-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CFgw+0lGJV2Fyt3m/HJbH+Ihcx6ccM1ZjmrIASKLxDDC3DMUPNsP58grPwn7eS5y +VjbYGV2Ul/4Ob+uh49GiA== 0001047469-98-037305.txt : 19981016 0001047469-98-037305.hdr.sgml : 19981016 ACCESSION NUMBER: 0001047469-98-037305 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981015 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WALTER INDUSTRIES INC /NEW/ CENTRAL INDEX KEY: 0000837173 STANDARD INDUSTRIAL CLASSIFICATION: GEN BUILDING CONTRACTORS - RESIDENTIAL BUILDINGS [1520] IRS NUMBER: 133429953 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13711 FILM NUMBER: 98725746 BUSINESS ADDRESS: STREET 1: 1500 N DALE MABRY HWY CITY: TAMPA STATE: FL ZIP: 33607 BUSINESS PHONE: 8138714811 MAIL ADDRESS: STREET 1: 1500 N DALE MABRY HWY CITY: TAMPA STATE: FL ZIP: 33607 FORMER COMPANY: FORMER CONFORMED NAME: HILLSBOROUGH HOLDINGS CORP DATE OF NAME CHANGE: 19910814 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 1998 or / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 000-20537 WALTER INDUSTRIES, INC. Incorporated in Delaware IRS Employer Identification No. 13-3429953 1500 North Dale Mabry, Tampa, Florida 33607 Telephone Number 813-871-4811 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No . --- --- There were 51,838,860 shares of common stock of the registrant outstanding at September 30, 1998. PART I - FINANCIAL INFORMATION WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
August 31, May 31, 1998 1998 (unaudited) (audited) ----------- --------- ASSETS (in thousands) Cash and cash equivalents $ 47,955 $ 54,709 Short-term investments, restricted 136,414 247,463 Marketable securities 40,334 39,064 Instalment notes receivable 4,215,093 4,238,745 Less - Allowance for possible losses (26,049) (26,221) Unearned time charges (2,881,439) (2,894,459) Trade and other receivables, less allowance for possible losses of $7,136 and $7,133, respectively 214,131 224,691 Inventories, at lower of cost (first in, first out or average) or market: Finished goods 177,564 205,516 Goods in process 33,836 36,876 Raw materials and supplies 59,197 53,509 Houses held for resale 3,493 3,153 Prepaid expenses 13,472 12,156 Property, plant and equipment, at cost 1,168,118 1,149,707 Less - Accumulated depreciation and depletion (496,541) (477,359) Deferred income taxes 77,019 84,409 Investments and other long-term assets 51,049 51,800 Unamortized debt expense 29,775 31,215 Goodwill, net 517,187 527,696 ----------- ----------- $ 3,380,608 $ 3,562,670 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Book overdrafts $ 23,633 $ 24,867 Accounts payable 122,430 145,476 Accrued expenses 108,834 126,022 Income taxes payable 61,784 60,098 Short-term notes payable 10,200 5,800 Long-term senior debt Mortgage-backed/asset-backed notes 1,737,897 1,886,167 Other senior debt 594,151 589,450 Accrued interest 24,092 27,147 Accumulated postretirement benefits obligation 287,644 283,708 Other long-term liabilities 55,053 54,848 Stockholders' equity Common stock - 200,000,000 authorized, $.01 par value Issued - 55,292,852 shares and 55,283,686 shares 553 553 Capital in excess of par value 1,169,213 1,169,052 Retained earnings (accumulated deficit) (775,466) (784,503) Cumulative foreign currency translation adjustment 26 (52) Treasury stock - 2,570,592 and 1,398,092 shares, at cost (35,524) (21,841) Excess of additional pension liability over unrecognized prior years service cost (4,122) (4,122) Net unrealized appreciation (depreciation) in marketable securities 210 - ----------- ----------- Total stockholders' equity 354,890 359,087 ----------- ----------- $ 3,380,608 $ 3,562,670 =========== ===========
See accompanying Notes to Consolidated Financial Statements 1 WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the three months ended August 31, -------------------------- 1998 1997 (in thousands, except per share amounts) Sales and revenues: Net sales $422,600 $334,878 Time charges 64,231 57,824 Miscellaneous 6,303 6,631 -------- -------- 493,134 399,333 -------- -------- Cost and expenses: Cost of sales 348,528 260,483 Depreciation and depletion 20,033 17,568 Selling, general and administrative 43,109 35,110 Postretirement benefits 5,873 5,566 Provision for possible losses 85 319 Interest and amortization of debt expense 47,485 44,863 Amortization of goodwill 10,609 8,416 -------- -------- 475,722 372,325 -------- -------- 17,412 27,008 Income tax expense: Current (985) (1,046) Deferred (7,390) (11,897) -------- -------- Net income $ 9,037 $ 14,065 ======== ======== Net income per share: Basic $ .17 $ .26 ======== ======== Diluted $ .17 $ .26 ======== ========
See accompanying Notes to Consolidated Financial Statements 2 WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Retained Accumulated Earnings Other Comprehensive (Accumulated Comprehensive Common Capital in Treasury Total Income Deficit) Income Stock Excess Stock -------- ------------- ------------ ------------- ------- ---------- --------- Balance at May 31, 1998 $359,087 $(784,503) $(4,174) $553 $1,169,052 $(21,841) Comprehensive income Net income 9,037 $9,037 9,037 Other comprehensive income, net of tax Net unrealized appreciation in marketable securities 210 210 Foreign currency translation adjustment 78 78 ------ Other comprehensive income 288 288 ------ Comprehensive income $9,325 ====== Stock issued from options exercises 161 161 Purchase of treasury stock (13,683) (13,683) -------- --------- ------- ---- ---------- -------- Balance at August 31, 1998 $354,890 $(775,466) $(3,886) $553 $1,169,213 $(35,524) ======== ========= ======= ==== ========== ========
See accompanying Notes to Consolidated Financial Statements 3 WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
For the three months ended August 31, -------------------------- 1998 1997 --------- --------- OPERATING ACTIVITIES (in thousands) Net income $ 9,037 $ 14,065 Charges to income not affecting cash: Depreciation and depletion 20,033 17,568 Provision for deferred income taxes 7,390 11,897 Accumulated postretirement benefits obligation 3,936 3,495 Provision for other long-term liabilities 205 (379) Amortization of goodwill 10,609 8,416 Amortization of debt expense 1,440 1,756 --------- --------- 52,650 56,818 Decrease (increase) in assets, net of effects from acquisition: Short-term investments, restricted 111,049 (9,798) Marketable securities (1,060) 2,634 Instalment notes receivable, net (a) 10,460 (2,010) Trade and other notes and accounts receivable, net 10,560 (8,287) Inventories 24,964 21,713 Prepaid expenses (1,316) 2,735 Increase (decrease) in liabilities, net of effects from acquisition: Book overdrafts (1,234) (1,746) Accounts payable (23,046) (15,095) Accrued expenses (17,188) (20,463) Income taxes payable 1,686 505 Accrued interest (3,055) 3,125 --------- --------- Cash flows from operating activities 164,470 30,131 --------- --------- INVESTING ACTIVITIES Additions to property, plant and equipment, net of retirements and effects from acquisition (19,262) (18,686) Decrease (increase) in investments and other assets, net 651 (142) Acquisition, net of cash acquired - (1,893) --------- --------- Cash flows used in investing activities (18,611) (20,721) --------- --------- FINANCING ACTIVITIES Issuance of short-term notes payable and long-term senior debt 53,701 566,150 Retirement of short-term notes payable and long-term senior debt (192,870) (550,018) Additions to unamortized debt expense - (12,124) Purchases of treasury stock (13,683) (21,799) Exercise of employee stock options 161 318 --------- --------- Cash flows used in financing activities (152,691) (17,473) --------- --------- EFFECT OF EXCHANGE RATE ON CASH 78 - --------- --------- Net decrease in cash and cash equivalents (6,754) (8,063) Cash and cash equivalents at beginning of period 54,709 35,782 --------- --------- Cash and cash equivalents at end of period $ 47,955 $ 27,719 ========= =========
(a) Consists of sales and resales, net of repossessions and provision for possible losses, of $40,944 and $43,662 and cash collections on account and payouts in advance of maturity of $51,404 and $41,652, respectively. See accompanying Notes to Consolidated Financial Statements 4 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1998 (In Thousands, Except Per Share Data) Note 1 - Principles of Consolidation Walter Industries, Inc. (the "Company") is a diversified holding company with five operating segments: Homebuilding and Financing, Water Transmission Products, Natural Resources, Industrial Products and Energy Services. Through its operating segments, the Company offers a diversified line of products and services primarily including home construction and financing, ductile iron pressure pipe, coal, methane gas, furnace and foundry coke, chemicals, slag fiber, aluminum foil and sheet products, petroleum coke and distribution and refinery outsourcing services. The consolidated financial statements include the accounts of the Company and all of its subsidiaries. Preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from those estimates. All significant intercompany balances have been eliminated. All of the August 31, 1998 and 1997 amounts are unaudited but in the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation have been made. The results for the three months ended August 31, 1998 and 1997 are not necessarily indicative of results for a full fiscal year. These financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended May 31, 1998. Unless otherwise specified, capitalized terms used herein are as defined in the aforementioned Form 10-K. Note 2 - Acquisition of AIMCOR On October 15, 1997, the Company completed the acquisition of AIMCOR, which, through its Carbon Group, is a leading international provider of products, and outsourcing services to the petroleum, steel, foundry and aluminum industries. Through its Metals Group, AIMCOR is also a leading supplier of ferrosilicon in the southeastern United States. The purchase price was approximately $400.0 million, including direct acquisition costs of $4.8 million and is subject to certain indemnity obligations of the parties as required by the Stock Purchase Agreement. The acquisition was accounted for using the purchase method of accounting and had an effective date of September 30, 1997. Note 3 - Cash and Cash Equivalents, Restricted Short-Term Investments and Marketable Securities Cash and cash equivalents include short-term deposits and highly liquid investments which have original maturities of three months or less and are stated at cost which approximates market. The Company's cash management system provides for the reimbursement of all major bank disbursement accounts on a daily basis. Checks issued but not yet presented to the banks for payment are classified as book overdrafts. Restricted short-term investments at August 31, 1998 and May 31, 1998 include temporary investment of reserve funds and collections on instalment notes receivable owned by Mid-State Trusts II, III, IV, V and VI (the "Trust") ($121.5 million and $125.3 million, respectively) which are available only to pay expenses of the Trusts and principal and interest on indebtedness of the Trusts, miscellaneous other segregated accounts restricted to specific uses ($14.9 million and $15.3 million, respectively) and certain funds held by Trust II that are in excess of the interest on the Trust II Mortgage-Backed Notes, but which were subject to retention at May 31, 1998 ($106.9 million). In June 1998, an agreement was reached with Financial Security Assurance, Inc. to release approximately $121.6 million of funds held by Trust II which were subject to retention at July 1, 1998. These funds were utilized to pay down Trust IV indebtedness. 5 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Investments with original maturities greater than three months are classified as marketable securities. In accordance with Statement of Financial Accounting Standards No. 115 - "Accounting for Certain Investments in Debt and Equity Securities," the Company's marketable securities are classified as available for sale and are carried at estimated fair values which approximate cost. The net unrealized appreciation in marketable securities is shown as a separate component of stockholders' equity. Note 4 - Instalment Notes Receivable and Mortgage-Backed/Asset-Backed Notes Mid-State Trusts II, III, IV and VI are business trusts organized by Mid-State Homes, Inc. ("Mid-State Homes"), which owns all of the beneficial interest in Trusts III, IV and VI. Trust IV owns all of the beneficial interest in Trust II. The Trusts were organized for the purpose of purchasing instalment notes receivable from Mid-State Homes with the net proceeds from the issuance of mortgage or asset backed notes. The assets of Trusts II, III, IV and VI, including the instalment notes receivable, are not available to satisfy claims of general creditors of the Company and its subsidiaries. The liabilities of Mid-State Trusts II, III, IV and VI for their publicly issued debt are to be satisfied solely from the proceeds of the underlying instalment notes and are non-recourse to the Company and its subsidiaries. Mid-State Trust V ("Trust V"), a business trust in which Mid-State Homes holds all the beneficial interest, was organized to hold instalment notes receivable as collateral for borrowings to provide temporary financing to Mid-State Homes for its current purchases of instalment notes and mortgages from Jim Walter Homes. The gross amount of instalment notes receivable, the economic balance and long-term debt outstanding by trust are as follows (in thousands):
August 31, 1998 ------------------------------------------------------- Gross Balance Economic Balance Debt Outstanding ------------- ---------------- ---------------- Trust II $ 737,714 $ 473,397 $ 306,850 Trust III 295,071 163,720 75,863 Loan & Security Agreement - - 80,300 Trust IV 1,365,772 616,918 637,526 Trust V 794,582 309,798 245,000 Trust VI 1,018,493 409,293 392,358 Unpledged 3,461 1,516 - ---------- ---------- ---------- Total $4,215,093 $1,974,642 $1,737,897 ========== ========== ==========
Note 5 - Stockholders' Equity As of August 31, 1998, the Company has repurchased 1,172,500 shares of its common stock under a share repurchase program authorized by its board of directors in July 1998. In September 1998, the Company's board of directors authorized an increase, from two to four million, in the number of shares of the Company's common stock which may be repurchased under the share repurchase program. Note 6 - Earnings Per Share In February 1997, Statement of Financial Accounting Standards No. 128 - "Earnings Per Share" ("FAS 128"), was issued. FAS 128 became effective for both interim and annual periods ending after December 15, 1997 and required a restatement of previously reported earnings per share. Under FAS 128, "basic" earnings per share 6 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) replaced the reporting of "primary" earnings per share. Basic earnings per share is calculated by dividing the income available to common stockholders by the weighted average number of common shares outstanding for the period, without consideration of common stock equivalents. "Fully diluted" earnings per share was replaced by "diluted" earnings per share under FAS 128. The calculation of diluted earnings per share is similar to that of fully diluted earnings per share under previous accounting pronouncements. Diluted earnings per share includes the number of shares issuable on the exercise of dilutive employee stock options less the number of shares of common stock that could have been purchased with the proceeds from the exercise of such options. A reconciliation of the basic and diluted per share computations for the three months ended August 31, 1998 and 1997 are as follows (in thousands, except per share amounts):
Three Months Ended August 31, ------------------------------------- 1998 1997 ----------------- ----------------- Basic Diluted Basic Diluted ------- ------- ------- ------- Net income $ 9,037 $ 9,037 $14,065 $14,065 ======= ======= ======= ======= Shares of common stock outstanding: Average number of common shares (a) 53,458 53,458 54,134 54,134 Effect of diluted securities: Stock options (b)(c) - 404 - 715 ------- ------- ------- ------- Average common shares and dilutive effect 53,458 53,862 54,134 54,849 ======= ======= ======= ======= Per share: Net income $ .17 $ .17 $ .26 $ .26 ======= ======= ======= =======
(a) For the three months ended August 31, 1998 and 1997, includes 3,880,140 additional shares issued to an escrow account on September 13, 1995 pursuant to the Consensual Plan, but does not include 2,570,592 and 1,395,992 shares, respectively, held in treasury. (b) Represents the number of shares of common stock issuable on the exercise of dilutive employee stock options less the number of shares of common stock which could have been purchased with the proceeds from the exercise of such options. These purchases of common stock were assumed to have been made at the higher of either the market price of the common stock at the end of the period or the average market price for the period. (c) For the three months ended August 31, 1998 and 1997, does not include 717,500 and 329,000 shares respectively, subject to options because such options would have an anti-dilutive effect in such period. Note 7 - Comprehensive Income Effective in the first quarter ended August 31, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 - "Reporting Comprehensive Income" ("FAS 130"). FAS 130 requires that all items of comprehensive income be classified separately and the accumulated balance of comprehensive income be reported in the equity section of the financial statements. The adoption of FAS 130 did not have a material effect on the Company's financial condition. 7 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 8 - Segment Information Information relating to the Company's operating segments is set forth below (in thousands):
Three months ended August 31, ----------------------- 1998 1997 -------- -------- Sales and revenues: Homebuilding and Financing $111,850 $110,838 Water Transmission Products 120,720 108,859 Natural Resources 87,710 101,629 Industrial Products 84,841 77,663 Energy Services 87,973 - Corporate 40 344 -------- -------- Consolidated sales and revenues $493,134 $399,333 ======== ======== Operating income (a) : Homebuilding and Financing (b) $ 27,934 $ 19,687 Water Transmission Products 7,078 5,348 Natural Resources (3,356) 13,543 Industrial Products 6,221 4,755 Energy Services 3,544 - -------- -------- Operating income 41,421 43,333 Less-General corporate expense (b) (2,004) (1,717) Senior debt interest expense (b) (10,552) (5,936) Intercompany interest expense (b) (11,453) (8,672) -------- -------- Income before tax expense 17,412 27,008 Income tax expense (8,375) (12,943) -------- -------- Net income $ 9,037 $ 14,065 ======== ========
(a) - Operating income amounts are after deducting amortization of goodwill. A breakdown by segment is as follows (in thousands):
Three months ended August 31, ----------------------- 1998 1997 -------- -------- Homebuilding and Financing $ 6,899 $ 6,816 Water Transmission Products 3,079 3,081 Natural Resources (335) (335) Industrial Products 162 161 Energy Services 2,111 - Corporate (1,307) (1,307) ------- ------- $10,609 $ 8,416 ======= =======
8 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (b) - Interest and amortization of debt expense incurred by the Homebuilding and Financing segment and Corporate is as follows (in thousands):
Three months ended August 31, ----------------------- 1998 1997 -------- -------- Homebuilding and Financing: Gross interest $ 36,933 $38,927 Less: Intercompany interest income (11,453) (8,672) -------- ------- Net interest 25,480 30,255 Corporate: Senior debt interest 10,552 5,936 Intercompany interest 11,453 8,672 -------- ------- $ 47,485 $44,863 ======== =======
The general corporate expense, senior debt interest expense and inter- company interest expense are attributable to all groups, but cannot be reasonably allocated to specific groups. Note 9 - Subsequent Events On October 1, 1998 the Company sold the window balance operations of JW Window Components, Inc. ("JWWC") to The Amesbury Group, Inc. ("Amesbury"), an affiliate of The Laird Group plc, in an all cash transaction for $10 million. The business acquired by Amesbury consists of JWWC's block and tackle jambliner assembly plant in Sioux Falls, South Dakota together with the spiral balance business in Elizabethton, Tennessee and jambliner operations in Merrill, Wisconsin. Effective October 1, 1998, Jim Walter Homes, Inc. the Company's homebuilding subsidiary acquired Texas-based builder Dream Homes, Inc. in an all cash transaction. At May 31, 1998, the Company had forward-interest rate lock agreements which fixed the interest rate on a portion of asset-backed long-term debt anticipated to be issued in October 1999. The lock agreements in effect at May 31, 1998 were terminated on October 9, 1998. The losses incurred ($24.0 million) have been deferred and will be amortized to interest expense over the life of the asset-backed long-term debt anticipated to be issued in fiscal 1999. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Company completed the acquisition of Applied Industrial Materials Corporation ("AIMCOR") on October 15, 1997. AIMCOR is a leading international provider of products and outsourcing services to the petroleum, steel, foundry and aluminum industries. AIMCOR is also a leading supplier of ferrosilicon in the southeastern United States (see Note 2 of "Notes to Consolidated Financial Statements"). Sales and revenues and operating income for AIMCOR are reflected in the Company's new business segment, the Energy Services Group. RESULTS OF OPERATIONS THREE MONTHS ENDED AUGUST 31, 1998 AND 1997 Net sales and revenues for the three months ended August 31, 1998 were $93.8 million above the prior year period representing a 23.5% increase of which 22.0% was attributable to AIMCOR. In addition to the contribution from AIMCOR, the increase was the result of improved performances from all other operating segments except the Natural Resources Group. Homebuilding and Financing Group sales and revenues were $1.0 million, or .9%, above the prior year period. This performance reflects a 4.8% increase in the average net selling price, from $47,700 in the 1997 period to $50,000 in 1998, which was more than offset by a decrease in the number of units sold, from 979 units in the 1997 period to 844 units in 1998. The higher average selling price is primarily attributable to price increases instituted to compensate for higher building material and labor costs. The decrease in unit sales resulted from continuing intense competition from local and regional homebuilders as well as labor shortages due to high demand for subcontractors and construction crews. Jim Walter Homes' backlog at August 31, 1998 was 2,143 units compared to 2,128 units at August 31, 1997. Time charge income (revenues received from Mid-State Homes' instalment note portfolio) increased from $57.8 million in the 1997 period to $64.2 million in 1998. The increase is attributable to increased payoffs received in advance of maturity and to an increase in the average balance per account in the portfolio, partially offset by a reduction in the total number of accounts. The aggregate amount of instalment notes receivable having at least one payment 90 or more days delinquent was 3.21% of the total instalment notes receivable in the 1998 period as compared to the prior year period of 2.74%. The allowance for possible losses as a percentage of net instalment notes receivable was approximately 2.0% for both periods, which reflects management's assessment of the amount necessary to provide against future loss in the portfolio. Operating income of $27.9 million (net of interest expense) was $8.2 million greater than the prior year period reflecting higher time charge income, the increase in the average net selling price per home sold, greater payoffs received in advance of maturity and lower interest expense in the 1998 period ($25.5 million) as compared to the prior year period ($30.3 million), partially offset by the decrease in the number of homes sold. Water Transmission Products Group sales and revenues were $11.9 million, or 10.9%, above the prior year period. The increase was the result of greater sales volumes for ductile iron pressure pipe, fittings, valves and hydrants, partially offset by lower selling prices for all of these products. Ductile iron pressure pipe shipments at 159,700 tons were 9.7%, greater than the prior year period. The order backlog at August 31, 1998 was 131,005 tons, which represents approximately three months shipments compared with 135,788 tons at August 31, 1997. Operating income of $7.1 million was $1.7 million above the prior year period. This performance was the result of the previously mentioned factors as well as improved gross profit margins. Natural Resources Group sales and revenues were $13.9 million, or 13.7%, below the prior year period. The decrease was the result of reduced coal shipments due to unexpected geological problems in two of the Group's four coal mines, a five-week work stoppage in one mine early in the quarter and curtailed production resulting from scheduled mining equipment moves. A total of 1.82 million tons of coal was sold at an average selling price per ton of $43.07 in the current year period compared with 2.23 million tons at $42.25 in 1997. The increase in the average 10 selling price was the result of a greater percentage of tonnage sold to Alabama Power Company at above market prices. Methane gas sales volumes were 2.2 billion cubic feet in the 1998 period versus 1.9 billion cubic feet in 1997. The average selling price per thousand cubic feet was $3.18 in the 1998 period versus $3.46 in 1997. Both periods include a monthly reservation fee of $.7 million. The Group's operating loss of $3.4 million was below the prior year period by $16.9 million. This performance was the result of lower coal shipments and methane gas selling prices combined with decreased coal productivity which contributed to greater production costs ($44.39 per ton in the 1998 period versus $35.46 in 1997), partially offset by the higher coal selling prices and methane gas sales volumes. Prior year results included a $4.0 million credit from settlement of an insurance claim relating to a production hoist accident at Blue Creek Mine No. 3 in fiscal 1993. Industrial Products Group sales and revenues were $7.2 million, or 9.2%, greater than the prior year period. The improved performance was the result of increased shipments of aluminum foil and sheet products, furnace and foundry coke and slag fiber, partially offset by lower selling prices for aluminum foil and sheet products. Operating income of $6.2 million exceeded the prior year period by $1.5 million. The improved performance primarily resulted from sales increases and higher gross profit margins realized on aluminum foil and sheet products and furnace coke. Cost of sales, exclusive of depreciation, of $348.5 million was 82.5% of net sales in the 1998 period versus $260.5 million and 77.8% in 1997. The percentage increase reflected lower gross profit margins realized on coal and methane gas. Selling, general and administrative expenses of $43.1 million were 8.7% of net sales and revenues in the 1997 period versus $35.1 million and 8.8% in 1997. Interest and amortization of debt expense was $47.5 million in the 1998 period versus $44.9 million in 1997 reflecting higher average outstanding debt balances primarily resulting from the AIMCOR acquisition, partially offset by lower interest rates. The average rate of interest in the 1998 period was 7.6% as compared to 8.2% in 1997. The prime rate of interest was 8.5% in both periods. The Company's effective tax rate in the 1998 and 1997 periods differed from the statutory tax rate primarily due to amortization of goodwill (excluding such amounts related to the AIMCOR acquisition), which is not deductible for tax purposes and percentage depletion. The net income in the 1998 period was $9.0 million compared to net income of $14.1 million in the 1997 period reflecting all of the previously mentioned factors as well as the income contribution from the Energy Services Group. Financial Condition Since May 31, 1998, total debt decreased $139.2 million. Scheduled payments on the mortgage backed/asset backed notes amounted to $175.2 million. Scheduled retirements of other long-term debt amounted to $.3 million. Also, during the current three month period borrowings under the Mid-State Trust V Variable Funding Loan Agreement and the Credit Facilities totaled $27.0 million and $9.4 million, respectively. At August 31, 1998 borrowings under the Credit Facilities totaled $600.2 million (including swingline advances of $10.2 million). The Revolving Credit Facility includes a sub-facility for trade and other standby letters of credit in an amount up to $75.0 million at any time outstanding. At August 31, 1998 there were $24.1 million face amount of letters of credit outstanding thereunder. The Credit Facilities contain a number of significant covenants that, among other things, restrict the ability of the 11 Company and its subsidiaries to dispose of assets, incur additional indebtedness, pay dividends, create liens on assets, enter into capital leases, make investments or acquisitions, engage in mergers or consolidations, or engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities (including change of control and asset sale transactions). In addition, under the Credit Facilities, the Company is required to maintain specified financial ratios and comply with certain financial tests, including fixed charge coverage ratios and maximum leverage ratios. The borrowers are required to maintain a leverage ratio (the ratio of indebtedness to consolidated EBITDA (as defined in the Credit Facilities)) of not more than 3.75-to-1 for the measurement period commencing May 31, 1998 and ending May 30, 1999 and 3.25-to-1 thereafter. The borrowers' fixed charge coverage ratio (the ratio of (a) EBITDA minus capital expenditures to (b) the sum of all required principal payments on outstanding indebtedness, interest expense and dividends paid) is required to be at least 1.25-to-1 at the end of each Four Quarter Period (as defined in the Credit Facilities) for the duration of the Credit Facilities. The Company was in compliance with these covenants at August 31, 1998. The Trust V Variable Funding Loan Agreement's covenants, among other things, restrict the ability of Trust V to dispose of assets, create liens and engage in mergers or consolidations. The Company was in compliance with these covenants at August 31, 1998. The Loan and Security Agreement contains a number of covenants that, among other things, restrict the ability of Mid-State Homes to dispose of assets, create liens on assets, engage in mergers, incur any unsecured or recourse debt, or make changes to their credit and collection policy. In addition, Mid-State Homes is required to maintain specified net income and net worth levels. The Company was in compliance with these covenants at August 31, 1998. Liquidity and Capital Resources At August 31, 1998, cash and cash equivalents, net of book overdrafts, were approximately $24.3 million. Operating cash flows for the three months ended August 31, 1998 together with issuance of long-term debt under the Mid-State Trust V Variable Funding Loan Agreement, borrowings under the Credit Facilities and the use of available cash balances were primarily used for retirement of long-term senior debt, interest payments, capital expenditures and the purchase of approximately 1.2 million shares of common stock during the quarter. In September 1998, the Company's Board of Directors authorized an increase, from two to four million, in the number of shares of the Company's common stock which may be repurchased under its stock repurchase program. Working capital is required to fund adequate levels of inventories and accounts receivable. Commitments for capital expenditures at August 31, 1998 were not significant; however, it is estimated that gross capital expenditures of the Company and its subsidiaries for the balance of the year ending May 31, 1999 will approximate $80.0 million. Because the Company's operating cash flow is significantly influenced by the general economy and, in particular, the level of construction, current results should not necessarily be used to predict the Company's liquidity, capital expenditures, investment in instalment notes receivable or results of operations. The Company believes that the Mid-State Trust V Variable Funding Loan Agreement will provide Mid-State Homes with the funds needed to purchase the instalment notes and mortgages generated by Jim Walter Homes. It is anticipated that one or more permanent financings similar to the previous Mid-State Homes asset-backed financings will be required over the next several years to repay borrowings under the Mid-State Trust V Variable Funding Loan Agreement. The Company believes that under present operating conditions, sufficient cash flow will be generated to make all required interest and principal payments on its indebtedness, to make all its planned capital expenditures and meet substantially all operating needs. It is further expected that amounts under the Revolving Credit Facility will be sufficient to meet peak operating needs of the Company and to repurchase up to an additional 2.8 million shares of the Company's common stock. 12 YEAR 2000 The Company is currently working to resolve the potential impact of the Year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The Year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. The Company has established a Corporate Steering Committee (the "Committee") to coordinate solutions to Year 2000 issues for its information systems. The Committee includes a representative from each subsidiary as well as two members of the Company's Law Department, the Director of Information Technology and the Chief Financial Officer. Each subsidiary also has a steering committee consisting of the representative on the Committee and other members from all functional areas of the respective subsidiary. The Committee has identified systems and applications that require modification and has evaluated alternative solutions. The Committee also developed a Year 2000 Standard that was issued to all subsidiaries and must be followed for Year 2000 compliance. Status conference calls are held monthly and on-site progress reviews are held quarterly. The Company has two data centers which have installed Year 2000 compliant mainframe equipment, operating systems and system software. Separate virtual machines within a computer have been installed for the purpose of testing. Testing has already commenced on systems which have been converted. In early calendar 1999, a detailed internal review will be conducted with each subsidiary to ascertain progress on supporting documentation, vendor compliance testing which includes responses from vendors to a questionnaire developed by the Committee regarding Year 2000 status, software conversion and testing and progress of contingency plans. Contingency plan guidelines have been developed by the Committee and provided to each subsidiary. On-site reviews of written contingency plans will be conducted throughout calendar 1999. Based on information currently available, estimated Year 2000 costs of approximately $12.2 million are not expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in future periods. However, if the Company, its customers or vendors are unable to resolve such processing issues in a timely manner, there is no assurance that it would not result in a material financial risk. Accordingly, the Company plans to devote the necessary resources to resolve all significant Year 2000 issues in a timely manner. NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 131 - "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"), was issued in June 1997 and became effective for annual periods beginning after December 15, 1997 (fiscal 1999 for the Company), but does not require compliance with interim reporting requirements until the second year of implementation. FAS 131 establishes standards for reporting information about operating segments in financial statements. In addition, it establishes standards for related disclosures about products and services, geographic areas and major customers. In February 1998, Statement of Financial Accounting Standards No. 132 - "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("FAS 132") was issued. FAS 132 becomes effective for fiscal years beginning after December 15, 1997 (fiscal 1999 for the Company). This statement revises employers' disclosures about pension and other postretirement benefit plans. In June 1998, Statement of Financial Accounting Standards No. 133 - "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") was issued. FAS 133 becomes effective for all fiscal quarters of fiscal years beginning after June 15, 1999 (fiscal 2000 for the Company). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. FAS 133 requires that all derivatives and hedging activities be recognized as either assets or liabilities in the statement of financial position and be measured at fair 13 value. Currently, the Company has no derivative instruments outstanding. The Company believes that the adoption of the above standards will not materially affect its financial performance or reporting. Private Securities Litigation Reform Act Safe Harbor Statement This Form 10-Q contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to the Company that is based on the beliefs of the management of the Company, as well as assumptions made by and information currently available to the management of the Company. When used in this Form 10-Q, the words "estimate," "project," "believe," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Among those factors which could cause actual results to differ materially are market demand, competition, interest rate fluctuations, weather and other risk factors listed from time to time in the Company's filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company does not undertake any obligation to publicly release any revisions to these forward looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 14 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS A substantial controversy exits with regard to federal income taxes allegedly owed by the Company. See "Note 7 - Income Taxes" of Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended May 31, 1998. The Company and its subsidiaries are parties to a number of other lawsuits arising in the ordinary course of their businesses. Most of these cases are in a preliminary stage and the Company is unable to predict a range of possible loss, if any. The Company provides for costs relating to these matters when a loss is probable and the amount is reasonably estimable. The effect of the outcome of these matters on the Company's future results of operations cannot be predicted because any such effect depends on future results of operations and the amount and timing of the resolution of such matters. While the results of litigation cannot be predicted with certainty, the Company believes that the final outcome of such other litigation will not have a materially adverse effect on the Company's consolidated financial condition. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 27 - Financial Data Schedule (b) None 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WALTER INDUSTRIES, INC. /s/ D. M. Fjelstul /s/ F. A. Hult - ------------------------------ ----------------------------------- D. M. Fjelstul F. A. Hult Senior Vice President and Vice President, Controller and Principal Financial Officer Principal Accounting Officer Date: October 15, 1998 ------------------ 16 EX-27 2 FDS
5 This schedule contains summary financial information extracted from the Consolidated Financial Statements and related notes thereto and is qualified in its entirety by reference to such financial statements and related notes. 1,000 3-MOS MAY-31-1999 JUN-01-1998 AUG-31-1998 47,955 176,748 1,554,921 (33,185) 274,090 0 1,168,118 (496,541) 3,380,608 0 2,342,248 0 0 553 354,337 3,380,608 422,600 493,134 348,528 63,142 16,482 85 47,485 17,412 (8,375) 9,037 0 0 0 9,037 .17 .17 This line item is not presented on the Consolidated Financial Statements.
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