIVITIES
Issuance of short-term notes payable and long-term senior debt 516,659 1,342,450
Retirement of short-term notes payable and
long-term senior debt (671,254) (975,172)
Additions to unamortized debt expense (25,698) (18,731)
Purchases of treasury stock (42,859) (21,821)
Exercise of employee stock options 325 1,125
----------- -----------
Cash flows (used in) from financing activities (222,827) 327,851
----------- -----------
EFFECT OF EXCHANGE RATE ON CASH 6 594
----------- -----------
Net increase in cash and cash equivalents 3,410 4,002
Cash and cash equivalents at beginning of period 54,647 35,726
----------- -----------
Cash and cash equivalents at end of period $ 58,057 $ 39,728
=========== ===========
</TABLE>
(a) Consists of sales and resales, net of repossessions and provision for
possible losses, of $123,945 and $128,503 and cash collections on account
and payouts in advance of maturity of $148,733 and $131,602 respectively.
(b) Includes non-cash charges of approximately $30.9 million from write-down
of impaired assets.
See accompanying Notes to Consolidated Financial Statements
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999
(in thousands, except per share data)
Note 1 - Principles of Consolidation
Walter Industries, Inc. (the "Company") is a diversified holding company with
four operating segments: Homebuilding and Financing, Water Transmission
Products, Industrial Products and Energy Services. Through these operating
segments, the Company offers a diversified line of products and services
including home construction and financing, ductile iron pressure pipe,
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 February 28, 1999 and 1998 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
nine months ended February 28, 1999 and 1998 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, accounting principles and capitalized
terms used herein are as defined in the aforementioned Form 10-K.
Note 2 - Acquisitions and Divestitures
On February 26, 1999, Jim Walter Homes, Inc., the Company's homebuilding
subsidiary, acquired Crestline Homes, Inc., a modular homebuilder, located in
Laurinburg, North Carolina. Effective October 1, 1998, Jim Walter Homes, Inc.
acquired Texas-based builder Dream Homes, Inc.
On October 1, 1998, the Company sold the assets of the window balance
operations of JW Window Components, Inc. ("JWWC"). On November 23, 1998, the
Company sold the outstanding capital stock of JWWC, which comprised the roll
form and screen products operations. These transactions completed the
Company's divestiture of JWWC. The Company recorded a pretax loss of $3,849
and a tax benefit of $10,528 on the sale of JWWC.
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.
<PAGE>
Note 3 - Discontinued Operation
In February 1999, a decision was made to dispose of Jim Walter Resources
("JWR"), the Company's coal mining and methane gas subsidiary. The Company
expects to complete the disposition within calendar 1999. As a result, the
operations of JWR have been classified as a discontinued operation in the
consolidated financial statements. JWR comprised substantially all of the
Company's Natural Resources operating segment. In February 1999 (the
measurement date), a decision was also made to shut down Blue Creek Mine No.
3 ("Mine No. 3"). The estimated costs to shut down the mine approximated $53
million. In addition, the Company realized a $25 million pre-tax gain from a
reduction in JWR's postretirement benefit obligation resulting from a recent
actuarial analysis of medical claims experience, a reduction in the workforce
and the decision to close Mine No. 3. Both of the above items were recorded
in the fiscal 1999 third quarter, net of taxes, within the results of
discontinued operations prior to the measurement date.
The following is a summary of the operating results of JWR prior to the
measurement date:
<TABLE>
<CAPTION>
Three months ended February 28, Nine months ended February 28,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales and revenues $ 63,853 $ 76,863 $ 237,056 $ 263,591
Costs and expenses 96,282 68,731 274,763 236,856
--------- --------- --------- ---------
Income (loss) before tax (32,429) 8,132 (37,707) 26,735
Income tax benefit (expense) 14,597 (1,920) 18,005 (6,095)
--------- --------- --------- ---------
Income (loss) from discontinued operation $ (17,832) $ 6,212 $ (19,702) $ 20,640
========= ========= ========= =========
</TABLE>
The assets of JWR have been segregated on the balance sheet from their
historical classification to separately identify them as assets held for
disposition. Such amounts are summarized as follows:
February 28, May 31,
1999 1998
--------- ---------
Cash and cash equivalents $ 53 $ 62
Short-term investments, restricted 3,461 3,290
Trade and other receivables, net 23,131 26,944
Inventories 45,249 55,210
Prepaid expenses 1,866 4,039
Property, plant and equipment, net 220,270 259,808
Deferred income taxes 24,359 24,828
Investments and other long-term assets 6,306 7,060
--------- ---------
Total Assets Held for Disposition $ 324,695 $ 381,241
========= =========
The liabilities of JWR have not been classified separately pending determination
of the form and structure of disposition. Management does not presently
anticipate a loss on the ultimate disposition.
Note 4 - Restricted Short-Term Investments
Restricted short-term investments at February 28, 1999 and May 31, 1998
include (i) temporary investment of reserve funds and collections on
instalment notes receivable owned by Mid-State Trusts II, III, IV, V, VI and
Mid-State Trust VII ("Trust VII") (collectively the "Trusts") ($127.8 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, (ii)
miscellaneous other segregated accounts restricted to specific uses ($12.7
million and $12.0 million, respectively), and (iii) 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
<PAGE>
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.
Note 5 - Instalment Notes Receivable and Mortgage Backed/Asset Backed Notes
Mid-State Trusts II, III, IV, VI and VII are business trusts organized by
Mid-State Homes, Inc. ("Mid-State Homes"), which owns all of the beneficial
interest in Trusts III, IV, VI and VII. 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, VI and VII, 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, VI and VII 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.
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.
On December 10, 1998, Mid-State Homes purchased from Trust V instalment notes
having a gross value of $858.7 million and an economic balance of $335.3
million. Mid-State Homes subsequently sold these notes to Trust VII, a
business trust organized by Mid-State Homes. These sales were in exchange for
the net proceeds from the public issuance of $313.5 million of Asset Backed
Notes by Trust VII ("Trust VII Asset Backed Notes"). The notes were issued in
a single class and bear interest at 6.34% payable quarterly beginning March
15, 1999. The notes have a final maturity of December 15, 2036. The $313.5
million in proceeds were primarily used to repay related asset-backed
borrowings of $284.0 million under the Trust V warehouse facility. Lehman
Brothers, Inc., an affiliate of Lehman Brothers Holdings, Inc., which owned
2.8 million shares of the Company's common stock at February 28, 1999, served
as an underwriter in connection with the public issuance of the Trust VII
Asset Backed Notes and received underwriting commissions and fees of $1.3
million.
The gross amount of instalment notes receivable, the economic balance and
long-term debt outstanding by trust are as follows:
February 28, 1999
---------------------------------------------------
Gross Balance Economic Balance Debt Outstanding
------------- ---------------- ----------------
Trust II $ 656,667 $ 422,905 $ 274,550
Trust III 269,043 151,019 57,187
Loan & Security Agreement -- -- 86,300
Trust IV 1,267,346 579,543 602,282
Trust V 180,016 68,361 20,000
Trust VI 958,789 389,952 369,615
Trust VII 835,934 328,674 313,488
Unpledged 20,596 7,946 --
---------- ---------- ----------
Total $4,188,391 $1,948,400 $1,723,422
========== ========== ==========
At May 31, 1998, the Company had forward-interest rate lock agreements which
fixed the interest rates on a portion of asset-backed long-term debt
anticipated to be issued by Mid-State Homes in October 1998. The lock
agreements in effect at May 31, 1998 were terminated on October 9, 1998. The
losses incurred ($24.0 million) were deferred and are being amortized to
interest expense over the life of the Trust VII Asset Backed Notes.
<PAGE>
Note 6 - Stockholders' Equity
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 authorized in July 1998.
Information relating to the Company's share repurchases under this program is
set forth below (in thousands):
Shares Amount
------ ------
Three months ended February 28, 1999 318 $ 4,711
------- -------
Nine months ended February 28, 1999 2,973 $42,859
======= =======
Note 7 - Earnings Per Share
Shares of common stock outstanding used in the basic and diluted per share
computations for the three months and nine months ended February 28, 1999 and
1998 are as follows:
Three months ended February 28,
---------------------------------
1999 1998
--------------- ---------------
Basic Diluted Basic Diluted
------ ------ ------ ------
Average number of common shares
outstanding (a) 51,024 51,024 53,706 53,706
Effect of diluted securities:
Stock options (b)(c) -- -- -- 869
------ ------ ------ ------
51,024 51,024 53,706 54,575
====== ====== ====== ======
Nine months ended February 28,
---------------------------------
1999 1998
--------------- ---------------
Basic Diluted Basic Diluted
------ ------ ------ ------
Average number of common shares
outstanding (a) 51,980 51,980 53,842 53,842
Effect of diluted securities:
Stock options (b)(c) -- 200 -- 869
------ ------ ------ ------
51,980 52,180 53,842 54,711
====== ====== ====== ======
(a) For the three and nine months ended February 28, 1999 and 1998 include
3,880 additional shares issued to an escrow account on September 13, 1995
pursuant to the Consensual Plan, but does not include 4,371 and 1,398
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 and nine months ended February 28, 1999, does not
include 3,853 and 906 shares, respectively, subject to options because
such options would have an anti-dilutive effect in such period.
<PAGE>
Note 8 - Segment Information
Information relating to the Company's operating segments is set forth below:
Three months ended
February 28,
-------------------------
1999 1998
--------- ---------
Sales and revenues:
Homebuilding and Financing $ 110,507 $ 108,219
Water Transmission Products 87,673 84,482
Industrial Products 69,280 72,538
Energy Services 83,360 109,461
Corporate 1,757 2,259
--------- ---------
Consolidated sales and revenues
from continuing operations $ 352,577 $ 376,959
========= =========
Operating income (a) :
Homebuilding and Financing (b) $ 25,287 $ 22,965
Water Transmission Products 6,593 (2,892)
Industrial Products 5,155 4,540
Energy Services 2,974 10,826
--------- ---------
Operating income 40,009 35,439
Less: General corporate expense (b) (3,969) (4,957)
Senior debt interest expense (b) (9,621) (12,350)
Intercompany interest expense (b) (11,288) (10,374)
--------- ---------
Income before tax expense 15,131 7,758
Income tax expense (8,225) (6,262)
--------- ---------
Income from continuing operations $ 6,906 $ 1,496
========= =========
(a) Operating income amounts are after deducting amortization of goodwill. A
breakdown of goodwill amortization by segment is as follows:
Three months ended
February 28,
-----------------------
1999 1998
-------- --------
Homebuilding and Financing $ 6,121 $ 6,482
Water Transmission Products 3,012 3,011
Industrial Products 158 160
Energy Services 2,127 2,037
Corporate (1,175) (1,175)
-------- --------
$ 10,243 $ 10,515
======== ========
<PAGE>
(b) Interest and amortization of debt expense incurred by the Homebuilding and
Financing segment and Corporate is as follows:
Three months ended
February 28,
---------------------
1999 1998
-------- --------
Homebuilding and Financing:
Gross interest $ 36,133 $ 38,553
Less: Intercompany interest income (11,288) (10,374)
-------- --------
Net interest 24,845 28,179
Corporate:
Senior debt interest 9,621 12,350
Intercompany interest 11,288 10,374
-------- --------
$ 45,754 $ 50,903
======== ========
General corporate expense, senior debt interest expense and intercompany
interest expense are attributable to all operating segments, but cannot
be reasonably allocated to specific segments.
Nine months ended
February 28,
----------------------------
1999 1998
----------- -----------
Sales and revenues:
Homebuilding and Financing $ 334,696 $ 332,782
Water Transmission Products 338,514 309,009
Industrial Products 235,615 223,389
Energy Services 270,191 165,856
Corporate 8,446 6,597
----------- -----------
Consolidated sales and revenues
from continuing operations $ 1,187,462 $ 1,037,633
=========== ===========
Operating income (a) :
Homebuilding and Financing (b) $ 82,180 $ 65,876
Water Transmission Products 22,229 8,047
Industrial Products 14,134 14,220
Energy Services 13,670 12,767
----------- -----------
Operating income 132,213 100,910
Less: General corporate expense (b) (7,440) (8,154)
Senior debt interest expense (b) (30,758) (26,999)
Intercompany interest expense (b) (34,265) (28,981)
----------- -----------
Income before tax expense 59,750 36,776
Income tax expense (22,202) (23,002)
----------- -----------
Income from continuing operations $ 37,548 $ 13,774
=========== ===========
<PAGE>
(a) Operating income amounts are after deducting amortization of goodwill. A
breakdown of goodwill amortization by segment is as follows:
Nine months ended
February 28,
-----------------------
1999 1998
-------- --------
Homebuilding and Financing $ 19,667 $ 20,060
Water Transmission Products 9,136 9,138
Industrial Products 477 480
Energy Services 6,629 3,466
Corporate (3,568) (3,566)
-------- --------
$ 32,341 $ 29,578
======== ========
(b) Interest and amortization of debt expense incurred by the Homebuilding and
Financing segment and Corporate is as follows:
Nine months ended
February 28,
-----------------------
1999 1998
--------- ---------
Homebuilding and Financing:
Gross interest $ 108,476 $ 116,738
Less: Intercompany interest income (34,265) (28,981)
--------- ---------
Net interest 74,211 87,757
Corporate:
Senior debt interest 30,758 26,999
Intercompany interest 34,265 28,981
--------- ---------
$ 139,234 $ 143,737
========= =========
General corporate expense, senior debt interest expense and intercompany
interest expense are attributable to all operating segments, but cannot
be reasonably allocated to specific segments.
<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"). Net sales and revenues and operating income for AIMCOR are
reflected in the Company's Energy Services operating segment.
In February 1999, the decision was made to dispose of Jim Walter Resources
("JWR"), the Company's coal mining and methane gas subsidiary. JWR comprised
substantially all of the Company's Natural Resources segment. The operations
of JWR have been classified as a discontinued operation in the consolidated
financial statements. The decision was also made to shut down Blue Creek Mine
No. 3. The estimated cost to shut down the mine was approximately $53
million. In addition, the Company realized a $25 million pre-tax gain from a
reduction in JWR's postretirement benefit obligation resulting from a recent
actuarial analysis of medical claims experience, a reduction in the workforce
and the decision to close Mine No. 3. Both of the above items were recorded
in the fiscal 1999 third quarter, net of taxes, within the results of
discontinued operations prior to the measurement date.
RESULTS OF OPERATIONS
Three Months ended February 28, 1999 and 1998
Sales and revenues for the three months ended February 28, 1999 were $24.4
million below the prior year period, a 6% decrease. The decrease was the
result of lower sales and revenues from the Company's Industrial Products and
Energy Services segments.
Cost of sales, exclusive of depreciation, of $228.3 million was 79.5% of net
sales in the 1999 period versus $252.2 million and 81.0 % in 1998. The
improvement principally reflected higher gross profit margins realized on
pipe and aluminum products.
Selling, general and administrative expenses of $39.4 million were 11.2% of net
sales and revenues in the 1999 period compared to $41.9 million and 11.1% in
1998.
Interest and amortization of debt expense was $45.8 million in the 1999 period
versus $50.9 million in 1998 as a result of lower interest rates and lower
average outstanding debt balances. The average rate of interest in the 1999
period was 7.42% as compared to 7.84% in 1998. The average prime rate of
interest was 7.75% and 8.5% in the 1999 and 1998 periods, respectively.
The Company's effective tax rate in the 1999 and 1998 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.
The net loss in the 1999 period was $10.9 million, including an after-tax
loss of $17.8 million from the discontinued operations of Jim Walter
Resources. This compared to net income of $7.7 million in the 1998 period
which included after-tax income of $6.2 million from the discontinued
operations of Jim Walter Resources. The Company's diluted loss per share was
$.21 compared to last year's diluted earnings per share of $.14. The increase
in earnings adjusted for the results of the discontinued operation
approximates $5.4 million which reflects all of the factors discussed in the
following segment analysis.
<PAGE>
Segment Analysis:
Homebuilding and Financing sales and revenues of $110.5 million were 2.1%
above the prior year period. This performance reflects a 6.7% increase in the
average net selling price per home sold, from $49,500 in the 1998 period to
$52,800 in 1999, as well as an increase in the number of units sold, from 856
units in the 1998 period to 864 units in 1999. The higher average selling
price is primarily attributable to price increases instituted to compensate
for higher building material and labor costs, coupled with consumer
preference for new and more upscale models and amenities being offered by Jim
Walter Homes. The increase in unit sales resulted from the new home designs
as well as more targeted marketing and advertising programs. Jim Walter
Homes' backlog at February 28, 1999 was 2,401 units compared to 1,894 units
at February 28, 1998. Time charge income (revenues received from Mid-State
Homes' instalment note portfolio) increased from $59.2 million in the 1998
period to $60.0 million in 1999. 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 3.56% of the total
instalment notes receivable in the 1999 period compared to 3.35% in the prior
year period. 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 $25.3 million (net of
interest expense) was $2.3 million greater than the prior year period,
reflecting higher time charge income, the increase in the average net selling
price per home sold, an increase in units sold and lower interest expense in
the 1999 period ($24.8 million) as compared to the prior year period ($28.2
million).
Water Transmission Products sales and revenues of $87.7 million were 3.8%
above the prior year period. The increase was the result of increased
shipments for ductile iron pressure pipe fittings, valves and hydrants and
higher average selling prices for ductile iron pressure pipe. Ductile iron
pressure pipe shipments of 104,300 tons were 2% greater than the prior year
period. The order backlog at February 28, 1999 was 124,000 tons, representing
approximately three months shipments, compared with 135,000 tons at February
28, 1998, which included 26,000 tons remaining in a large international
contract that was fulfilled in the fall of 1998. Operating income of $6.6
million was $9.5 million above the prior year period. This performance was
the result of the previously mentioned increase in sales and revenues,
improved gross profit margins realized due to lower raw material costs
(primarily scrap iron) and improved operating efficiencies.
Industrial Products sales and revenues of $69.3 million were 4.5% lower than
the prior year period. The decline is attributable to $7.0 million in
revenues included in the prior year from JW Window Components, a former
subsidiary that was sold in November 1998. Operating income of $5.2 million
was above the prior year period by $.6 million. This performance resulted
from an increase in sales due to higher shipments and higher gross profit
margins realized on aluminum foil and sheet products, partially offset by
lower gross profit margins on furnace coke.
Energy Services sales and revenues of $83.4 million were 23.8% below the
prior year period. Operating income of $3.0 million was $7.9 million lower
than the prior year period. Unfavorable sales and earnings comparisons were
attributable to two principal factors: a decline in U.S. and European steel
production which affected pricing and demand for petroleum coke and specialty
metal products; and a temporary slowdown in petroleum coke shipments and
higher bulk handling costs at the Texas Gulf Coast terminals and services
operations, principally caused by equipment problems following last fall's
intense tropical storm activity in that region.
Nine Months ended February 28, 1999 and 1998
Sales and revenues for the nine months ended February 28, 1999 were $149.8
million above the prior year period, representing a 14.4% increase of which
$104.3 million, or 70%, was attributable to AIMCOR. In addition to the
contribution from AIMCOR, the increase was the result of improved
performances from all other operating segments.
Cost of sales, exclusive of depreciation, of $789.9 million was 80.3% of net
sales in the 1999 period versus $678.6 million and 80.6% in 1998. The percentage
decrease principally reflected improved gross profit margins realized on homes
sold, pipe and aluminum products.
<PAGE>
Selling, general and administrative expenses of $122.1 million were 10.3% of net
sales and revenues in the 1999 period versus $112.4 million and 10.8% in 1998.
Interest and amortization of debt expense was $139.2 million in the 1999 period
versus $143.7 million in 1998 as a result of lower interest rates and lower
average outstanding debt balances. The average rate of interest in the 1999
period was 7.48% as compared to 8.09% in 1998. The average prime rate of
interest was 8.14% and 8.50% in the 1999 and 1998 periods, respectively.
The Company's effective tax rate in the 1998 and 1999 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. Additionally, in the 1999 period, the Company's effective tax rate
differed from the statutory rate as a result of a $10.5 million non-recurring
tax benefit recognized on the sale of JWWC.
Net income in the 1999 period was $17.8 million, including an after-tax loss
of $19.7 million from the discontinued operations of Jim Walter Resources and
an after-tax gain of $6.7 million from the sale of JWWC. This compared to net
income of $31.8 million in the 1998 period, which included an after-tax gain
of $20.6 million from the discontinued operations of Jim Walter Resources and
a $2.7 million extraordinary loss from the write-off of unamortized debt
expense related to the refinancing of bank credit facilities in conjunction
with the Company's October 1997 acquisition of AIMCOR. The Company's diluted
earnings per share were $.34 compared to $.58 for the nine months ended
February 28, 1998. The increase in earnings adjusted for the results of the
discontinued operations, the sale of JWWC and the extraordinary item
approximates $16.9 million, which reflects all of the factors discussed
in the following segment analysis.
Segment Analysis:
Homebuilding and Financing sales and revenues of $334.7 million were 0.6%
above the prior year period. This performance reflects a 6.4% increase in the
average net selling price, from $48,400 in the 1998 period to $51,500 in
1999, which was more than offset by a decrease in the number of units sold,
from 2,813 units in the 1998 period to 2,596 units in 1999. The higher
average selling price is primarily attributable to price increases instituted
to compensate for higher building material and labor costs, coupled with
consumer preference for new and more upscale models and amenities being
offered by Jim Walter Homes. 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 during the first six months of fiscal 1999. Time charge income
(revenues received from Mid-State Homes' instalment note portfolio) increased
from $177.3 million in the 1998 period to $185.1 million in 1999. 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 $82.2 million (net of interest expense) was $16.3 million greater
than the prior year period, reflecting higher time charge income, the
increase in the average net selling price per home sold and lower interest
expense in the 1999 period ($74.2 million) compared to the prior year period
($87.8,million), partially offset by the decrease in the number of homes sold.
Water Transmission Products sales and revenues of $338.5 million were 9.5%
above the prior year period. The increase was the result of increased shipments
of ductile iron pressure pipe, fittings, valves and hydrants and higher average
selling prices for ductile iron pressure pipe. Ductile iron pressure pipe
shipments of 431,000 tons were 7.9% greater than the prior year period.
Operating income of $22.2 million was $14.2 million above the prior year period.
This performance was the result of the previously mentioned increase in sales
and revenues, improved gross profit margins realized due to lower raw material
costs (primarily scrap iron) and improved operating efficiencies.
Industrial Products sales and revenues of $235.6 million were 5.5% greater
than the prior year period. The improved performance was the result of increased
shipments of aluminum foil and sheet products, foundry coke, and metal building
and foundry products, coupled with improved selling prices for furnace and
foundry coke and slag fiber, partially offset by lower selling prices for
aluminum foil and sheet products. Operating income of $14.1
<PAGE>
million was $0.1 million lower than in the prior year period. This
performance resulted from the pre-tax loss on the sale of JWWC, partially
offset by sales increases and higher gross profit margins realized on
aluminum products, foundry coke and metal building and foundry products.
FINANCIAL CONDITION
Total debt has been reduced $154.6 million since May 31, 1998. Scheduled
payments on the mortgage-backed/asset-backed notes amounted to $446.6
million. In addition, $121.6 million of funds held by Trust II, which were
subject to retention at July 1, 1998, were utilized to pay down Trust IV
indebtedness, pursuant to an agreement reached with Financial Security
Assurance, Inc. Scheduled retirements of other long-term debt amounted to
$26.5 million. Also during the current nine month period, net borrowings
under Trust VII, Mid-State Variable Funding Loan Agreements and the Credit
Facilities totaled $405.5 million and $34.6 million, respectively.
Borrowings under the Credit Facilities totaled $603.4 million at February 28,
1999. 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. There were $25.6 million face amount of letters of credit
outstanding thereunder as of February 28, 1999.
The Credit Facilities 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 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-to-1 at the
end of each Four Quarter Period (as defined in the Credit Facilities) ended
February 28, 1999 and at least 1.25-to-1 at the end of each four quarter period
for the duration of the Credit Facilities. The Company was in compliance with
these covenants at February 28, 1999.
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
February 28, 1999.
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 February 28, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, net of book overdrafts, were approximately $28.7
million at February 28, 1999. Operating cash flows for the nine months ended
February 28, 1999, together with issuance of long-term debt under Trust VII
and 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 to purchase approximately 3.0 million shares of common stock during the
nine months ended February 28, 1999. 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
<PAGE>
repurchase program.
Working capital is required to fund adequate levels of inventories and accounts
receivable. Commitments for capital expenditures at February 28, 1999 were not
significant; however, it is estimated that gross capital expenditures of the
Company and its subsidiaries for the remaining three months of the fiscal year
ending May 31, 1999 will approximate $38.3 million.
Because the Company's operating cash flow is significantly influenced by the
general economy and, in particular, levels of domestic construction activity,
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 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 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 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 1.0 million shares of the Company's common stock, the amount
remaining at February 28, 1999 under the current authorization.
YEAR 2000
Introduction
The Company is currently working to resolve the potential impact of the Year
2000 ("Y2K") on the processing of date-sensitive information by the Company's
computerized information systems. The Y2K 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 problems created
by using abbreviated dates appear in hardware (such as microchips), operating
systems and other software programs. The Company's Y2K compliance project is
intended to determine the readiness of the Company's business for the year 2000.
The Company defines Y2K "compliance" to mean that the computer code will process
all defined future dates properly and give accurate results.
Description of Areas of Impact and Risk
The Company has identified three areas where the Y2K problem creates risk to the
Company. These areas are : a) internal Information Technology ("IT") systems; b)
non-IT systems with embedded chip technology; and c) system capabilities of
third party businesses with relationships with the Company, including product
suppliers, customers, service providers (such as telephone, power, logistics,
financial services) and other businesses whose failure to be Y2K compliant could
have a material adverse effect on the Company's business, financial condition or
results of operations.
Plan to Address Year 2000 Compliance
The Company has established a Corporate Steering Committee (the "Committee") to
coordinate solutions to Y2K issues for its information systems. The Committee
includes a representative from each subsidiary as well as a member 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 Y2K Standard that was issued to all subsidiaries
and must be followed for Y2K compliance. Status conference calls are held
monthly and on-site progress reviews are held quarterly. The Company has two
data centers which have installed Y2K
<PAGE>
compliant mainframe equipment, operating systems and system software. Separate
virtual machines within a computer have been installed for the purpose of
testing. During the first calendar quarter of 1999, the Company conducted a
detail review of all Year 2000 remediation activities and associated required
documentation to ensure the process was on schedule.
State of Readiness
IT Systems - The initial inventory and prioritization process for the Company's
IT systems has been completed. The Company's current focus in this area is on
remediation and testing. Approximately 30% of all identified IT system business
components have been deemed compliant as of March 31, 1999. Coding changes for
all legacy systems have been completed and the testing phase is in process. The
Y2K test environment is fully functional. Compliance testing will continue
through 1999 and will be completed in a phase approach beginning with the
financial systems in June 1999. Personal computer and other hardware upgrades
are 85% complete with the remainder on order.
Non-IT systems - Non-IT systems consist of any device which is able to store and
report date-related information, such as access control systems, elevators,
conveyors, and other items containing a microprocessor or internal clock. The
plan utilized by the Company for analysis of the IT systems is also being used
for non-IT systems. The Company currently plans to complete the Y2K compliance
program for all material non-IT systems by November 1999.
Material Third Parties - The Company has created an inventory of what it
believes to be all material third parties with whom the Company has a business
relationship in the United States. Y2K readiness surveys were sent to these
third parties beginning in January 1998. The Company is currently reviewing the
responses to these surveys to determine the Y2K readiness of these third
parties. For those critical third party suppliers, service providers and
customers that fail to respond to the Company's survey, the Company intends to
pursue alternative means of obtaining Y2K readiness information, such as review
of publicly available information published by such third parties. The Company
has also implemented this same approach to third party Y2K readiness at the
Company's foreign subsidiaries. The Company plans to continue to review its
third party relationships throughout the Y2K compliance program to ensure all
material third party relationships are addressed.
Contingency Planning and Risks
Contingency plan guidelines have been developed by the Committee and provided to
each subsidiary. Contingency plans are currently being prepared at all
subsidiaries. On-site reviews of written contingency plans will be conducted
throughout calendar 1999. While the Company believes that its approach to Y2K
readiness is sound, it is possible that some business components may not be
identified in the inventory, or that the scanning or testing process may not
result in analysis and remediation of all source code. The Company will assume a
third party is not Y2K ready if no Y2K verification is obtained. The Company's
contingency plan will address alternative providers and processes to deal with
business interruptions that may be caused by the internal system or by the
failure of third party providers to be Y2K ready to the extent possible.
The failure to correct a material Y2K problem could result in an interruption
in, or a failure of, certain normal business activities or operations. Such
failure could materially and adversely affect the Company's results of
operations, liquidity and financial condition.
Cost of Project
The overall cost of the Company's Y2K compliance effort is estimated to be
approximately $12.2 million based on information currently available.
<PAGE>
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
commenced conversion from their existing sovereign currencies to a new, single
currency called the euro. Fixed conversion rates between the existing
currencies, the legacy currencies, and the euro will be established and the euro
will become the common legal currency of the participating countries on this
date. The euro will then trade on currency exchanges and will be available for
non-cash transactions. The participants will issue sovereign debt exclusively in
euro and will, redenominate outstanding sovereign debt at this time. Following
this introduction period, the participating members legacy currencies will
remain legal tender as denominations of euro until January 1, 2002. At that
time, countries will issue new euro-denominated bills for use in cash
transactions. All legacy currency will be withdrawn prior to July 1, 2002,
completing the euro conversion on this date. As of January 1, 1999, the
participating countries no longer will control their own monetary policies by
directing independent interest rates for the legacy currencies; instead, the
authority to direct monetary policy, including money supply and official
interest rates for the euro, will be exercised by the new European Central Bank.
The Company has established a plan to address the issues raised by the euro
conversion. These issues include, but are not limited to: the competitive impact
created by cross-border price transparency; the need for the company and its
business partners to adapt IT and non-IT systems to accommodate euro-denominated
transactions; and the need to analyze the legal and contractual implications of
the Company's contracts. The Company currently anticipates that the required
modifications to its systems, equipment and processes will be made on a timely
basis and does not expect that the costs of such modifications will have a
material effect on the Company's financial position or results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards No. 131 -
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131") was issued. FAS 131 became effective for fiscal years beginning after
December 15, 1997 and can be adopted at the end of the fiscal year (fiscal
1999 for the Company). This statement establishes standards for reporting
information about operation segments in annual financial statements and
interim financial reports to shareholders. As a result of the
reclassification of Jim Walter Resources as a discontinued operation, the
Natural Resources segment was eliminated in the third quarter of fiscal 1999.
The Company anticipates further changes to its operating segments in the
fourth quarter of fiscal 1999 as a result of implementing FAS 131.
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.
The Company believes that the adoption of the above standard 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,
<PAGE>
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.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A substantial controversy exists 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) On March 16, 1999, the Company filed a report on Form 8-K with
respect to a decision to dispose of Jim Walter Resources, Inc.
<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: April 14, 1999
<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> 9-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 58,057
<SECURITIES> 163,045
<RECEIVABLES> 1,501,519
<ALLOWANCES> (30,603)
<INVENTORY> 251,006
<CURRENT-ASSETS> 0 <F1>
<PP&E> 739,387
<DEPRECIATION> (345,974)
<TOTAL-ASSETS> 3,347,919
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 2,326,822
<COMMON> 553
0 <F1>
0 <F1>
<OTHER-SE> 333,829
<TOTAL-LIABILITY-AND-EQUITY> 3,347,919
<SALES> 983,188
<TOTAL-REVENUES> 1,187,462
<CGS> 789,947
<TOTAL-COSTS> 155,842
<OTHER-EXPENSES> 42,029
<LOSS-PROVISION> 660
<INTEREST-EXPENSE> 139,234
<INCOME-PRETAX> 59,750
<INCOME-TAX> 22,202
<INCOME-CONTINUING> 37,548
<DISCONTINUED> (19,702)
<EXTRAORDINARY> 0
<CHANGES> 0 <F1>
<NET-INCOME> 17,846
<EPS-PRIMARY> .34
<EPS-DILUTED> .34 <F1>
<FN>
<F1> This line item is not presented on the Consolidated Financial Statements.
</FN>
</TABLE>
