10-Q/A 1 a2068930z10-qa.txt 10-Q/A -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q/A /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 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
4211 W. Boy Scout Boulevard, 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 / /. There were 44,406,926 shares of common stock of the registrant outstanding at October 31, 2001. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PART I--FINANCIAL INFORMATION WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS RESTATED
SEPTEMBER 30, DECEMBER 31, 2001 2000 (UNAUDITED) (NOTE 1) ----------------- ----------------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS Cash and cash equivalents................................... $ 18,495 $ 11,513 Short-term investments, restricted.......................... 109,727 100,901 Marketable securities....................................... 2,184 1,980 Instalment notes receivable, net............................ 1,689,374 1,686,277 Receivables, net............................................ 266,592 239,620 Inventories................................................. 250,013 261,441 Prepaid expenses............................................ 12,363 13,079 Property, plant and equipment, net.......................... 485,542 480,361 Investments................................................. 13,082 13,226 Unamortized debt expense.................................... 38,994 42,432 Other long-term assets, net................................. 44,232 37,129 Goodwill, net............................................... 425,260 452,234 ---------- ---------- $3,355,858 $3,340,193 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable............................................ $ 169,328 $ 171,949 Accrued expenses............................................ 116,831 118,644 Income taxes payable........................................ 62,663 61,027 Deferred income taxes....................................... 38,193 11,976 Debt Mortgage-backed/asset-backed notes........................ 1,751,853 1,769,833 Other senior debt......................................... 403,550 411,500 Accrued interest............................................ 31,518 28,231 Accumulated postretirement benefits obligation.............. 294,806 286,903 Other long-term liabilities................................. 48,965 54,679 Stockholders' equity Common stock, $.01 par value per share: Authorized--200,000,000 shares Issued--55,376,518 and 55,355,184 shares................ 554 554 Capital in excess of par value............................ 1,158,517 1,162,767 Accumulated deficit....................................... (589,738) (620,688) Treasury stock--10,899,392 and 9,296,592 shares, at cost.................................................... (132,558) (116,113) Accumulated other comprehensive income (loss)............. 1,376 (1,069) ---------- ---------- Total stockholders' equity.......................... 438,151 425,451 ---------- ---------- $3,355,858 $3,340,193 ========== ==========
See accompanying "Notes to Consolidated Financial Statements" 2 WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) RESTATED
THREE MONTHS ENDED SEPTEMBER 30, --------------------- 2001 2000 --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Sales and revenues: Net sales................................................. $419,957 $461,489 Time charges.............................................. 53,593 52,223 Miscellaneous............................................. 10,672 9,350 Excise tax refund claim................................... 11,227 -- -------- -------- 495,449 523,062 -------- -------- Cost and expenses: Cost of sales............................................. 336,517 377,484 Depreciation.............................................. 15,808 18,954 Selling, general and administrative....................... 49,818 48,610 Provision for losses on instalment notes.................. 3,882 2,403 Postretirement benefits................................... 5,472 5,402 Interest and amortization of debt expense................. 41,040 47,798 Amortization of goodwill and other intangibles............ 9,282 9,568 Loss on mining accident................................... 10,834 -- Restructuring charges..................................... -- 11,417 -------- -------- 472,653 521,636 -------- -------- Income before income taxes.................................. 22,796 1,426 Income tax expense.......................................... (11,603) (1,588) -------- -------- Net income (loss)........................................... $ 11,193 $ (162) ======== ======== Basic net income per share.................................. $ .25 $ -- ======== ======== Diluted net income per share................................ $ .25 $ -- ======== ========
See accompanying "Notes to Consolidated Financial Statements" 3 WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) RESTATED
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2001 2000 ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Sales and revenues: Net sales................................................. $1,280,610 $1,307,581 Time charges.............................................. 164,371 160,796 Miscellaneous............................................. 21,367 27,393 Excise tax refund claim................................... 11,227 -- ---------- ---------- 1,477,575 1,495,770 ---------- ---------- Cost and expenses: Cost of sales............................................. 1,029,562 1,062,085 Depreciation.............................................. 47,395 56,013 Selling, general and administrative....................... 147,446 168,186 Provision for losses on instalment notes.................. 8,750 7,672 Postretirement benefits................................... 13,877 16,308 Interest and amortization of debt expense................. 131,216 142,526 Amortization of goodwill and other intangibles............ 27,839 27,653 Loss on mining accident................................... 10,834 -- Restructuring and impairment charges...................... -- 179,283 ---------- ---------- 1,416,919 1,659,726 ---------- ---------- Income (loss) before income taxes........................... 60,656 (163,956) Income tax benefit (expense)................................ (29,706) 37,322 ---------- ---------- Net income (loss)........................................... $ 30,950 $ (126,634) ========== ========== Basic net income (loss) per share........................... $ .68 $ (2.69) ========== ========== Diluted net income (loss) per share......................... $ .68 $ (2.69) ========== ==========
See accompanying "Notes to Consolidated Financial Statements" 4 WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) RESTATED (IN THOUSANDS)
ACCUMULATED COMPREHENSIVE OTHER INCOME ACCUMULATED COMPREHENSIVE COMMON CAPITAL IN TREASURY TOTAL (LOSS) DEFICIT INCOME (LOSS) STOCK EXCESS STOCK -------- ------------- ----------- ------------- -------- ---------- --------- Balance at December 31, 2000...... $425,451 $(620,688) $(1,069) $554 $1,162,767 $(116,113) Comprehensive income: Net income...................... 30,950 $30,950 30,950 Other comprehensive income, net of tax: Net unrealized gain on hedge....................... 2,504 2,504 2,504 Foreign currency translation adjustment.................. (59) (59) (59) ------- Comprehensive income.............. $33,395 ======= Stock issued on exercise of stock options......................... 274 274 Purchases of treasury stock....... (16,445) (16,445) Dividends paid.................... (4,524) (4,524) -------- --------- ------- ---- ---------- --------- Balance at September 30, 2001..... $438,151 $(589,738) $ 1,376 $554 $1,158,517 $(132,558) ======== ========= ======= ==== ========== =========
See accompanying "Notes to Consolidated Financial Statements" 5 WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) RESTATED
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 2001 2000 --------- --------- (IN THOUSANDS) OPERATING ACTIVITIES Net income (loss)......................................... $ 30,950 $(126,634) Charges to income (loss) not affecting cash: Depreciation............................................ 47,395 56,013 Provision for (benefit from) deferred income taxes...... 26,215 (55,584) Accumulated postretirement benefits obligation.......... 7,903 8,248 Provision for other long-term liabilities (5,713) (1,161) Amortization of goodwill and other intangibles.......... 27,839 27,653 Amortization of debt expense............................ 3,481 5,047 Restructuring and impairment charges.................... -- 179,283 --------- --------- 138,070 92,865 Decrease (increase) in assets: Short-term investments, restricted (8,826) 15,098 Marketable securities................................... (204) 39,143 Instalment notes receivable, net (a).................... (3,097) (25,233) Trade and other receivables, net........................ (26,972) (38,169) Inventories............................................. 11,428 17,010 Prepaid expenses........................................ 716 4,492 Increase (decrease) in liabilities: Accounts payable........................................ (2,621) (5,885) Accrued expenses........................................ (1,813) 5,425 Income taxes payable.................................... 1,637 3,764 Accrued interest........................................ 3,287 (4,408) --------- --------- Cash flows from operating activities.................. 111,605 104,102 --------- --------- INVESTING ACTIVITIES Additions to property, plant and equipment, net of retirements............................................. (52,576) (77,078) Decrease (increase) in investments and other assets....... (7,824) 865 --------- --------- Cash flows used in investing activities............... (60,400) (76,213) --------- --------- FINANCING ACTIVITIES Issuance of debt.......................................... 534,314 940,164 Retirement of debt........................................ (560,244) (988,237) Additions to unamortized debt expense..................... (43) (2,337) Purchases of treasury stock............................... (16,445) (21,725) Dividends paid............................................ (4,524) (4,268) Net unrealized gain on hedge.............................. 2,504 -- Net unrealized gain on marketable securities.............. -- 268 Exercise of employee stock options........................ 274 510 --------- --------- Cash flows used in financing activities............... (44,164) (75,625) --------- --------- EFFECT OF EXCHANGE RATE ON CASH............................. (59) (651) --------- --------- Net increase (decrease) in cash and cash equivalents........ 6,982 (48,387) Cash and cash equivalents at beginning of period............ 11,513 57,508 --------- --------- Cash and cash equivalents at end of period.................. $ 18,495 $ 9,121 ========= =========
(a) Consists of sales and resales, net of repossessions and provision for losses of $116.9 million and $84.8 million and cash collections on account and payouts in advance of maturity of $120.0 million and $110.0 million, respectively. See accompanying "Notes to Consolidated Financial Statements" 6 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) RESTATED NOTE 1--BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain reclassifications have been made to conform prior year's data to the current presentation. These reclassifications had no effect on reported earnings. Operating results for the three and nine month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Walter Industries, Inc. and Subsidiaries Transition Report on Form 10-K/A for the transition period ended December 31, 2000. NOTE 2--RESTATEMENT The following amounts have been restated for certain accounting policy changes, collectively referred to as the "revised accounting policies" including use of the interest method of revenue recognition on the instalment note portfolio, related provision for losses on instalment notes, deferral and amortization of note origination costs and the deferral of gains recognized upon the sale of repossessed properties. Previously, time charges were included in equal parts in each monthly payment (i.e. straight-line method) and taken into income as collected. Generally, the effect of the revised accounting policies was to reduce revenues, including principally time-charge income which is reflected in net sales and revenues, and to increase provision for losses on instalment notes. In addition, the revisions reflect deferral and amortization of nominal gains on the sale of repossessed properties and nominal deferral and amortization of note origination costs. In addition, stockholders' equity increased by $229.9 million as of December 31, 2000, the earliest date presented, as a result of the impact of the restatements discussed above, net of tax. Previously reported selling, general and administrative expense amounts have been reduced in each period presented to reflect the amount of provision for losses on instalment notes that has been reclassified to a separate line item in the restated format. All financial data in the Form 10-Q/A reflects the impact of 7 the restatement. The following table summarizes the impact of applying the interest method on the statement of operations and balance sheet:
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 ENDED SEPTEMBER 30, 2001 ------------------------- --------------------------- AS PREVIOUSLY AS AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED ----------- ----------- ------------- ----------- Statement of operations data: Net sales and revenues............................ $496,131 $495,449 $1,476,133 $1,477,575 Cost of sales..................................... 337,068 336,517 1,031,212 1,029,562 Selling, general and administrative............... 50,139 49,818 148,197 147,446 Provision for losses on instalment notes.......... -- 3,882 -- 8,750 Income before income taxes........................ 26,488 22,796 65,563 60,656 Income tax expense................................ (12,895) (11,603) (31,423) (29,706) Net income........................................ $ 13,593 $ 11,193 $ 34,140 $ 30,950 Basic and diluted net income per share............ $ .30 $ .25 $ .75 $ .68
AS OF SEPTEMBER 30, 2001 --------------------------- AS PREVIOUSLY AS REPORTED RESTATED ------------- ----------- Balance sheet data: Instalment notes receivable................................. $1,367,293 $1,700,374 Allowance for losses on instalment notes.................... (27,079) (11,000) Inventories................................................. 250,383 250,013 Deferred income taxes--asset (liability).................... 83,884 (38,193) Total assets................................................ 3,090,952 3,355,858 Accumulated deficit......................................... (816,451) (589,738) Stockholders' equity........................................ 211,438 438,151
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 ENDED SEPTEMBER 30, 2000 ------------------------- --------------------------- AS PREVIOUSLY AS AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED ----------- ----------- ------------- ----------- Statement of operations data: Net sales and revenues............................ $522,107 $523,062 $1,494,467 $1,495,770 Cost of sales..................................... 378,039 377,484 1,063,825 1,062,085 Selling, general and administrative............... 48,923 48,610 169,366 168,186 Provision for losses on instalment notes.......... -- 2,403 -- 7,672 Income (loss) before income taxes................. 2,006 1,426 (160,507) (163,956) Income tax benefit (expense)...................... (1,791) (1,588) 36,115 37,322 Net income (loss)................................. $ 215 $ (162) $ (124,392) (126,634) Basic and diluted net income (loss) per share..... $ -- $ -- $ (2.64) $ (2.69)
8
DECEMBER 31, 2000 -------------------------- AS PREVIOUSLY AS REPORTED RESTATED ------------- ---------- Balance sheet data: Instalment notes receivable................................. $1,358,858 $1,696,577 Allowance for losses on instalment notes.................... (26,839) (10,300) Inventories................................................. 262,002 261,441 Deferred income taxes--asset (liability) 111,818 (11,976) Total assets................................................ 3,098,314 3,340,193 Accumulated deficit......................................... (850,591) (620,688) Stockholders' equity........................................ 195,548 425,451
NOTE 3--RESTRICTED SHORT-TERM INVESTMENTS Restricted short-term investments at September 30, 2001 and December 31, 2000 include (i) temporary investment of reserve funds and collections on instalment notes receivable owned by Mid-State Trusts II, IV, VI, VII, VIII, and IX at September 30, 2001 and Mid-State Trusts II, IV, V, VI, VII, and VIII at December 31, 2000 (the "Trusts") ($104.7 million and $94.1 million, respectively), which are available only to pay expenses of the Trusts and principal and interest on indebtedness of the Trusts and (ii) miscellaneous other segregated accounts restricted to specific uses ($5.0 million and $6.8 million), respectively. NOTE 4--INSTALMENT NOTES RECEIVABLE--RESTATED (SEE NOTE 2) The instalment notes receivable is summarized as follows (in thousands):
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ Instalment Notes Receivable................................. $1,700,374 $1,696,577 Less: Allowance for losses on instalment notes.............. (11,000) (10,300) ---------- ---------- Net......................................................... $1,689,374 $1,686,277 ========== ==========
Activity in the allowance for losses on instalment notes is summarized as follows (in millions):
SEPTEMBER 31, DECEMBER 31, 2001 2000 ------------- ------------ Balance at beginning of period.............................. $10,300 $10,700 Provisions charged to income................................ 8,750 5,310 Charge-offs, net of recoveries.............................. (8,050) (5,710) ------- ------- Balance at end of period.................................... $11,000 $10,300 ======= =======
9 NOTE 5--INVENTORIES--RESTATED (SEE NOTE 2) Inventories are summarized as follows (in thousands):
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ Finished goods.............................................. $151,955 $159,069 Goods in process............................................ 40,731 46,289 Raw materials and supplies.................................. 52,366 49,387 Houses held for resale...................................... 4,961 6,696 -------- -------- Total inventories........................................... $250,013 $261,441 ======== ========
NOTE 6--DEBT Debt, in accordance with its contractual terms, consisted of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ Mortgage-Backed/Asset-Backed Notes: Trust II Mortgage-Backed Notes............................ $ 113,050 $ 161,500 Trust IV Asset Backed Notes............................... 484,834 502,174 Trust V Variable Funding Loan............................. -- 161,000 Trust VI Asset Backed Notes............................... 293,302 309,803 Trust VII Asset Backed Notes.............................. 255,795 272,192 Trust VIII Asset Backed Notes............................. 338,858 363,164 Trust IX Variable Funding Loan............................ 266,014 -- ---------- ---------- 1,751,853 1,769,833 ---------- ---------- Other senior debt: Walter Industries, Inc. Revolving Credit Facility............................... 100,000 110,000 Term Loan............................................... 300,000 300,000 Other................................................... 3,550 1,500 ---------- ---------- 403,550 411,500 ---------- ---------- Total....................................................... $2,155,403 $2,181,333 ========== ==========
On October 15, 2001, the Company made its required $75.0 million principal payment on the term loan. NOTE 7--STOCKHOLDERS' EQUITY Information relating to the Company's share repurchases is set forth in the following table (in thousands):
SHARES AMOUNT -------- -------- Treasury stock at December 31, 2000......................... 9,297 $116,113 Share repurchases for the nine months ended September 30, 2001...................................................... 1,602 16,445 ------ -------- Total held in treasury at September 30, 2001................ 10,899 $132,558 ====== ========
10 On April 2, 2001 the Board of Directors increased the authorization to repurchase the Company's common stock to $25.0 million. As of September 30, 2001, $13.0 million remained available to repurchase shares under this authorization. NOTE 8--EARNINGS PER SHARE--RESTATED (SEE NOTE 2) A reconciliation of the basic and diluted earnings per share computations for the three and nine months ended September 30, 2001 and 2000 are as follows (in thousands, except per share data):
THREE MONTHS ENDED SEPTEMBER 30, ------------------------------------------- 2001 2000 ------------------- --------------------- BASIC DILUTED BASIC DILUTED -------- -------- --------- --------- Net income (loss)........................................ $11,193 $11,193 $ (162) $ (162) Shares of common stock outstanding: Average number of common shares (a)...................... 44,633 44,633 46,409 46,409 Effect of diluted securities: Stock options (b)........................................ -- 407 - 60 ------- ------- --------- --------- 44,633 45,040 46,409 46,469 ======= ======= ========= ========= Net income (loss) per share.............................. $ .25 $ .25 $ -- $ -- ======= ======= ========= =========
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------- 2001 2000 ------------------- --------------------- BASIC DILUTED BASIC DILUTED -------- -------- --------- --------- Net income (loss)........................................ $30,950 $30,950 $(126,634) $(126,634) Shares of common stock outstanding: Average number of common shares (a)...................... 45,190 45,190 47,044 47,044 Effect of diluted securities: Stock options (b)........................................ -- 293 - 16 ------- ------- --------- --------- 45,190 45,483 47,044 47,060 ======= ======= ========= ========= Net income (loss) per share.............................. $ .68 $ .68 $ (2.69) $ (2.69) ======= ======= ========= =========
(a) The three and nine months ended September 30, 2001 and 2000 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 February 1, 2001, the Company declared a $.04 per share dividend for the four months ended December 31, 2000 payable to shareholders of record on February 15, 2001. On April 26, 2001, the Company declared a $.03 per share dividend for the three months ended March 31, 2001 payable to shareholders of record on May 16, 2001. On July 30, 2001, the Company declared a $.03 per share dividend for the three months ended June 30, 2001 payable to shareholders of record on August 15, 2001. On November 7, 2001, the Company declared a $.03 per share dividend for the three months ended September 30, 2001 payable to shareholders of record on November 21, 2001. 11 NOTE 9--DERIVATIVES Financial Accounting Standards Board Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Statement 133), requires companies to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument based on the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. The Company uses derivative instruments principally to manage exposures to natural gas price fluctuations. The Company's objective for holding derivatives is to minimize risk using the most effective methods to eliminate or reduce the impacts of exposures. The Company documents all relationships between hedging instruments and hedged items, and links all derivatives designated as fair value, cash flow or foreign currency hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also assesses and documents, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows associated with the hedged items. To protect against the reduction in value of forecasted cash flows resulting from sales of natural gas over the remainder of 2001, the Company has instituted a natural gas hedging program. The Company hedges portions of its forecasted revenues from sales of natural gas with swap contracts. The Company has entered into natural gas swap agreements that effectively convert a portion of its forecasted sales at floating-rate natural gas prices to a fixed-rate basis for the remainder of 2001, thus reducing the impact of natural gas price changes on future sales revenues. When natural gas prices fall, the decline in value of future natural gas sales is offset by gains in the value of swap contracts designated as hedges. Conversely, when natural gas prices rise, the increase in the value of future cash flows from natural gas sales is offset by losses in the value of the swap contracts. At September 30, 2001, approximately 50% of the Company's forecasted natural gas sales for the remainder of the year were designated as the hedged items to natural gas swap agreements. During the quarter ended September 30, 2001, the net loss from the ineffective portion of the Company's hedging instruments, which was insignificant, was recognized and included in net sales in the statement of operations. The $2.5 million of net gains on derivative instruments included in accumulated other comprehensive income at September 30, 2001 is expected to be reclassified, along with any additional gains or losses that may be incurred after September 30, 2001, to earnings as actual natural gas sales occur during the remaining three months of 2001. NOTE 10--OTHER ITEMS AND EVENTS On September 23, 2001, an explosion and fire occurred at one of the Company's coal mines. The quarter ended September 30, 2001 includes a $10.8 million pre-tax charge related to this accident. The 12 charge principally includes cost and expenses associated with the accident and the idling of the mine that are not expected to be covered by insurance. Additionally, revenues in the quarter ended September 30, 2001 include a federal excise tax refund credit of $11.2 million related to coal export sales in prior years. NOTE 11--SEGMENT INFORMATION--RESTATED (SEE NOTE 2) Summarized financial information concerning the Company's reportable segments is shown in the following tables (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, ------------------- 2001 2000 -------- -------- Sales and revenues: Homebuilding and Financing................................ $118,786 $118,702 Industrial Products....................................... 209,305 239,359 Energy Services........................................... 94,559 89,812 Natural Resources......................................... 69,597 72,517 Other..................................................... 3,202 2,672 -------- -------- Sales and revenues...................................... $495,449 $523,062 ======== ======== Operating income (a): Homebuilding and Financing................................ $ 10,888 $ 6,448 Industrial Products....................................... 15,635 25,766 Energy Services........................................... 5,509 2,188 Natural Resources......................................... 6,049 (10,547) -------- -------- Operating income (loss)................................. 38,081 23,855 Less: General corporate expense........................... 7,544 11,467 Senior debt interest expense......................... 7,741 10,962 -------- -------- Income (loss) before tax (expense) benefit................ 22,796 1,426 Income tax (expense) benefit.............................. (11,603) (1,588) -------- -------- Net income (loss)....................................... $ 11,193 $ (162) ======== ======== Depreciation: Homebuilding and Financing................................ $ 1,098 $ 1,134 Industrial Products....................................... 9,130 9,572 Energy Services........................................... 1,682 1,708 Natural Resources......................................... 2,907 5,567 Other..................................................... 991 973 -------- -------- Total................................................... $ 15,808 $ 18,954 ======== ========
(a) Operating income amounts are after deducting amortization of goodwill and other intangibles. A breakdown of amortization by segment is as follows (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, ------------------- 2001 2000 -------- -------- Homebuilding and Financing.................................. $ 4,226 $ 4,371 Industrial Products......................................... 2,650 2,648 Energy Services............................................. 2,139 2,139 Natural Resources........................................... -- 143 Other....................................................... 267 267 -------- -------- $ 9,282 $ 9,568 ======== ========
13
NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 2001 2000 ---------- ---------- Sales and revenues: Homebuilding and Financing................................ $ 350,557 $ 360,915 Industrial Products....................................... 625,150 664,590 Energy Services........................................... 292,675 281,836 Natural Resources......................................... 203,039 174,292 Other..................................................... 6,154 14,137 ---------- ---------- Sales and revenues...................................... $1,477,575 $1,495,770 ========== ========== Operating income (a): Homebuilding and Financing................................ $ 34,829 $ 25,797 Industrial Products....................................... 48,024 49,231 Energy Services........................................... 20,327 14,395 Natural Resources......................................... 9,502 (189,759) ---------- ---------- Operating income (loss)................................. 112,682 (100,336) Less: General corporate expense........................... 23,864 30,056 Senior debt interest expense......................... 28,162 33,564 ---------- ---------- Income (loss) before tax (expense) benefit................ 60,656 (163,956) Income tax (expense) benefit.............................. (29,706) 37,322 ---------- ---------- Net income (loss)....................................... $ 30,950 $ (126,634) ========== ========== Depreciation: Homebuilding and Financing................................ $ 3,247 $ 3,292 Industrial Products....................................... 27,692 25,522 Energy Services........................................... 4,808 5,235 Natural Resources......................................... 8,721 19,366 Other..................................................... 2,927 2,598 ---------- ---------- Total................................................... $ 47,395 $ 56,013 ========== ==========
(a) Operating income amounts are after deducting amortization of goodwill and other intangibles. A breakdown of amortization by segment is as follows (in thousands):
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2001 2000 -------- -------- Homebuilding and Financing.................................. $ 12,769 $ 13,483 Industrial Products......................................... 7,858 7,886 Energy Services............................................. 6,417 6,417 Natural Resources........................................... -- (8,314) Other....................................................... 795 8,181 -------- -------- $ 27,839 $ 27,653 ======== ========
14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As more fully described in Note 2 of "Notes to Consolidated Financial Statements," on January 28, 2002, the Company restated its previously issued financial statements for certain accounting policy changes, collectively referred to as the "restated accounting policies." Accordingly, all prior period information presented herein has been restated to reflect these changes. Total assets, net instalment notes receivable, allowance for losses, equity, certain income statement amounts and net income were restated on this Form 10-Q/A from amounts previously reported in the Company's Form 10-Q, as filed November 14, 2001. The principal differences result from a change in the method of recognizing time charge income from the straight-line method to the interest method, which also has a related impact on the allowance for losses. These changes are reflected in the Homebuilding and Financing segment. The following discussion of operating results includes the impact of these restatements. 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 SEPTEMBER 30, 2001 AND 2000 Net sales and revenues for the three months ended September 30, 2001 were $495.4 million, a decrease of $27.6 million from the comparable three month period in 2000. The current year included a federal excise tax refund credit of $11.2 million related to coal export sales in prior years. Excluding this credit, net sales and revenues were down $38.8 million, or 7.4%. The decrease in revenues primarily reflected decreased demand in the Company's Industrial Products segment resulting from a weakened economy and lower shipments from the Natural Resources segment resulting from large spot sales of excess coal inventories in the prior year. These declines were partially offset by an increase in time charges of $1.4 million in the Homebuilding and Financing segment, principally as the result of higher prepayments, and higher coal selling prices in the Natural Resources segment. Cost of sales, exclusive of depreciation, of $336.5 million was 80.1% of net sales in the 2001 period versus $377.5 million and 81.8% of net sales in the comparable period of 2000. Cost of sales decreased in the current period primarily due to decreased sales. The decrease in cost of sales as a percentage of net sales reflects lower material costs at U.S. Pipe and Jim Walter Homes, lower storage costs and reduced overhead at AIMCOR, and improved productivity and cost reduction efforts in all business segments. These improvements were partially offset by higher product costs for petcoke and aluminum, higher labor costs at U.S. Pipe and higher material costs at Sloss. Depreciation for the three months ended September 30, 2001 was $15.8 million, a decrease of $3.1 million from the same period in 2000. This decrease was primarily attributable to accelerated depreciation on certain assets during the prior year period. Selling, general and administrative expenses of $49.8 million were 10.1% of net sales and revenues in the 2001 period, compared to $48.6 million and 9.3% in 2000. Provision for losses on instalment notes of $3.9 million were 7.2% of time charges in the 2001 period, compared to $2.4 million and 4.6% in 2000. The increase was primarily due to higher losses on sales of repossessed homes as Mid-State Homes actively sold repossessed home inventories at lower values in anticipation of continued economic weaknesses. The increase in provision for losses on instalment notes was due to current economic conditions which are expected to increase losses on the portfolio. 15 Interest and amortization of debt expense was $41.0 million for the three months ended September 30, 2001, as compared to $47.8 million in the same period of 2000. The average rate of interest for the three months ended September 30, 2001 was 7.3% as compared to 8.1% for the three months ended September 30, 2000. The prime rate of interest was a range from 6.3% to 6.8% in the current year period compared to 9.5% for the same period in 2000. The Company's effective tax rate for the three months ended September 30, 2001 and 2000 differed from the federal 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 September 30, 2001 was $11.2 million compared to a net loss of $0.2 million in the comparable 2000 period. The Company's diluted earnings per share in the 2001 period was $0.25 compared to break even in the 2000 period. In addition to the $11.2 million federal excise tax refund credit, the current period included a $10.8 million pre-tax charge related to the coal mining accident at Jim Walter Resources. This charge principally includes costs and expenses associated with the accident and the idling of Mine No. 5 that are not expected to be covered by insurance. The prior year results included pre-tax restructuring charges totaling $11.4 million of which $5.2 million related to executive and other personnel severance and $6.2 million was attributable to the restructuring of AIMCOR'S European operations. The current and prior period results also reflect the factors discussed in the following segment analysis. Segment Analysis: HOMEBUILDING AND FINANCING Net sales and revenues were $118.8 million for the three months ended September 30, 2001, an increase of $0.1 million from the quarter ended September 30, 2000. During the three months ended September 30, 2001, revenues increased principally due a $1.4 million increase in time charge income principally associated with higher prepayments. The average net selling price increased as a result of new product options, amenity upgrades and consumer preference for more upscale models. Offsetting these positives was a decline in unit completions.
THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ------------------- ------------------- Homes Completed..................................... 1,020 1,072 Average Net Selling Price........................... $60,200 $57,200
The prepayment rate increased to 6.2% for the quarter ended September 30, 2001 compared to 4.5% for the quarter ended September 30, 2000. The estimated backlog of homes to be constructed at September 30, 2001 was $116.9 million compared to $99.0 million at December 31, 2000 and $108.0 million at September 30, 2000. Due to more aggressive marketing efforts, gross sales of new construction contracts for the first nine months of the year increased 8.6%, which is expected to translate into higher unit completions and revenues in the fourth quarter of 2001 and the first quarter of 2002. Operating income was $10.9 million for the three months ended September 30, 2001 compared to $6.4 million in the prior year period. The $4.5 million increase was principally caused by the $1.4 million increase in time charges, a reduction in net interest costs associated with the instalment note portfolio, higher average net selling prices and improved operating margins, attributable to lower material costs and productivity improvements. These improvements were partially offset by lower revenues from fewer unit completions. 16 INDUSTRIAL PRODUCTS Net sales and revenues were $209.3 million for the three months ended September 30, 2001, a decrease of $30.1 million from the $239.4 million for the three months ended September 30, 2000. Recent weakness in the domestic steel industry, caused by competition from foreign suppliers and a slower economy, has significantly impacted sales at Sloss. Sloss' revenues decreased by $2.8 million from the comparable period a year earlier, principally due to reduced sales of furnace coke. JW Aluminum's revenues declined $9.4 million from the year earlier period, principally due to lower shipments as a result of reduced demand for its fin stock products used in air conditioners. The current economic downturn has also resulted in decreased shipments at U.S. Pipe principally due to customers delaying construction and water projects. The order backlog for U.S. Pipe at September 30, 2001 was $91.4 million compared to $94.0 million at September 30, 2000 and $82.0 million at December 31, 2000. Operating income of $15.6 million for the third quarter of 2001 was down $10.1 million from the $25.8 million for the three months ended September 30, 2000. Sloss' operating income declined $1.6 million from last year due to lower demand for furnace coke. JW Aluminum's operating income declined $6.3 million, due to reduced demand for fin stock products. In response to this lower demand for fin stock products, production levels have been reduced and the production mix has been changed to emphasize building products, where demand is better but margins are lower. Lower material costs, cost reductions and improved productivity at U.S. Pipe helped mitigate the effect of lower volumes and higher labor costs on operating income. ENERGY SERVICES Net sales and revenues were $94.6 million for the three months ended September 30, 2001, an increase of $4.7 million from the three months ended September 30, 2000. Operating income of $5.5 million, was $3.3 million above the prior year period. However, excluding the $6.2 million of restructuring charges in the prior year, operating income declined $2.9 million. This decline is primarily due to lower margins on petroleum coke sales as well as weaker performance by the metals additive business which continues to be impacted by the distressed domestic steel industry. Offsetting these declines in performance are productivity improvements and cost reductions including restructuring of the European operations, lower storage costs and reduced overhead. NATURAL RESOURCES Net sales and revenues were $69.6 million for the three months ended September 30, 2001, a decrease of $2.9 million from the $72.5 million in the prior year period. Excluding the federal excise tax refund credit of $11.2 million, net sales and revenues were down $14.1 million. This is attributable to a $23.5 million decline in coal shipments partially offset by in increase in average coal selling prices.
THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ------------------- ------------------- Average Natural Gas Selling Price (per MCF)......... $4.01 $4.13 Number of Natural Gas Wells......................... 369 332 Average Coal Selling Price (per ton)................ $34.77 $27.44 Tons of Coal Sold................................... 1.3 million 2.2 million
For the three months ended September 30, 2001, Natural Resources had operating income of $6.0 million. Excluding both the impact of the mining accident and the gain from excise tax refund claims, operating income was $5.7 million in the 2001 period compared to an operating loss of $10.5 million for the quarter ended September 30, 2000. The improvement in operating income was 17 principally driven by higher coal selling prices and a 12% decline in average production costs from productivity enhancements and successful cost reduction efforts in the mining operation. GENERAL CORPORATE EXPENSES General corporate expenses were $7.5 million during the three months ended September 30, 2001 compared to $11.5 million for the three months ended September 30, 2000. This decline is principally attributable to the executive severance during the prior year period. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 Net sales and revenues for the nine months ended September 30, 2001 were $1.5 billion, a 1.2% decline from the comparable nine month period in 2000. Revenue growth within the Energy Services and Natural Resources segments and at U.S. Pipe was partially offset by declines in unit sales of homes and lower demand for furnace coke and aluminum products. Miscellaneous income decreased $6.0 million, primarily because of non-recurring revenues from life insurance policies of $8.8 million in the prior year. Additionally, the current year includes the federal excise tax refund credit of $11.2 million related to coal export sales in prior years. Cost of sales, exclusive of depreciation, of $1.0 billion was 80.4% of net sales in the 2001 period versus $1.1 billion and 81.2% of net sales in the comparable period of 2000. The prior year included approximately $13.2 million of charges, primarily for inventory obsolescence and valuation reserves and environmental liabilities in the Industrial Products and Natural Resources segments. Excluding these charges, cost of sales as a percent of net sales was relatively flat. Higher gross profit margins were driven by cost reductions and productivity improvements, including lower materials cost for homebuilding, lower scrap iron cost for U.S. Pipe, lower storage costs and reduced overhead at AIMCOR and lower production costs at Jim Walter Resources. Offsetting these improvements were lost fixed cost absorption in some of the Industrial Products businesses, higher product costs for petcoke and aluminum, higher energy and labor costs at U.S. Pipe and higher material costs at Sloss. Depreciation for the nine months ended September 30, 2001 was $47.4 million, a decrease of $8.6 million from the same period in 2000. This decrease was primarily attributable to a lower depreciable asset base resulting from the $166.7 million asset impairment charge to the Company's coal mining assets taken in May 2000. Selling, general and administrative expenses of $147.4 million were 10.0% of net sales and revenues in the 2001 period, compared to $168.2 million and 11.2% in 2000. The prior year included charges of $11.4 million, primarily for an increase in the provision for losses on trade receivables within the Energy Services segment, and increased workers compensation expense. Productivity improvement programs implemented in the last twelve months, including the restructuring of the European operations in the Energy Services segment and headcount reductions at the corporate headquarters and homebuilding, have contributed to additional reductions in selling, general and administrative expenses. Provision for losses on instalment notes of $8.8 million were 5.3% of time charges in the 2001 period, compared to $7.7 million and 4.8% in 2000. The increase was primarily due to higher losses on sales of repossessed homes as Mid-State Homes actively sold repossessed home inventories at lower values in anticipation of continued economic weaknesses. The increase in provision for losses on installment notes was due to current economic conditions, which are expected to increase losses on the portfolio. Interest and amortization of debt expense was $131.2 million for the nine months ended September 30, 2001, as compared to $142.5 million in the same period of 2000. The average rate of interest was 7.7% for the nine months ended September 30, 2001 compared to 8.0% for the nine 18 months ended September 30, 2000. The prime rate of interest was a range from 6.3% to 9.0% in the current year period compared to a range of 8.5% to 9.5% in 2000. The Company's effective tax rate for the nine months ended September 30, 2001 differed from the federal 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. The effective tax rate for the nine months ended September 30, 2000 differed from the federal statutory tax rate primarily due to amortization of goodwill, the utilization of certain federal tax credits, the effect of state and local income taxes, recording of a valuation allowance associated with certain tax benefits which are not likely to be realized, the recognition of a tax reserve for the loss of certain tax litigation relating to leveraged buyout costs and the effect of a gain from an executive life insurance policy which is not subject to income taxes. Net income for the nine months ended September 30, 2001 was $31.0 million compared to a net loss of $126.6 million in the comparable 2000 period. The Company's diluted earnings per share in the 2001 period was $0.68 compared to a loss of $2.69 per share in the 2000 period. In addition to the $11.2 million federal excise tax credit, the current period included the $10.8 million pre-tax charge related to the coal mining accident at Jim Walter Resources. Prior year results also included pre-tax restructuring and impairment charges of $179.3 million. The current and prior period results also reflect the factors discussed in the following segment analysis. Segment Analysis: HOMEBUILDING AND FINANCING Net sales and revenues were $350.6 million for the nine months ended September 30, 2001, a decrease of $10.4 million from the quarter ended September 30, 2000. During the nine months ended September 30, 2001, revenues decreased as the Company completed fewer homes, but this was partially offset by an increase in the average net selling price.
NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ------------------ ------------------ Homes Completed....................................... 2,942 3,239 Average Net Selling Price............................. $59,200 $57,600
Additionally, time charge income increased $3.6 million as the prepayment speed increased to 5.9% for the nine months ended September 30, 2001 compared to 4.9% for the comparable period in the prior year. Operating income was $34.8 million for the nine months ended September 30, 2001 compared to $25.8 million in the prior year period. The $9.0 million increase was principally caused by the increase in the time charge income, a reduction in net interest cost associated with the instalment note portfolio, higher average net selling prices and improved operating margins attributable to lower materials costs and productivity improvements. These improvements were partially offset by lower revenues from fewer unit completions. INDUSTRIAL PRODUCTS Net sales and revenues were $625.2 million for the nine months ended September 30, 2001, a decrease of $39.4 million from the $664.6 million for the nine months ended September 30, 2000. This decrease is due to primarily to declines in shipments at Sloss and JW Aluminum. Sloss' revenues decreased by $17.2 million from the comparable period a year earlier, principally due to reduced sales of furnace coke. JW Aluminum also experienced lower shipments principally due to the slowing 19 economy and lower demand for its fin stock products used in air conditioners. However, compared to the nine months ended September 30, 2000, U.S. Pipe revenues were up 3% as shipments of fittings products increased and the average selling price per ton for pipe products also increased. Operating income of $48.0 million for the nine months ended September 30, 2001 was down $1.2 million from the $49.2 million for the nine months ended September 30, 2000. The 2000 period included $16.4 million of charges in the Industrial Products segment taken in the second quarter primarily for inventory obsolescence write-offs and environmental liabilities. Excluding these charges, operating income at U.S. Pipe improved 9%, reflecting higher volume and improved pricing for it's ductile iron pipe products. Higher energy and labor costs at U.S. Pipe of approximately $7.8 million were offset by a $7.8 million reduction in scrap iron costs. However, positive results at U.S. Pipe were offset by decreases in operating income at JW Aluminum and Sloss, where declines in demand for their products, primarily fin stock and furnace coke, were the primary drivers for poor performance. ENERGY SERVICES Net sales and revenues were $292.7 million for the nine months ended September 30, 2001, an increase of $10.8 million from the nine months ended September 30, 2000. The increase is primarily due to increased prices and a change in sales mix offset by a decline in volume. Operating income of $20.3 million, was $5.9 million above the prior year period due to ongoing productivity improvements, along with cost reductions associated with last year's restructuring of its European operations and a higher provision for losses on trade receivables in the prior year. These improvements were offset by lower margins, as well as weaker performance by the metals additive business. NATURAL RESOURCES Net sales and revenues were $203.0 million for the nine months ended September 30, 2001, an increase of $28.7 million from the $174.3 million in the prior year period. Excluding the federal excise tax refund credit of $11.2 million, net sales and revenues increased $17.5 million. This improvement is primarily attributable to an increase in natural gas revenues, which rose $13.8 million, resulting primarily from an increase in average selling price. Additionally, coal revenues rose $3.7 million primarily due to an increase in average coal selling prices, which was partially offset by a slight decrease in tons of coal sold.
NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ------------------ ------------------ Average Natural Gas Selling Price (per MCF)........... $5.24 $3.34 Average Coal Selling Price (per ton).................. $30.15 $28.23 Tons of Coal Sold..................................... 4.8 million 5.0 million
For the nine months ended September 30, 2001, Natural Resources had operating income of $9.5 million, compared to an operating loss of $189.8 million for the nine months ended September 30, 2000. Excluding both the impact of the mining accident and the gain from excise tax refund claims operating income was $9.1 million in the 2001 period. The loss in the prior year period included pre-tax restructuring, impairment and other charges of $164.3 million. Excluding these charges, the improvement in operating income was principally driven by significant increases in natural gas prices, increased coal selling prices and a 7% decline in average production costs from improved productivity and successful cost reduction efforts in the mining operation. GENERAL CORPORATE EXPENSES General corporate expenses were $23.9 million during the nine months ended September 30, 2001 compared to $30.1 million for the nine months ended September 30, 2000. The prior year includes $4.9 million of restructuring costs principally associated with executive severance. Excluding these 20 charges, the decline is principally attributable to cost reduction efforts, including a reduction in headcount and other expenses at the corporate office. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Since December 31, 2000, total debt has decreased by $25.9 million. During the nine month period ended September 30, 2001, net borrowings under the Mid-State Trust IX Variable Funding Loan Agreement totaled $266.0 million. Payments on the mortgage-backed/asset-backed notes amounted to $284.0 million. Other senior debt decreased by $8.0 million. Since September 30, 2000 total debt has decreased by $125.5 million. Subsequent to period end, on October 15, 2001 the Company made its required $75.0 million principal payment on the term loan. At September 30, 2001 borrowings under the Revolving Credit Facility totaled $100.0 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 September 30, 2001 letters of credit with a face amount of $64.2 million were outstanding. 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 and its Restricted Subsidiaries is required to maintain specified financial ratios and comply with certain financial tests. The most restrictive of these limitations are requirements to maintain (a) a minimum interest coverage ratio (the ratio of EBITDA to interest expense for the Company and its Restricted Subsidiaries as defined in the Credit Facilities) of at least 2.50-to-1 and (b) a maximum leverage ratio (the ratio of indebtedness to EBITDA for the Company and its Restricted Subsidiaries as defined in the Credit Facilities) of not more than 3.75-to-1. The Company was in compliance with these covenants at September 30, 2001. The Trust IX Variable Funding Loan Agreement's covenants, among other things, restrict the ability of Trust IX to dispose of assets, create liens and engage in mergers or consolidations. The Company was in compliance with these covenants at September 30, 2001. Cash and cash equivalents were approximately $18.5 million at September 30, 2001. Operating cash flows for the nine months ended September 30, 2001 together with issuance of long-term debt under the Mid-State Trust IX Variable Funding Loan Agreement were primarily used for payments on the mortgage-backed/asset-backed notes, capital expenditures, dividends and to purchase 1.6 million shares of common stock under the stock repurchase program. Cash provided by operating activities for the nine months ended September 30, 2001, was $111.6 million, principally reflecting operating income for the period and non-cash charges for depreciation and amortization, offset by an increase in working capital. The increase in working capital primarily reflected higher receivables levels at U.S. Pipe from increased sales. 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. Capital expenditures totaled $54.5 million in the nine months ended September 30, 2001. These capital expenditures reflect the Company's ongoing commitment to maintain safe, efficient plants and continually increase productivity. Commitments for capital expenditures at September 30, 2001 were not significant; however, it is estimated that gross capital expenditures for the year ending December 31, 2001 will approximate $70-80 million. Actual expenditures in 2001 may be more or less than this 21 amount, depending upon the level of earnings and cash flow, or expansion opportunities in certain markets. In the nine months ended September 30, 2001, the Company repurchased $16.4 million of its Common Stock. On April 2, 2001 the Board of Directors increased the authorization to repurchase the Company's common stock to $25.0 million. As of September 30, 2001, $13.0 million remained available for share repurchases under this authorization. The Board of Directors approved a $0.04 per share dividend payable March 15, 2001 to shareholders of record on February 15, 2001. The $0.04 per share dividend reflects a one-time, non-recurring adjustment to the Company's regular dividend rate of $0.03 per share because of a one-time dividend reporting period of four months due to the change in fiscal year end. On April 26, 2001, the Board of Directors declared a $0.03 per share dividend payable to shareholders of record on May 16, 2001. On July 30, 2001, the Company declared a $0.03 per share dividend for the three months ended June 30, 2001 payable to shareholders of record on August 15, 2001. On November 7, 2001, the Company declared a $0.03 per share dividend for the three months ended September 30, 2001 payable to shareholders of record on November 21, 2001. The Company believes that the Mid-State Trust IX 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 IX Variable Funding Loan Agreement. In order to facilitate these permanent financings, the Company completed a $750.0 million shelf offering effective on August 1, 2001. 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. On November 9, 2001, Mid-State Trust X issued $394.1 million in Asset Backed Note under its shelf issuance. The net proceeds from the transaction will be used to repay borrowings under the Company's Mid-State Trust IX warehouse facility, and will provide more than $50 million of liquidity for general corporate purposes. 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, the Trust IX Variable Funding Loan Agreement, 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 and (ii) the impact of interest rate movements on its ability to meet interest rate expense requirements and comply with financial covenants. The Company has historically managed interest rate risk through the periodic use of interest rate hedging instruments. There were no such instruments outstanding at September 30, 2001. 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 periodically securitizing its instalment notes into asset-backed trust agreements funded by fixed 22 rate debt. Therefore, the Company's asset/liability management requires a high degree of analysis and estimation. In the ordinary course of business, the Company is also exposed to commodity price risks. These exposures primarily relate to the acquisition of raw materials and the purchase and the sale of natural gas. The Company may occasionally utilize derivative financial instruments to manage certain of these exposures where it considers it practical to do so. In the first quarter of 2001, the Company entered into a commodity swap to hedge anticipated sales of natural gas. At September 30, 2001, the Company had outstanding commodity swaps with a notional amount of approximately 1.2 million cubic feet. These commodity swaps, which cover the period from October through December of 2001, provide for the Company to receive a weighted average fixed price of approximately $5.38 per MMBTU and to pay a variable price that is substantially the same as the price to be received by the Company from its sales contract with Southern Natural Gas. For further information about the Company's use of derivative instruments, see Note 9 of "Notes to Consolidated Financial Statements." 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. NEW ACCOUNTING PRONOUNCEMENTS On June 30, 2001, the Financial Accounting Standards Board finalized FAS 141, "Business Combinations", and FAS 142, "Goodwill and Other Tangible Assets." FAS 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. With the adoption of FAS 142 effective January 1, 2002, goodwill is no longer subject to amortization. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test. Under the new rules, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. These intangible assets will be required to be amortized over their useful lives. As of September 30, 2001, Walter had $425.3 million of goodwill, net of accumulated amortization of $548.3 million. The Company estimates the adoption of FAS 142 effective January 1, 2002 will result in the elimination of approximately $29.0 million of annual goodwill amortization. However, the Company is in the process of analyzing the effect of applying this new standard. In June 2001, the Financial Accounting Standards Board issued FAS 143, "Accounting for Asset Retirement Obligations." FAS 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002 with initial application required as of the beginning of an entity's fiscal year. The Company is in the process of analyzing any potential effect of applying this new standard. In August 2001, the Financial Accounting Standards Board issued FAS 144, "Accounting for Impairment or Disposal of Long-Lived Assets". This Statement supersedes FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-lived Assets to be Disposed of" and APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment." This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company is in the process of analyzing any potential effect of applying this new standard. 23 PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT This Form 10-Q/A 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/A, 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. 24 PART II--OTHER INFORMATION Item 1. LEGAL PROCEEDINGS None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Item. 6 EXHIBITS AND REPORTS ON FORM 8-K (a) None (b) None 25 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/ W. F. OHRT /s/ C. E. CAUTHEN -------------------------------------------- -------------------------------------------- W. F. Ohrt C. E. Cauthen Executive Vice President and Senior Vice President, Controller Principal Financial Officer and Principal Accounting Officer Date: January 28, 2002
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