<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, 2000
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 46,258,892 shares of common stock of the registrant outstanding at
September 29, 2000.
<PAGE>
PART I - FINANCIAL INFORMATION
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, May 31,
2000 2000
(unaudited) (audited)
----------- -----------
(in thousands, except share amounts)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 14,863 $ 27,281
Short-term investments, restricted 141,155 141,526
Marketable securities 1,193 1,524
Instalment notes receivable, net 1,325,174 1,313,392
Receivables, net 256,398 249,363
Inventories 271,777 318,216
Prepaid expenses 12,629 8,902
Property, plant and equipment, net 473,970 467,717
Investments 12,963 12,814
Deferred income taxes 112,984 112,970
Unamortized debt expense 44,530 45,279
Other long-term assets, net 35,125 35,181
Goodwill, net 464,422 473,723
----------- -----------
$ 3,167,183 $ 3,207,888
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Book overdrafts $ 18,768 $ 24,950
Accounts payable 125,657 150,724
Accrued expenses 125,137 124,942
Income taxes payable 59,799 59,829
Debt
Mortgage-backed/asset-backed notes 1,798,219 1,783,712
Other senior debt 479,000 495,400
Accrued interest 21,850 23,481
Accumulated postretirement benefits obligation 286,602 281,773
Other long-term liabilities 57,033 56,170
Stockholders' equity
Common stock, $.01 par value per share:
Authorized - 200,000,000 shares
Issued - 55,355,184 shares and 55,315,184 shares 554 553
Capital in excess of par value 1,164,156 1,165,131
Accumulated deficit (853,592) (853,594)
Treasury stock - 9,096,292 and 8,033,567 shares, at cost (114,829) (104,032)
Accumulated other comprehensive loss (1,171) (1,151)
----------- -----------
Total stockholders' equity 195,118 206,907
----------- -----------
$ 3,167,183 $ 3,207,888
=========== ===========
</TABLE>
See accompanying "Notes to Consolidated Financial Statements"
2
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
August 31,
----------------------
2000 1999
--------- ---------
(in thousands, except per share amounts)
<S> <C> <C>
Sales and revenues:
Net sales $ 450,839 $ 396,873
Time charges 52,900 58,316
Miscellaneous 10,043 4,621
--------- ---------
513,782 459,810
--------- ---------
Cost and expenses:
Cost of sales 369,998 309,639
Depreciation 18,492 17,912
Selling, general and administrative 49,364 47,343
Postretirement benefits 5,403 6,020
Interest and amortization of debt expense 48,128 45,520
Amortization of goodwill and other intangibles 9,422 9,986
Restructuring charges 11,417 --
--------- ---------
512,224 436,420
--------- ---------
Income before income tax expense 1,558 23,390
Income tax expense (1,556) (11,309)
--------- ---------
Net income $ 2 $ 12,081
========= =========
Basic net income per share $ -- $ .24
========= =========
Diluted net income per share $ -- $ .24
========= =========
</TABLE>
See accompanying "Notes to Consolidated Financial Statements"
3
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Comprehensive Other
Income Accumulated Comprehensive Common Capital in Treasury
Total (Loss) Deficit Income (Loss) Stock Excess Stock
-------- ------------- ----------- ----------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 2000 $206,907 $ (853,594) $ (1,151) $ 553 $1,165,131 $(104,032)
Comprehensive income (loss)
Net income 2 $ 2 2
Other comprehensive income (loss), net of tax
Net unrealized gains in
marketable securities 42 42 42
Foreign currency translation adjustment (62) (62) (62)
-----------
Comprehensive loss $ (18)
===========
Stock issued from option exercises 427 1 426
Dividends paid (1,401) (1,401)
Purchases of treasury stock (10,797) (10,797)
-------- ----------- ---------- ----------- ------ ---------- ---------
Balance at August 31, 2000 $195,118 $ 00.00 $ (853,592) $ (1,171) $ 554 $1,164,156 $(114,829)
======== =========== ========== =========== ====== ========== =========
</TABLE>
See accompanying "Notes to Consolidated Financial Statements"
4
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
August 31,
2000 1999
--------- ---------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2 $ 12,081
Charges to income not affecting cash:
Depreciation 18,492 17,912
Provision for deferred income taxes (14) 10,675
Accumulated postretirement benefits obligation 4,829 3,776
Provision for other long-term liabilities 863 56
Amortization of goodwill and other intangibles 9,422 9,986
Amortization of debt expense 1,494 1,968
--------- ---------
35,088 56,454
Decrease (increase) in assets:
Short-term investments, restricted 371 (626)
Marketable securities 373 (25,975)
Instalment notes receivable, net (a) (11,782) (1,966)
Trade and other receivables, net (7,035) 7,634
Inventories 46,439 8,634
Prepaid expenses (3,727) (3,387)
Increase (decrease) in liabilities:
Book overdrafts (6,182) 118
Accounts payable (25,067) (6,188)
Accrued expenses 195 (23,023)
Income taxes payable (30) (826)
Accrued interest (1,631) (1,002)
--------- ---------
Cash flows from operating activities 27,012 9,847
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment, net of retirements (24,745) (15,284)
Increase in investments and other assets (214) (1,624)
--------- ---------
Cash flows used in investing activities (24,959) (16,908)
--------- ---------
FINANCING ACTIVITIES
Issuance of debt 206,600 179,600
Retirement of debt (208,493) (157,628)
Additions to unamortized debt expense (745) --
Purchases of treasury stock (10,797) (3,721)
Dividends paid (1,401) --
Exercise of employee stock options 427 33
--------- ---------
Cash flows from (used in) financing activities (14,409) 18,284
--------- ---------
EFFECT OF EXCHANGE RATE ON CASH (62) 107
--------- ---------
Net increase (decrease) in cash and cash equivalents (12,418) 11,330
Cash and cash equivalents at beginning of period 27,281 40,841
--------- ---------
Cash and cash equivalents at end of period $ 14,863 $ 52,171
========= =========
</TABLE>
(a) Consists of sales and resales, net of repossessions and provision for
possible losses, of $48,077 and $48,091 and cash collections on account and
payouts in advance of maturity of $36,295 and $46,125, respectively.
See accompanying "Notes to Consolidated Financial Statements"
5
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2000
NOTE 1 - ORGANIZATION
Walter Industries, Inc. ("the Company") is a diversified company which operates
in four reportable segments: Homebuilding and Financing, Industrial Products,
Energy Services, and Natural Resources. Through these operating segments, the
Company offers a diversified line of products and services including home
construction and financing, ductile iron pressure pipe, aluminum foil and sheet
products, furnace coke, foundry coke, chemicals and slag fiber, and alloys,
metals, petroleum coke distribution and refinery outsourcing servicing as well
as coal and methane gas production and distribution.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
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, 2000 and 1999 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, 2000 and 1999 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, 2000.
Unless otherwise specified, capitalized terms used herein are as defined in the
aforementioned Form 10-K.
NOTE 3 - RECLASSIFICATION OF JIM WALTER RESOURCES TO CONTINUING OPERATIONS
In February 1999, a decision was made to dispose of Jim Walter Resources, Inc.
("JWR"), the Company's coal mining and methane gas subsidiary. Accordingly,
prior year financial statements reflected JWR as a discontinued business
segment. The Company was unsuccessful in disposing of this segment on terms it
found acceptable and, accordingly, all prior periods have been reclassified to
include the assets and operating results of JWR on a consolidated basis.
However, the Company is committed to ultimately separating the operations of JWR
at such time that it believes shareholder value can be realized more fully than
is possible at current market and industry conditions.
NOTE 4 - RESTRUCTURING CHARGES
As a result of the restructurings identified below, the Company recorded a
pre-tax restructuring charge of $11.4 million ($7.4 million net of tax), or
$0.16 per share after tax during the three months ended August 31, 2000. The
charge includes $10.5 million of severance costs and $.9 million of other
related exit costs. The restructurings identified below are part of the
Company's overall cost reduction plan and change in the strategic direction of
the Company in order to realize long-term improved overall efficiencies.
6
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
August 31,
2000
--------------
(in thousands)
Charges:
<S> <C>
Severance Costs $ 10,500
Other 900
Payments (3,150)
----------
Accrued Restructuring $ 8,250
==========
</TABLE>
Management estimates that all remaining amounts payable under this restructuring
will be paid within twelve months.
During the three months ended August 31, 2000, the Company identified the need
to change strategic direction and made several management changes, primarily at
the Corporate level. The Company accepted the resignation of Robert G. Burton,
Chairman, President and Chief Executive Officer of Water Industries. The Company
also had numerous other across-the-board reductions. As of August 31, 2000, all
employees identified have been terminated. In connection with these
terminations, $5.2 million was charged to restructuring expense during the three
months ended August 31, 2000, for severance benefits. Amounts paid to these
individuals during the three months ended August 31, 2000 was $2.7 million.
During the three months ended August 31, 2000, the Company also committed to a
plan to restructure the foreign sales operations of AIMCOR and eliminate certain
jobs at other AIMCOR facilities. The restructuring plan for the foreign sales
operations primarily involves the elimination of AIMCOR's Luxembourg sales
office in order to transfer the Luxembourg sales responsibilities to the United
Kingdom office which has additional capacity to perform those sales office
functions.
As a result of the foreign sales operations restructuring, all employees in the
Luxembourg office will be terminated. No additional personnel or overhead costs
will be incurred at the United Kingdom office as a result of the Luxembourg
closure. Numerous other positions will be eliminated in the course of the AIMCOR
restructuring. Total severance payments related to the foreign sales operations
and other AIMCOR facilities are estimated to be $5.3 million, of which $.4
million have been paid as of August 31, 2000. Other costs related to the AIMCOR
restructuring, which includes legal fees, lease commitments and other costs are
$.9 million, of which $.05 million had been paid by August 31, 2000.
NOTE 5 - RESTRICTED SHORT-TERM INVESTMENTS
Restricted short-term investments at August 31, 2000 and May 31, 2000 include
(i) temporary investment of reserve funds and collections on instalment notes
receivable owned by Mid-State Trusts II, IV, V, VI, VII, and VIII (the "Trusts")
($86.4 million and $89.0 million, respectively) which are available only to pay
expenses of the Trusts and principal and interest on indebtedness of the Trusts,
(ii) certain funds held by Trust II that are in excess of the amount required to
be paid for expenses, principal and interest on the Trust II Mortgage-Backed
Notes, but which are subject to retention ($39.1 million and $36.8 million,
respectively) and (iii) miscellaneous other segregated accounts restricted to
specific uses ($15.7 million at both dates).
7
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - INSTALMENT NOTES RECEIVABLE
The instalment notes receivable is summarized as follows (in thousands):
<TABLE>
<CAPTION>
August 31, May 31,
2000 2000
---------- -----------
<S> <C> <C>
Gross Balance $4,380,200 $ 4,319,786
Less: Unearned time charges (3,028,361) (2,979,999)
Allowance for possible losses (26,665) (26,395)
---------- -----------
Net $1,325,174 $ 1,313,392
========== ===========
</TABLE>
The gross amount of instalment notes receivable and the economic balance by
trust are as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, 2000 MAY 31, 2000
Gross Balance Economic Balance Gross Balance Economic Balance
------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Trust II $ 466,855 $ 304,440 $ 491,823 $ 320,619
Trust IV 1,042,487 495,059 1,073,305 506,760
Trust V 345,897 125,933 178,906 66,174
Trust VI 816,026 344,226 833,722 349,744
Trust VII 745,278 302,616 758,497 306,469
Trust VIII 942,689 403,761 963,009 410,912
Unpledged 20,968 8,180 20,524 8,200
------------- --------------- -------------- ----------------
Total $ 4,380,200 $ 1,984,215 $ 4,319,786 $ 1,968,878
============= =============== ============== ================
</TABLE>
NOTE 7 - INVENTORIES
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
August 31, May 31,
2000 2000
---------- -----------
<S> <C> <C>
Finished goods $ 167,478 $ 206,313
Goods in process 51,720 48,973
Raw materials and supplies 47,766 57,390
Houses held for resale 4,813 5,540
---------- -----------
Total inventories $ 271,777 $ 318,216
========== ===========
</TABLE>
8
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - DEBT
Debt, in accordance with its contractual terms, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
August 31, May 31,
2000 2000
---------- ----------
<S> <C> <C>
Mortgage-Backed/Asset-Backed Notes:
Trust II Mortgage-Backed Notes $ 177,650 $ 193,800
Trust IV Asset Backed Notes 548,206 554,165
Trust V Variable Funding Loan 104,000 49,000
Trust VI Asset Backed Notes 314,770 320,676
Trust VII Asset Backed Notes 281,351 286,006
Trust VIII Asset Backed Notes 372,242 380,065
---------- ----------
1,798,219 1,783,712
---------- ----------
Other senior debt:
Walter Industries, Inc.
Revolving Credit Facility 102,300 118,700
Term Loan 375,000 375,000
Other 1,700 1,700
---------- ----------
479,000 495,400
---------- ----------
Total $2,277,219 $2,279,112
========== ==========
</TABLE>
NOTE 9 - STOCKHOLDERS' EQUITY
Information relating to the Company's share repurchases is set forth in the
following table (in thousands):
<TABLE>
<CAPTION>
Shares Amount
-------- --------
<S> <C> <C>
Treasury stock at May 31, 2000 8,034 $104,032
Share repurchases for the three months
ended August 31, 2000 1,062 10,797
Total held in treasury at August 31, 2000
-------- --------
9,096 $114,829
======== ========
</TABLE>
9
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - EARNINGS PER SHARE
A reconciliation of the basic and diluted earnings per share computations for
the three months ended August 31, 2000 and 1999 are as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
for the Three Months Ended August 31,
2000 1999
----------------- -----------------
Basic Diluted Basic Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 2 $ 2 $12,081 $12,081
======= ======= ======= =======
Shares of common stock outstanding:
Average number of common shares(a) 46,603 46,603 50,084 50,084
Effect of diluted securities:
Stock options (b) -- 77 -- 28
------- ------- ------- -------
46,603 46,680 50,084 50,112
======= ======= ======= =======
Net income per share $ -- $ -- $ .24 $ .24
======= ======= ======= =======
</TABLE>
(a) The three months ended August 31, 2000 and 1999 shares include
3,880,140 additional shares issued to an escrow account on September
13, 1995 pursuant to the Consensual Plan, but do not include shares
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 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.
On October 3, 2000, the Company declared a $.03 per share dividend for the three
months ended August 31, 2000 payable to shareholders of record on October 17,
2000.
10
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 - SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable segments is
shown in the following tables (in thousands):
<TABLE>
<CAPTION>
Three months ended
August 31,
2000 1999
--------- ---------
<S> <C> <C>
Sales and revenues:
Homebuilding and Financing $ 122,146 $ 126,409
Industrial Products 229,518 204,800
Energy Services 87,046 64,592
Natural Resources 71,021 62,611
Other 4,051 1,398
--------- ---------
Sales and revenues $ 513,782 $ 459,810
========= =========
<CAPTION>
Three months ended
August 31,
2000 1999
--------- ---------
<S> <C> <C>
Operating income (a) :
Homebuilding and Financing $ 9,157 $ 12,071
Industrial Products 23,384 22,123
Energy Services 973 4,657
Natural Resources (10,791) 26
--------- ---------
Operating income 22,723 38,877
Less: General corporate expense (10,028) (5,307)
Senior debt interest expense (11,137) (10,180)
--------- ---------
Income before tax expense 1,558 23,390
Income tax expense (1,556) (11,309)
--------- ---------
Net income $ 2 $ 12,081
========= =========
Depreciation:
Homebuilding and Financing $ 1,136 $ 1,327
Industrial Products 9,176 7,437
Energy Services 1,805 1,643
Natural Resources 5,410 6,866
Other 965 639
--------- ---------
Total $ 18,492 $ 17,912
========= =========
</TABLE>
(a) Operating income amounts are after deducting amortization of goodwill and
other intangibles. A breakdown of amortization by segment is as follows
(in thousands):
<TABLE>
<CAPTION>
Three months ended
August 31,
2000 1999
--------- ---------
<S> <C> <C>
Homebuilding and Financing $ 4,369 $ 5,510
Industrial Products 2,647 2,644
Energy Services 2,139 2,127
Natural Resources -- (440)
Other 267 145
--------- ---------
$ 9,422 $ 9,986
========= =========
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION AND
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This discussion should be read in conjunction with the consolidated financial
statements and notes thereto of Walter Industries, Inc. and subsidiaries,
particularly Note 11 of "Notes to Consolidated Financial Statements" which
presents sales and revenues and operating income by operating segment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2000 AND 1999
Sales and revenues for the three months ended August 31, 2000 were $513.8
million compared to $459.8 million for the three months ended August 31, 1999.
The increase is primarily attributable to the Industrial Products and the Energy
Services segments, which increased $24.7 million and $22.5 million,
respectively. The increase for the Industrial Products segment was due to an
increase in both shipments and sales price per ton of pipe products and an
increase in aluminum tonnage shipped. The increase for Energy Services relates
to the increase in the price per ton for petroleum coke. Miscellaneous income
increased as a result of an increase in interest income, a gain on sale of land
and receipt of a settlement on an insurance claim. These increases are offset by
a decrease in time charge income for the Homebuilding and Financing segment.
Cost of sales, excluding depreciation, was $370.0 million for the three months
ended August 31, 2000 compared to $309.6 million for the three months ended
August 31, 1999. Cost of sales (excluding depreciation), as a percentage of net
sales for the three months ended August 31, 2000 was 82.1% compared to 78.0% for
the three months ended August 31, 1999. The increase in cost of sales as a
percentage of sales is primarily attributable to Energy Services, which was not
able to maintain margins based on certain contract sales commitments and Natural
Resources, which continued to experience a decline in the market price for coal
despite improvements in the cost per ton of coal produced during the quarter
ended August 31, 2000.
Selling, general and administrative costs were relatively constant at $49.4
million for the three months ended August 31, 2000 compared to $47.3 million for
the three months ended August 31, 1999.
Interest and amortization of debt expense was $48.1 million versus $45.5 million
in the prior year period as a result of higher interest rates. The average rate
of interest for the three months ended August 31, 2000 was 8.2% as compared to
7.4% for the three months ended August 31, 1999. The prime rate of interest was
9.5% in the current year period compared to a range of 7.75% to 8.25% in 1999.
Restructuring charges were $11.4 million for the three months ended August 31,
2000 as discussed in Note 4 of "Notes to Consolidated Financial Statements".
The Company's effective tax rate for the three months ended August 31, 2000 and
August 31, 1999 periods differed from the statutory tax rate primarily due to
amortization of goodwill (excluding amounts related to the AIMCOR acquisition)
which is not deductible for tax purposes, the utilization of certain federal tax
credits, and the effect of state and local income taxes.
Net income for the three months ended August 31, 2000 was essentially breakeven,
which included the after tax restructuring charges of $7.4 million, compared to
$12.1 million for the three months ended August 31, 1999.
12
<PAGE>
Segment Analysis:
HOMEBUILDING AND FINANCING
Sales and revenues decreased $4.3 million or 3.4% during the three months ended
August 31, 2000 compared to the quarter ended August 31, 1999. During the three
months ended August 31, 2000, the Company completed fewer homes, which was
offset by an increase in the average net selling price. The average net selling
price increased as a result of new product options, amenity upgrades, consumer
preference for more upscale models and price increases instituted to compensate
for higher building material and labor costs. The increase in pricing had a
negative impact on home completions for the quarter.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Three months ended Three months ended
August 31, 2000 August 31, 1999
-------------------------------------------------------------------
<S> <C> <C>
Homes Completed 1,126 units 1,169 units
-------------------------------------------------------------------
Average Net Selling Price $57,200 $54,100
-------------------------------------------------------------------
</TABLE>
In addition to the decrease in the homes completed and the increase in the
average net selling price, time charge income decreased $5.4 million as result
of the prepayment rate decreasing to 5.0% for the quarter ended August 31, 2000
compared to 7.6% for the quarter ended August 31, 1999.
Units in backlog at August 31, 2000 were 1,821 compared to 1,773 at May 31,
2000.
Operating income was $9.2 million for the three months ended August 31, 2000
compared to $12.1 million in the prior year period. The decrease in operating
income was principally caused by the decline in prepayment income, an increase
in interest expense of $1.7 million partially offset by margin improvements on
home sales and a decline in goodwill amortization of $1.1 million.
INDUSTRIAL PRODUCTS
Sales and revenues increased $24.7 million or 12.1% during the three months
ended August 31, 2000 compared to the three months ended August 31, 1999. The
increase is due primarily to an increase in shipments at U.S. Pipe and JW
Aluminum as well as from an increase in the average selling price per ton for
pipe products. Compared to the quarter ended August 31, 1999, JW Aluminum
shipment tonnage increased 6.7% and U.S. Pipe shipment tonnage increased 9.0%
while the average selling price per ton for pipe products increased 3%.
The order backlog for U.S. Pipe at August 31, 2000 was $104.4 million
representing approximately three months shipments, compared to $89.7 million at
August 31, 1999. JW Aluminum had backlog of $24.6 million at August 31, 2000, up
18.8% from the prior year.
Operating income increased $1.3 million during the three months ended August 31,
2000 compared to the three months ended August 31, 1999 primarily as a result of
a 15% improvement in operating income at U.S. Pipe offset by production
inefficiencies for the fiber division of Sloss Industries which caused a 35%
reduction in their operating income. JW Aluminum's operating income was
essentially flat due to increased energy and raw material costs.
ENERGY SERVICES
Sales and revenues increased $22.5 million or 34.8% during the three months
ended August 31, 2000 compared to the three months ended August 31, 1999. The
increase is primarily due to an increase in pricing resulting from a stronger
demand for energy products. Additionally, during the three months ended August
31, 2000, AIMCOR received and recognized an insurance settlement of $2.3 million
which was recorded as miscellaneous income.
13
<PAGE>
Operating income of $1.0 million, which included the restructuring charge of
$6.2 million discussed in Note 4 of "Notes to Consolidated Financial
Statements", was $3.7 million below the prior year period. Operating income
before the restructuring charge improved when compared to the prior period due
to the increase in revenues described above as well as from a return to more
normalized margins, which were offset by $2.0 million of unfavorable sales
commitment expense.
NATURAL RESOURCES
Sales and revenues increased $8.4 million or 13.4% during the three months ended
August 31, 2000 compared to the three months ended August 31, 1999. The increase
is primarily attributable to an increase in methane gas revenues, which
increased $5.6 million or 84.4%, resulting from an increase in methane gas
produced (9.6%), an increase in number of methane gas wells (6.5%), and an
increase in sales price (61.6%). Additionally, coal revenues increased $2.8
million or 4.9% due to an increase in tons of coal sold (50%), which was offset
by a decrease in average coal sales prices (31%).
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Three months ended Three months ended
August 31, 2000 August 31, 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Average Methane Selling Price (per MCF) $4.88 $3.02
--------------------------------------------------------------------------------
Number of Methane Wells 539 506
--------------------------------------------------------------------------------
Average Coal Selling Price (per ton) $27.26 $39.50
--------------------------------------------------------------------------------
Average Cost Per Ton Produced $30.57 $39.96
--------------------------------------------------------------------------------
Tons of Coal Sold 2.1 million 1.4 million
--------------------------------------------------------------------------------
</TABLE>
For the three months ended August 31, 2000, Natural Resources had an operating
loss of $10.8 million, compared to operating income of $0.03 million for the
quarter ended August 31, 1999. The loss is attributable to the decline in the
average selling price per ton of coal caused by the expiration of an above
market coal contract with Alabama Power Company as well as a continued decline
in the market price for coal.
GENERAL CORPORATE EXPENSES
General corporate expenses increased $4.7 million or 89% during the three months
ended August 31, 2000 compared to the three months ended August 31, 1999
primarily due to the corporate restructuring charges of $5.2 million recorded
during the three months as discussed in Note 4 of "Notes to Consolidated
Financial Statements".
FINANCIAL CONDITION
Since May 31, 2000, total debt decreased $1.9 million. During the three month
period ended August 31, 2000, net borrowings under the Mid-State Trust V
Variable Funding Loan Agreement totaled $55.0 million. Payments on the
mortgage-backed/asset-backed notes amounted to $40.5 million. Other senior debt
decreased by $16.4 million.
At August 31, 2000 borrowings under the Credit Facilities totaled $477.3
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, 2000 letters of credit with a face amount of $32.6
million were outstanding.
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<PAGE>
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. Effective August 31, 1999, the Credit Facilities were
amended to include, among other things, the following: (a) the Applicable Margin
(as defined in the Credit Facilities) for LIBOR rate loans was amended in its
entirety and now includes a range from .625% to 2.25% (based upon a leverage
ratio pricing grid); (b) the Applicable Unused Fee (as defined in the Credit
Facilities) was amended in its entirety and includes a range from .20% to .40%
(based upon a leverage ratio pricing grid); (c) the borrowers' fixed charge
coverage ratio was replaced by an interest coverage ratio (the ratio of
Consolidated EBITDA (as defined in Amendment Agreement No. 5 to the Credit
Facilities) to Consolidated Interest Expense (as defined in the Credit
Facilities). The interest coverage ratio is required to be at least 2.50-to-1 at
the end of each Four Quarter Period (as defined in the Credit Facilities) for
the duration of the Credit Facilities; and (d) the borrowers are required to
maintain a leverage ratio (the ratio of indebtedness to Consolidated EBITDA) of
not more than 3.75-to-1 for the duration of the Credit Facilities. The Company
was in compliance with these covenants at August 31, 2000.
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, 2000. Effective September 27, 2000, the Trust V Variable Funding Loan
Agreement was amended to include, among other things, the following: (a) the
facility was decreased to $400.0 million; (b) interest is based upon the cost of
A-1 and P-1 rated commercial paper plus .40%; and (c) the facility fee on the
maximum net investment is .40%. The agreement expires December 29, 2000.
The Company has engaged in a series of studies to determine its optimal future
operating profile. With these studies underway, a number of inquiries have been
received regarding the potential sale of various portions of the Company's
business, including JW Aluminum Company ("JW Aluminum"). The Company has
determined that JW Aluminum has no relationship to any of the Company's other
businesses and does not lend itself to the synergistic profile envisioned for
the future. As a result, a decision has been made to respond to potential
acquirors. It is possible that a divestiture of JW Aluminum could be concluded
early in the 2001 calendar year. The Company is also considering the divestiture
of certain other operating subsidiaries, but is not prepared to provide further
specifics at this time.
The Company also continues to explore ways to exit its Jim Walter Resources coal
mining and degasification business. The Company believes that an orderly exit
from this business will be achieved at an appropriate future date that is in the
best interest of shareholders.
LIQUIDITY AND CAPITAL RESOURCES
Operating cash flows for the three months ended August 31, 2000 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, dividends and to purchase 1,063,000 shares of
common stock under the stock repurchase program.
Working capital is required to fund adequate levels of inventories and accounts
receivable. Commitments for capital expenditures at August 31, 2000 were not
significant; however, it is estimated that gross capital expenditures for the
Company and its subsidiaries for the balance of the fiscal year ending May 31,
2001 will approximate 4% to 5% of net sales and revenues. Additional
expenditures in fiscal year 2001 are possible in line with growth in earnings
and cash flow, or expansion opportunities in certain markets.
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
15
<PAGE>
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 and its
affiliates. 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 to pay dividends, 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.
During the quarter ended August 31, 2000, the Board of Directors announced and
paid a $.03 per share dividend to shareholders of record on July 17, 2000. The
dividend paid for the quarter aggregated approximately $1.4 million.
MARKET RISK
The Company is exposed to certain market risks inherent in the Company's
financial instruments. These instruments arise from transactions entered into in
the normal course of business. The Company is subject to interest rate risk on
its existing Credit Facilities, Loan and Security Agreement, Trust V Variable
Funding Loan, and any future financing requirements.
The Company's primary market risk exposure relates to (i) the interest rate risk
on long-term and short-term borrowings, (ii) the impact of interest rate
movements on its ability to meet interest rate expense requirements and comply
with financial covenants, and (iii) the impact of interest rate movements on the
Company's ability to obtain adequate financing to fund future acquisitions. The
Company has historically managed interest rate risk through the periodic use of
interest rate hedging instruments. There were no such instruments outstanding at
August 31, 2000. While the Company can not predict its ability to refinance
existing debt or the impact interest rate movements will have on its existing
debt, management continues to evaluate its financial position on an ongoing
basis.
The Company is at risk on its portfolio of instalment notes receivable. The
Company's instalment notes receivable are fixed rate and have terms ranging from
12 to 30 years. The Company manages its risk by securitizing its instalment
notes into asset-backed trust agreements funded by fixed rate debt. Therefore,
the Company's asset/liability management requires a high degree of analysis and
estimation.
The Company is also subject to a limited amount of foreign currency risk, but
does not currently engage in any significant foreign currency hedging
transactions to manage exposure for transactions denominated in currencies other
than the U.S. dollar.
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<PAGE>
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
commenced conversion from their existing sovereign currencies ("legacy
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 by January 1, 2000. The Euro is trading on currency
exchanges and is available for non-cash transactions. The participants are
issuing sovereign debt exclusively in Euro and are redenominating outstanding
sovereign debt. 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 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, is being exercised by the new European Central
Bank.
The Company has established a plan to address issues raised by the Euro
conversion. These issues, which are applicable to the operations of AIMCOR,
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. As part of Phase I, the
core IT system has been modified for Euro Currency compliance. The Company's
European locations are currently processing Euro-compliant transactions. Phase
II of the Euro Currency project focuses on the conversion effect to a Euro base
currency. Phase II is scheduled to be complete by July 1, 2002. The cost of
conversion to the Euro is immaterial.
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. 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.
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<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 10 of Notes to Consolidated
Financial Statements contained in the Company's Annual Report on Form
10-K for the year ended May 31, 2000.
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 5. OTHER INFORMATION
On August 3, 2000, the Company announced that Robert G. Burton
resigned as Chairman, President and Chief Executive Officer for
personal reasons. The Board of Directors has appointed Donald N. Boyce
to replace Mr. Burton on an interim basis while a search for a
successor is underway.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
Exhibit 99 - Amendment No. 6 to Variable Funding Loan Agreement
(b) None
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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/ R. B. LEWIS /s/ M. S. HILTWEIN
-------------------------------- ---------------------------------
R. B. Lewis M. S. Hiltwein
Executive Vice President and Senior Vice President, Controller
Principal Financial Officer
Date: OCTOBER 13, 2000
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