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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 September 30, 2002
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 44,375,373 shares of common stock of the registrant outstanding at
October 31, 2002.
PART I - FINANCIAL INFORMATION
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
2002 December 31,
(unaudited) 2001
------------- ------------
(in thousands, except share amounts)
ASSETS
Cash and cash equivalents $ 24,530 $ 11,536
Short-term investments, restricted 135,993 126,751
Marketable securities 1,926 1,499
Instalment notes receivable, net 1,709,319 1,689,773
Receivables, net 279,100 223,630
Inventories 241,726 252,781
Prepaid expenses 15,826 8,778
Property, plant and equipment, net 484,321 480,586
Assets held for sale 12,460 12,622
Investments 13,401 13,116
Deferred income taxes 18,270 -
Unamortized debt expense 36,209 39,918
Other long-term assets, net 33,314 44,550
Goodwill and other intangibles, net 217,217 423,720
------------- ------------
$ 3,223,612 $ 3,329,260
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 149,501 $ 115,293
Accrued expenses 124,037 142,565
Income taxes payable 63,571 68,536
Debt
Mortgage-backed/asset-backed notes 1,807,886 1,833,442
Other senior debt 332,000 308,500
Accrued interest 33,093 30,512
Deferred income taxes - 45,037
Accumulated postretirement benefits obligation 297,401 296,178
Other long-term liabilities 45,520 48,546
Stockholders' equity
Common stock, $.01 par value per share:
Authorized - 200,000,000 shares
Issued - 55,596,665 and 55,379,270 shares 556 554
Capital in excess of par value 1,155,939 1,157,202
Accumulated deficit (644,561) (577,438)
Treasury stock - 11,221,292 and 11,103,292 shares, at cost (135,828) (134,565)
Accumulated other comprehensive loss (5,503) (5,102)
------------- ------------
Total stockholders' equity 370,603 440,651
------------- ------------
$ 3,223,612 $ 3,329,260
============= ============
See accompanying "Notes to Consolidated Financial Statements"
2
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended
September 30,
----------------------------------------
2002 2001
----------- -----------
(in thousands, except per share amounts)
Net sales and revenues:
Net sales $ 439,831 $ 419,957
Time charge income 53,024 52,959
Miscellaneous 6,417 10,672
Excise tax refund claim - 11,227
----------- -----------
499,272 494,815
----------- -----------
Cost and expenses:
Cost of sales 360,885 337,063
Depreciation 16,728 15,808
Selling, general and administrative 44,434 48,638
Provision for losses on instalment notes 1,688 3,882
Postretirement benefits 4,379 5,472
Interest and amortization of debt expense 38,379 41,040
Amortization of goodwill and other intangibles 1,716 9,282
Impairment charge 1,692 -
Loss on mining accident - 10,834
----------- -----------
469,901 472,019
----------- -----------
Income before income taxes 29,371 22,796
Income tax expense (8,244) (11,603)
----------- -----------
Net income $ 21,127 $ 11,193
=========== ===========
Basic net income per share $ .48 $ .25
=========== ===========
Diluted net income per share $ .47 $ .25
=========== ===========
See accompanying "Notes to Consolidated Financial Statements"
3
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine months ended
September 30,
----------------------------------------
2002 2001
----------- -----------
(in thousands, except per share amounts)
Net sales and revenues:
Net sales $ 1,269,634 $ 1,280,610
Time charge income 161,052 162,535
Miscellaneous 15,598 21,367
Excise tax refund claim - 11,227
----------- -----------
1,446,284 1,475,739
----------- -----------
Cost and expenses:
Cost of sales 1,026,242 1,031,208
Depreciation 50,079 47,395
Selling, general and administrative 144,919 143,964
Provision for losses on instalment notes 4,636 8,750
Postretirement benefits 13,128 13,877
Interest and amortization of debt expense 117,669 131,216
Amortization of goodwill and other intangibles 5,503 27,839
Impairment charge 1,692 -
Loss on mining accident - 10,834
----------- -----------
1,363,868 1,415,083
----------- -----------
Income before income tax expense and cumulative
effect of change in accounting principle 82,416 60,656
Income tax expense (23,592) (29,706)
----------- -----------
Income before cumulative effect of change in
accounting principle 58,824 30,950
----------- -----------
Cumulative effect of change in accounting principle
(net of income tax of $75,053) (125,947) -
----------- -----------
Net income (loss) $ (67,123) $ 30,950
=========== ===========
Basic net income (loss) per share:
Income per share before cumulative effect of change
in accounting principle $ 1.33 $ .68
----------- -----------
Cumulative effect of change in accounting principle $ (2.84) $ -
----------- -----------
Basic net income (loss) per share $ (1.51) $ .68
=========== ===========
Diluted net income (loss) per share:
Income per share before cumulative effect of change
in accounting principle $ 1.31 $ .68
----------- -----------
Cumulative effect of change in accounting principle $ (2.81) $ -
----------- -----------
Diluted net income (loss) per share $ (1.50) $ .68
=========== ===========
See accompanying "Notes to Consolidated Financial Statements"
4
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
Accumulated
Other
Comprehensive Accumulated Comprehensive Common Capital in Treasury
Total Loss Deficit Loss Stock Excess Stock
---------- ------------- ----------- ------------- ----------- ----------- ----------
Balance at December 31, 2001 $ 440,651 $ (577,438) $ (5,102) $ 554 $ 1,157,202 $ (134,565)
Comprehensive loss:
Net loss (67,123) $ (67,123) (67,123)
Other comprehensive loss, net of
tax:
Net unrealized loss on hedge (128) (128) (128)
Foreign currency translation
adjustment (273) (273) (273)
-------------
Comprehensive loss $ (67,524)
=============
Stock issued on exercise of
stock options 2,722 2 2,720
Purchases of treasury stock (1,263) (1,263)
Dividends paid (3,983) (3,983)
---------- ----------- ------------- ----------- ----------- ----------
Balance at September 30, 2002 $ 370,603 $ (644,561) $ (5,503) $ 556 $ 1,155,939 $ (135,828)
========== =========== ============= =========== =========== ==========
See accompanying "Notes to Consolidated Financial Statements"
5
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Nine months ended
September 30,
--------------------------
2002 2001
----------- -----------
OPERATING ACTIVITIES
Net income (loss) $ (67,123) $ 30,950
Charges to income (loss) not affecting cash:
Depreciation 50,079 47,395
Cumulative effect of change in accounting principle, net of tax 125,947 -
Provision for deferred income taxes 11,746 26,217
Accumulated postretirement benefits obligation 1,223 7,903
Benefit from other long-term liabilities (3,026) (348)
Amortization of goodwill and other intangibles 5,503 27,839
Amortization of debt expense 3,802 3,938
Impairment charge 1,316 -
----------- -----------
129,467 143,894
Decrease (increase) in assets:
Short-term investments, restricted (9,242) (8,826)
Marketable securities (427) (204)
Instalment notes receivable, net(a) (19,546) (3,097)
Receivables, net (55,470) (26,973)
Inventories 11,055 11,428
Prepaid expenses (7,048) 717
Increase (decrease) in liabilities:
Accounts payable 34,208 (17,072)
Accrued expenses (19,844) 7,272
Income taxes payable (4,965) (713)
Accrued interest 2,581 3,287
----------- -----------
Cash flows from operating activities 60,769 109,713
----------- -----------
INVESTING ACTIVITIES
Additions to property, plant and equipment, net of retirements (53,652) (52,576)
Decrease (increase) in investments and other assets 10,951 (5,473)
----------- -----------
Cash flows used in investing activities (42,701) (58,049)
----------- -----------
FINANCING ACTIVITIES
Issuance of debt 435,509 534,314
Retirement of debt (437,565) (560,244)
Additions to unamortized debt expense (93) (500)
Purchases of treasury stock (1,263) (16,446)
Dividends paid (3,983) (4,524)
Net unrealized gain (loss) on hedge (128) 2,504
Exercise of employee stock options 2,722 273
----------- -----------
Cash flows used in financing activities (4,801) (44,623)
----------- -----------
EFFECT OF EXCHANGE RATE ON CASH (273) (59)
----------- -----------
Net increase in cash and cash equivalents 12,994 6,982
Cash and cash equivalents at beginning of period 11,536 11,513
----------- -----------
Cash and cash equivalents at end of period $ 24,530 $ 18,495
=========== ===========
(a) Consists of sales and resales, net of repossessions and provision for
losses, of $318.1 million and $289.3 million and reduced by cash collections
on accounts and payouts in advance of maturity of $298.6 million and $286.2
million, for the nine months ended September 30, 2002 and 2001,
respectively.
See accompanying "Notes to Consolidated Financial Statements"
6
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
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. Operating results for the three and nine month periods ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2002.
The balance sheet at December 31, 2001 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.
Certain reclassifications have been made to prior year's amounts to conform to
the current period classifications, including reclassifications as a result of
adopting FAS No. 142, "Goodwill and Other Intangible Assets". These
reclassifications had no effect on reported earnings.
NOTE 2 - RESTRICTED SHORT-TERM INVESTMENTS
Restricted short-term investments at September 30, 2002 and December 31, 2001
include (i) temporary investment of reserve funds and collections on instalment
notes receivable owned by Mid-State Trusts II, IV, VI, VII, VIII, IX and X (the
"Trusts") ($129.7 million and $120.5 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 ($6.3 million and $6.3 million, respectively). Included in the
balance at September 30, 2002 was $48 million that was used to retire all Trust
II outstanding indebtedness on October 1, 2002.
NOTE 3 - MINE ACCIDENT RECEIVABLE
In September 2001, an explosion and fire occurred at one of the Company's mines
in Alabama. The accident caused extensive damage to the mine and resulted in the
deaths of thirteen employees. For the three months and nine months ended
September 30, 2002, approximately $7.4 million and $22.2 million, respectively,
that is expected to be recovered from business interruption insurance was
recorded as a reduction to cost of sales in the statement of operations. In
addition, for the three months and nine months ended September 30, 2002,
approximately $0.9 million and $15.0 million, respectively, have been incurred
for re-entry costs. These expenses have been fully offset by amounts expected to
be recovered through property and casualty insurance. Approximately $2.2
million of expected insurance proceeds have been recorded as miscellaneous
income, representing the gain on reimbursement of fully depreciated equipment,
which were capitalized during the three months ended September 30, 2002.
Approximately $30.4 million and $8.2 million of business interruption and
property and casualty insurance receivables were included in the consolidated
balance sheet at September 30, 2002 and December 31, 2001, respectively. Through
September 30, 2002, approximately $17.8 million of insurance proceeds had been
received.
7
NOTE 4 - INSTALMENT NOTES RECEIVABLE
The instalment notes receivable is summarized as follows (in thousands):
September 30, December 31,
2002 2001
------------- ------------
Instalment Notes Receivable $ 1,720,387 $ 1,700,773
Less: Allowance for losses on instalment notes (11,068) (11,000)
------------- ------------
Net $ 1,709,319 $ 1,689,773
============= ============
Activity in the allowance for losses on instalment notes is summarized as
follows (in thousands):
For the Nine Months Ended
-----------------------------
September 30, September 30,
2002 2001
------------- -------------
Balance at beginning of period $ 11,000 $ 10,300
Provisions charged to income 4,636 8,750
Charge-offs, net of recoveries (4,568) (8,050)
------------- -------------
Balance at end of period $ 11,068 $ 11,000
============= =============
NOTE 5 - INVENTORIES
Inventories are summarized as follows (in thousands):
September 30, December 31,
2002 2001
------------- ------------
Finished goods $ 136,151 $ 155,898
Goods in process 44,082 34,630
Raw materials and supplies 54,830 56,425
Houses held for resale 6,663 5,828
------------- ------------
Total inventories $ 241,726 $ 252,781
============= ============
8
NOTE 6 - DEBT
Debt, in accordance with its contractual terms, consisted of the following (in
thousands):
September 30, December 31,
2002 2001
------------- ------------
Mortgage-Backed/Asset-Backed Notes and
Variable Funding Loan:
Trust II Mortgage-Backed Notes $ 48,450 $ 96,900
Trust IV Asset Backed Notes 456,771 477,803
Trust VI Asset Backed Notes 263,498 286,131
Trust VII Asset Backed Notes 231,867 250,558
Trust VIII Asset Backed Notes 303,599 330,797
Trust IX Variable Funding Loan 131,509 -
Trust X Asset Backed Notes 372,192 391,253
------------- ------------
1,807,886 1,833,442
------------- ------------
Other senior debt:
Walter Industries, Inc.
Revolving Credit Facility 107,000 83,500
Term Loan 225,000 225,000
------------- ------------
332,000 308,500
------------- ------------
Total $ 2,139,886 $ 2,141,942
============= ============
On October 15, 2002, the Company made a scheduled $100 million principal payment
on the Term Loan.
On October 1, 2002, all outstanding indebtedness under the Trust II Indenture
was retired under provisions that allowed the trust's indebtedness to be called
prior to its scheduled maturity.
NOTE 7 - INCOME TAXES
During the first quarter of 2002, the Company's capital loss carryforward
increased, which resulted in a $2.8 million decrease in income tax expense. This
increase was due to a change in the consolidated return loss disallowance rules
which favorably affected the Company's previous treatment of the November 1998
sale of JW Window Components.
NOTE 8 - 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, 2001 11,103 $ 134,565
Share repurchases for the nine months
ended September 30, 2002 118 1,263
------ ------------
Total held in treasury at September 30, 2002 11,221 $ 135,828
====== ============
9
NOTE 9 - NET INCOME (LOSS) PER SHARE
A reconciliation of the basic and diluted earnings per share computations for
the three and nine months ended September 30, 2002 and 2001 are as follows (in
thousands, except per share data):
Three Months Ended September 30,
----------------------------------------------------------
2002 2001
---------------------------- ---------------------------
Basic Diluted Basic Diluted
------------ ------------ ------------ ------------
Net income $ 21,127 $ 21,127 $ 11,193 $ 11,193
============ ============ ============ ============
Shares of common stock outstanding:
Average number of common shares(a) 44,379 44,379 44,633 44,633
Effect of diluted securities:
Stock options(b) - 450 - 407
------------ ------------ ------------ ------------
44,379 44,829 44,633 45,040
============ ============ ============ ============
Net income per share $ .48 $ .47 $ .25 $ .25
============ ============ ============ ============
Nine Months Ended September 30,
----------------------------------------------------------
2002 2001
---------------------------- ---------------------------
Basic Diluted Basic Diluted
------------ ------------ ------------ ------------
Net income (loss) $ (67,123) $ (67,123) $ 30,950 $ 30,950
============ ============ ============ ============
Shares of common stock outstanding:
Average number of common shares(a) 44,308 44,308 45,190 45,190
Effect of diluted securities:
Stock options(b) - 451 - 293
------------ ------------ ------------ ------------
44,308 44,759 45,190 45,483
============ ============ ============ ============
Net income (loss) per share $ (1.51) $ (1.50) $ .68 $ .68
============ ============ ============ ============
(a) The three and nine months ended September 30, 2002 and 2001 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 7, 2002, the Board of Directors approved a $0.03 per share dividend
payable March 20, 2002 to shareholders of record on February 20, 2002. On April
29, 2002, the Board of Directors declared a $0.03 per share dividend payable on
June 12, 2002 to shareholders of record on May 15, 2002. On August 5, 2002, the
Board of Directors declared a $0.03 per share dividend, payable on September 12,
2002, to shareholders of record on August 15, 2002. On November 11, 2002, the
Board of Directors declared a $0.03 per share dividend, payable on December 19,
2002, to shareholders of record on November 21, 2002.
10
NOTE 10 - SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable segments is
shown in the following tables (in thousands):
Three months ended
September 30,
------------------------------
2002 2001
----------- -----------
Net sales and revenues:
Homebuilding $ 68,760 $ 61,473
Financing 60,904 58,868
Industrial Products 190,894 187,311
Carbon and Metals 115,589 120,206
Natural Resources 66,649 69,597
Other 1,426 3,846
Consolidating Eliminations (4,950) (6,486)
----------- -----------
Net sales and revenues $ 499,272 $ 494,815
=========== ===========
Operating income(a):
Homebuilding $ 4,812 $ 1,368
Financing 15,685 10,616
Industrial Products 9,606 16,247
Carbon and Metals 643 4,897
Natural Resources 11,240 6,049
Consolidating Eliminations (1,562) (1,126)
----------- -----------
Operating income 40,424 38,051
Less: General corporate expense, net 6,292 7,514
Senior debt interest expense 4,761 7,741
----------- -----------
Income before tax expense 29,371 22,796
Income tax expense (8,244) (11,603)
----------- -----------
Net income $ 21,127 $ 11,193
=========== ===========
Depreciation:
Homebuilding $ 859 $ 1,050
Financing 52 48
Industrial Products 8,391 7,925
Carbon and Metals 3,218 2,887
Natural Resources 3,386 2,907
Other 822 991
----------- -----------
Total $ 16,728 $ 15,808
=========== ===========
(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,
------------------------------
2002 2001
----------- -----------
Homebuilding $ - $ 2,273
Financing 1,716 1,953
Industrial Products - 2,630
Carbon and Metals - 2,159
Other - 267
----------- -----------
$ 1,716 $ 9,282
=========== ===========
11
Nine months ended
September 30,
------------------------------
2002 2001
----------- -----------
Net sales and revenues:
Homebuilding $ 199,873 $ 174,509
Financing 178,636 180,584
Industrial Products 531,109 567,717
Carbon and Metals 355,891 361,172
Natural Resources 189,137 203,039
Other 6,531 8,165
Consolidating Eliminations (14,893) (19,447)
----------- -----------
Net sales and revenues $ 1,446,284 $ 1,475,739
=========== ===========
Operating income(a):
Homebuilding $ 11,921 $ 1,638
Financing 41,208 36,717
Industrial Products 33,117 52,874
Carbon and Metals 8,174 15,477
Natural Resources 26,699 9,502
Consolidating Eliminations (3,259) (3,615)
----------- -----------
Operating income 117,860 112,593
Less: General corporate expense, net 21,097 23,774
Senior debt interest expense 14,347 28,163
----------- -----------
Income before tax expense and cumulative effect of
change in accounting principle 82,416 60,656
Income tax expense (23,592) (29,706)
----------- -----------
Income before cumulative effect of change
in accounting principle 58,824 30,950
Cumulative effect of change in accounting
principle (net of tax) (125,947) -
----------- -----------
Net income (loss) $ (67,123) $ 30,950
=========== ===========
Depreciation:
Homebuilding $ 2,725 $ 3,130
Financing 156 117
Industrial Products 25,097 24,045
Carbon and Metals 9,152 8,455
Natural Resources 10,120 8,721
Other 2,829 2,927
----------- -----------
Total $ 50,079 $ 47,395
=========== ===========
(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,
------------------------------
2002 2001
----------- -----------
Homebuilding $ - $ 6,738
Financing 5,124 6,031
Industrial Products - 7,801
Carbon and Metals - 6,474
Other 379 795
----------- -----------
$ 5,503 $ 27,839
=========== ===========
12
NOTE 11 - GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF FAS STATEMENT 142
The Company adopted FAS No. 142, "Goodwill and Other Intangible Assets"
effective on January 1, 2002. Under FAS 142, goodwill and intangible assets that
have an indefinite useful life are no longer subject to amortization. Instead,
FAS 142 requires goodwill and intangible assets that have an indefinite life to
be reviewed for impairment on an annual basis, or more frequently if events or
circumstances indicate possible impairment.
GOODWILL
As of December 31, 2001, the Company had $423.7 million of goodwill, net of
accumulated amortization of $711.3 million related to the 1987 acquisition of
Jim Walter Corporation and related subsidiaries, and subsequent acquisitions of
AIMCOR and three home building companies.
The fair value of each of the Company's reporting units was individually
determined using valuation models reflecting the expected future cash flow
projections related to each reporting unit, which were discounted using a
risk-adjusted discount rate and adjusted for comparable industry earnings
multiples. The Company's reporting units are similar, although not identical, to
its reporting segments. This analysis indicated that the AIMCOR reporting units'
carrying value, including tax deductible goodwill, exceeded its fair value. The
Company then determined that the carrying value of the AIMCOR reporting units'
goodwill exceeded the fair value of its goodwill.
As a result of implementing this new goodwill impairment testing standard, the
Company recorded a goodwill impairment loss of $125.9 million, net of taxes of
$75.1 million, related to the AIMCOR reporting units which was accounted for as
a cumulative effect of a change in accounting principle. This goodwill
impairment resulted from a change in the profitability of the business since its
acquisition due to increased competition and eroding industry margins.
The following is a reconciliation of reported net income to adjusted net income
after adding back discontinued amortization:
For the Three For the Three
Months Ended Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Reported net income $ 21,127 $ 11,193
Add back: Goodwill amortization (net of tax) - 6,388
---------- ----------
Adjusted net income $ 21,127 $ 17,581
========== ==========
Basic Net Income Per Share:
Reported basic net income per share $ 0.48 $ 0.25
Add back: Goodwill amortization (net of tax) - 0.14
---------- ----------
Adjusted basic net income per share $ 0.48 $ 0.39
========== ==========
Diluted Net Income Per Share:
Reported diluted net income per share $ 0.47 $ 0.25
Add back: Goodwill amortization (net of tax) - 0.14
---------- ----------
Adjusted diluted net income per share $ 0.47 $ 0.39
========== ==========
13
For the Nine For the Nine
Months Ended Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Reported net income $ (67,123) $ 30,950
Add back:
Cumulative effect of change
in accounting principle (net of tax) 125,947 -
Goodwill amortization (net of tax) - 18,989
----------- -----------
Adjusted net income $ 58,824 $ 49,939
=========== ===========
Reported basic net income (loss) per share $ (1.51) $ 0.68
Add back:
Cumulative effect of change
in accounting principle (net of tax) 2.84 -
Goodwill amortization (net of tax) - 0.42
----------- -----------
Adjusted basic net income per share $ 1.33 $ 1.10
=========== ===========
Reported diluted net income (loss) per share $ (1.50) $ 0.68
Add back:
Cumulative effect of change
in accounting principle (net of tax) 2.81 -
Goodwill amortization (net of tax) - 0.42
----------- -----------
Adjusted diluted net income per share $ 1.31 $ 1.10
=========== ===========
DEFINITE LIVED INTANGIBLES
The Company identified and reclassified definite lived intangible assets, which
met recognition criteria under FAS No. 141, "Business Combinations", from
goodwill to definite lived intangibles. These intangible assets have
historically been amortized by the Company and will continue to be amortized
over their useful lives.
Definite lived intangible assets at January 1, 2002 and September 30, 2002
consisted of intangibles principally associated with the instalment notes
receivable portfolio of $30.8 million and $25.3 million, net of accumulated
amortization, respectively. Definite lived intangible assets amortization
expense was $1.7 million and $2.2 million for the three-months ended September
30, 2002 and 2001 and $5.5 million and $6.8 million for the nine-months ended
September 30, 2002 and 2001. Estimated intangible asset amortization expense
based on current payment schedules adjusted for current prepayment speeds for
the full year 2002 is expected to be approximately $7.0 million and
approximately $6.0 million, $5.0 million, $4.0 million, and $3.0 million for
2003, 2004, 2005 and 2006, respectively.
14
CHANGES IN CARRYING AMOUNT
The changes in the carrying amount of goodwill and intangibles by reportable
segment for the nine months ended September 30, 2002 are as follows (in
thousands):
GOODWILL INTANGIBLES
---------------------------------------------- ------------
INDUSTRIAL CARBON FINANCING
HOMEBUILDING FINANCING PRODUCTS & METALS & OTHER TOTALS
---------------------------------------------- ------------ ---------
Net balance as of January 1, 2002 $ 63,210 $ 41,698 $ 60,868 $ 257,944 - $ 423,720
Reclasses - (30,803) - - $ 30,803 -
Impairment Loss - - - (201,000) - (201,000)
Amortization - - - - (5,503) (5,503)
---------------------------------------------- ------------ ---------
Net balance as of September 30, 2002 $ 63,210 $ 10,895 $ 60,868 $ 56,944 $ 25,300 $ 217,217
============================================== ============ =========
Goodwill and definite lived intangible assets will be reviewed for impairment on
an annual basis, or more frequently if significant events occur that indicate
that an impairment could exist. The Company will perform its annual impairment
review as of the beginning of each fiscal year, commencing with January 1, 2003.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Income Tax Litigation - A substantial controversy exists with regard to federal
income taxes allegedly owed by the Company. See Note 10 of Notes to Consolidated
Financial Statements contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
Miscellaneous Litigation - 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.
NOTE 13 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued FAS No. 143,
"Accounting for Asset Retirement Obligations." FAS No. 143 applies to legal
obligations associated with the retirement of long-lived assets, 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 will be
adopting FAS No. 143 effective January 1, 2003 and is in the process of
analyzing any potential effect of applying this new standard.
In April 2002, the Financial Accounting Standards Board issued FAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". FAS No. 145 eliminates the requirement that
gains and losses from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect and
eliminates an inconsistency between the accounting for sale-leaseback
transactions and certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. Generally, FAS No. 145 is effective for
transactions occurring after May 15, 2002. As the Company considers its senior
debt refinancing options, any gain or loss associated with the refinancing will
be recorded as an operating expense and will not be presented as an
15
extraordinary item in the statement of operations.
In June 2002, the Financial Accounting Standards Board (FASB) issued FAS No.146,
"Accounting for Exit or Disposal Activities". FAS No. 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring". The scope of FAS
No. 146 also includes: (1) costs related to terminating a contract that is not a
capital lease and (2) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred-compensation contract.
FAS No. 146 will be effective for exit or disposal activities that are initiated
after December 31, 2002. Early application is encouraged. The Company is in the
process of analyzing any potential effect of applying this new standard.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION AND LIQUIDTY AND CAPITAL RESOURCES
AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This discussion should be read in conjunction with the consolidated financial
statements and notes thereto of Walter Industries, Inc. and its subsidiaries,
particularly Note 10 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, 2002 AND 2001
Net sales and revenues for the three months ended September 30, 2002 were $499.3
million, an increase of $4.5 million from the quarter ended September 30, 2001.
Revenue increases within the Homebuilding, Financing, and Industrial Products
segments were partially offset by declines in the Carbon and Metals and Natural
Resources segments. Homebuilding revenues improved on increased unit completions
and higher average selling prices. Financing revenue increased due to slightly
higher prepayment speeds and higher insurance income, partially offset by lower
portfolio yields. Industrial Products benefited from increased shipments of
aluminum products and higher pipe volumes, which were partially offset by lower
pricing for pipe products, reflecting the impact of intense pricing competition
within the industry. Revenues were lower in Carbon and Metals due to fewer
shipments, which were partially offset by increased petroleum coke pricing and
new terminal business. Natural Resources revenues were lower due to a prior year
excise tax refund credit related to coal export sales in prior years, which was
partially offset by higher coal prices and an increase in tons of coal shipped
in the current year.
Cost of sales, exclusive of depreciation, of $360.9 million was 82.1% of net
sales in the 2002 period versus $337.1 million and 80.3% of net sales in the
comparable period of 2001. The increase of $23.8 million is primarily due to
higher volumes in the Homebuilding, Industrial Products, and Natural Resources
segments, higher petroleum coke costs in Carbon and Metals and higher scrap iron
costs in Industrial Products, partially offset by cost reductions and
productivity improvements across the Company.
Depreciation for the three months ended September 30, 2002 was $16.7 million, an
increase of $0.9 million from the same period in 2001.
Selling, general and administrative expenses were $44.4 million in the 2002
period, compared to $48.6 million in 2001. The decrease in expenses for the
current period was due to productivity improvements and cost reduction efforts,
including headcount reductions within Industrial Products and in Corporate
functions.
Provision for losses on instalment notes decreased to $1.7 million in the 2002
period, compared to $3.9 million in 2001 due to improved portfolio performance.
Interest and amortization of debt expense was $38.4 million in the 2002 period,
a decrease of $2.7 million from the same period in 2001 primarily due to lower
interest rates on senior debt and reduced bank debt and asset backed borrowings.
The average rate of interest for the three months ended September 30, 2002, was
7.0% as compared to 7.3% for the three months ended September 30, 2001.
Amortization expense for goodwill and other intangibles was $1.7 million in the
2002 period, compared to $9.3 million from the same period in 2001. The decrease
of $7.6 million was due to the adoption of FAS No. 142 "Goodwill and Other
Intangible Assets" as of January 1, 2002 which requires the discontinuance of
amortization for all goodwill and indefinite-lived intangible assets.
The Company's effective tax rate for the three months ended September 30,
2002 of 28% differed from the federal statutory tax rate primarily due to the
utilization of certain federal tax credits principally related to the
Company's mining operations and the effect of state and foreign income taxes.
The effective tax rate for the three months ended September 30, 2001 of 51%
17
differed from the federal statutory tax rate primarily due to amortization of
goodwill, the utilization of certain federal tax credits, and the effect of
state and foreign income taxes.
The 2002 period includes a $1.7 million pre-tax impairment charge to write-off
certain petroleum coke handling assets at Carbon and Metals. In addition to the
$11.2 million federal excise tax refund credit, the 2001 period included a $10.8
million pre-tax charge related to the coal mining accident at Natural Resources.
This charge principally included costs and expenses associated with the accident
and the idling of Mine No. 5 that are not expected to be covered by insurance.
Net income for the three months ended September 30, 2002 was $21.1 million, or
$0.47 per diluted share, compared to $11.2 million, or $0.25 per diluted share,
in the comparable 2001 period. The 2001 period included approximately $6.4
million, or $0.14 per share, of after-tax goodwill amortization, which is no
longer being expensed under FAS 142. On a comparable basis, the three months
ended September 30, 2002 was up 21%, or $0.08 per share, versus $0.39 per share
in the comparable 2001 period. The current and prior period results also include
the impact of the factors discussed in the following segment analysis.
Segment Analysis:
HOMEBUILDING
Net sales and revenues were $68.8 million for the three months ended September
30, 2002, an increase of $7.3 million from the quarter ended September 30, 2001.
As compared to the same quarter in the prior year, the Company completed more
homes and had an increase in average net selling price. Average net selling
price increased as a result of new product options, amenity upgrades and
consumer preference for more upscale models.
Three months ended Three months ended
September 30, 2002 September 30, 2001
-------------------------------- ------------------ ------------------
Homes Completed 1,082 1,020
-------------------------------- ------------------ ------------------
Average Net Selling Price $ 63,300 $ 60,300
-------------------------------- ------------------ ------------------
The estimated backlog of homes to be constructed at September 30, 2002 was
$132.4 million compared to $110.9 million at December 31, 2001 and $117.1
million at September 30, 2001.
Operating income was $4.8 million for the three months ended September 30, 2002
compared to $1.4 million in the prior year period. The $3.4 million increase was
principally caused by a $2.3 million decrease in goodwill amortization, higher
average selling prices, improved operating margins on home sales and increased
unit completions. Margins improved principally from lower costs and productivity
improvements.
FINANCING
Net sales and revenues were $60.9 million in the 2002 period, an increase of
$2.0 million from $58.9 million for the prior year period. The increase was
primarily attributable to slightly higher prepayment speeds and higher insurance
income, partially offset by lower portfolio yields. Operating income was $15.7
million in the 2002 period, up from $10.6 million in the prior year, primarily
as the result of the higher prepayment speeds of 6.6% in the 2002 period
compared to 6.2% in the prior year period, a $2.2 million lower provision for
losses on instalment notes and higher insurance income of $1.7 million.
Repossession inventory units at September 30, 2002 increased by 3% compared to
June 30, 2002, primarily reflecting slower sales attributable to the economic
slowdown. Delinquencies (the percentage of amounts outstanding over 30 days past
due) were 7.0% at September 30, 2002, unchanged from September 30, 2001.
18
INDUSTRIAL PRODUCTS
Net sales and revenues were $190.9 million for the three months ended September
30, 2002, an increase of $3.6 million from $187.3 million for the three months
ended September 30, 2001. The increase in the current period is due to higher
sales volumes of ductile iron pipe and increased shipments of aluminum products,
principally aluminum building products. Compared to the quarter ended September
30, 2001, pipe shipments increased 7%, while aluminum shipments for the 2002
period were 13% higher than the 2001 period. Partially offsetting these
increases was a decrease in average price per ton for ductile iron pipe products
attributable to significant price pressure in the ductile iron pipe industry.
Operating income of $9.6 million for the three months ended September 30, 2002
was down $6.6 million from $16.2 million for the three months ended September
30, 2001. Operating income declined due to a $12 million decrease in prices for
ductile iron pipe products due to significant price competition in the ductile
iron pipe industry and a $6 million increase in scrap iron costs. This was
partially offset by a 7% increase in pipe volume, a 13% increase in shipped
pounds of aluminum products, a $2.6 million reduction in goodwill amortization,
substantial cost reductions and productivity enhancements.
U.S. Pipe implemented a new ERP System in the second quarter, revising the
method of calculating order backlog. The estimated order backlog consisting of
pressure pipe, valves and hydrants, fittings and castings, calculated under the
revised method at September 30, 2002 was $83.9 million, compared to $88.8
million at June 30, 2002 and $75.2 million at December 31, 2001.
CARBON AND METALS
Net sales and revenues were $115.6 million for the three months ended September
30, 2002, a decrease of $4.6 million from the same period in the prior year. The
decrease in the current period is a result of lower petroleum coke volumes due
to renegotiated supplier contracts and the effect of the strike by the West
Coast longshoremen, decreases in tons of foundry coke sold and lower pricing for
furnace and foundry coke in the current quarter as compared to the prior year.
This was partially offset by an increase in revenues from in-refinery services
at two Gulf Coast refineries that began operation in the first quarter of 2002.
Operating income of $0.6 million was $4.3 million below the prior year. The 2002
period includes a $1.7 million pre-tax impairment charge to write-off certain
petroleum coke handling assets in a Gulf Coast facility that is being closed.
Operating income decreased primarily as a result of lower petroleum coke trading
volumes and reduced trading margins due to increased material costs from
renegotiated supplier contracts. This was partially offset by a $2.2 million
reduction in goodwill amortization and ongoing productivity improvements in all
of the Carbon and Metals businesses.
NATURAL RESOURCES
Net sales and revenues were $66.6 million for the three months ended September
30, 2002, a decrease of $2.9 million from the $69.6 million in the prior year
period. The decrease in net sales and revenues in the current period is
attributable to an $11.2 million excise tax refund credit in the prior period,
which was partially offset by an increase in coal shipments and coal selling
prices in the current period. The increase in coal tons sold is primarily due to
resumption of operations after the temporary shutdown at Mine No. 5 caused by
the accident on September 23, 2001.
19
Three months ended Three months ended
September 30, 2002 September 30, 2001
--------------------------------------------------- ------------------ ------------------
Average Natural Gas Selling Price (per MCF) $ 3.12 $ 4.02
--------------------------------------------------- ------------------ ------------------
Billion Cubic Feet of Natural Gas Sold 2.4 2.5
--------------------------------------------------- ------------------ ------------------
Number of Natural Gas Wells 378 340
--------------------------------------------------- ------------------ ------------------
Average Coal Selling Price (per Ton) $ 36.26 $ 34.77
--------------------------------------------------- ------------------ ------------------
Tons of Coal Sold 1.6 million 1.3 million
--------------------------------------------------- ------------------ ------------------
For the three months ended September 30, 2002, Natural Resources had operating
income of $11.2 million, compared to $6.0 million for the quarter ended
September 30, 2001. Operating income improved due to increased coal selling
prices, which was partially offset by higher costs as Mine No. 5 works to return
to normal levels of production following last year's accident and an $11.2
million excise tax refund claim in the prior year. The Company's business
interruption insurance continued to offset the impact of lower production and
higher costs at Mine No. 5. During the third quarter of 2002, operating income
includes approximately $7.4 million from business interruption insurance
coverage.
All three mines will be undergoing scheduled longwall moves in the fourth
quarter of 2002, which will result in a temporary increase in production cost
per ton and lower profitability.
GENERAL CORPORATE EXPENSES
General corporate expenses were $6.3 million during the three months ended
September 30, 2002 compared to $7.5 million for the three months ended September
30, 2001. This decrease is principally attributable to reduced headcount, lower
professional fees and other cost reduction efforts at the corporate office.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Net sales and revenues for the nine months ended September 30, 2002 were
$1,446.3 million, a decrease of $29.5 million from the comparable nine-month
period in 2001. Revenue declines within the Financing, Industrial Products,
Carbon and Metals, and Natural Resources segments were partially offset by
increases in the Homebuilding segment. Financing revenues decreased due to lower
portfolio yields partially offset by higher prepayment speeds and higher
insurance income. Industrial Products shipped fewer tons of ductile iron pipe
during the first nine months of 2002, reflecting the impact the national
recession had on demand for these products, combined with lower pricing during
the first nine months of 2002 due to intense pricing competition within the
industry. Carbon and Metals revenues declined as a result of reduced volumes for
petroleum coke and calcined coke. Revenues were lower in Natural Resources due
to a decline in natural gas prices, fewer tons of coal being shipped due to the
Mine No. 5 shutdown and a prior year $11.2 million excise tax refund credit
related to coal export sales in the prior year. Homebuilding revenues improved
on increased unit completions and higher average selling price.
Cost of sales, exclusive of depreciation, of $1,026.2 million was 80.8% of net
sales in the 2002 period versus $1,031.2 million and 80.5% of net sales in the
comparable period of 2001. The decrease of $5.0 million is primarily due to
reduced volumes in the Industrial Products, Carbon and Metals, and Natural
Resources segments, partially offset by an increase in completed homes within
the Homebuilding segment, higher petroleum coke costs in Carbon and Metals and
higher scrap iron prices in Industrial Products.
Depreciation for the nine months ended September 30, 2002 was $50.1 million, an
increase of $2.7 million from the same period in 2001.
20
Selling, general and administrative expenses were $144.9 million in the 2002
period, compared to $144.0 million in 2001. The slight increase in expenses for
the current period was primarily due to a $2.6 million charge to bad debt
expense related to a Carbon and Metal's customer that filed for bankruptcy
protection, an increase in professional fees related to converting time charge
income to the interest method, continued expansion into new homebuilding markets
and higher legal and other professional expenses in Industrial Products and in
Corporate functions. These increases were substantially all offset by decreases
related to various productivity and cost reduction projects in place throughout
the Company.
Provision for losses on instalment notes decreased to $4.6 million in the 2002
period, compared to $8.7 million in 2001 due to improved portfolio performance.
Interest and amortization of debt expense was $117.7 million in the 2002 period,
a decrease of $13.5 million from the same period in 2001 primarily due to lower
interest rates and reduced borrowings. The average rate of interest for the nine
months ended September 30, 2002, was 7.1% as compared to 7.7% for the nine
months ended September 30, 2001.
Amortization expense for goodwill and other intangibles was $5.5 million in the
2002 period, compared to $27.8 million from the same period in 2001. The
decrease of $22.3 million was due to the adoption of FAS No. 142 "Goodwill and
Other Intangible Assets" as of January 1, 2002 which requires the discontinuance
of amortization for all goodwill and indefinite-lived assets.
The Company's effective tax rate for the nine months ended September 30, 2002
of 29% differed from the federal statutory tax rate primarily due to a $2.8
million tax benefit related to the November 1998 sale of JW Window
Components, the utilization of certain federal tax credits principally
related to the Company's mining operations, and the effect of state and
foreign income taxes. The $2.8 million tax benefit was from an increased
capital loss carryforward due to a change in the consolidated return loss
disallowance rules, which favorably affected the Company's previous treatment
of the November 1998 sale of JW Window Components. The effective tax rate for
the nine months ended September 30, 2001 of 49% differed from the federal
statutory tax rate primarily due to amortization of goodwill, the utilization
of certain federal tax credits, and the effect of state and foreign income
taxes.
The 2002 period includes a $1.7 million pre-tax impairment charge to write-off
certain petroleum coke handling assets at Carbon and Metals. In addition to the
$11.2 million federal excise tax refund credit, the 2001 period included a $10.8
million pre-tax charge related to the coal mining accident at Natural Resources.
This charge principally included costs and expenses associated with the accident
and the idling of Mine No. 5 that are not expected to be covered by insurance.
Net loss for the nine months ended September 30, 2002 was $67.1 million, or
$1.50 per diluted share, which included a charge of $125.9 million, net of tax,
or $2.81 per diluted share, from the cumulative effect of a change in accounting
principle related to the transitional goodwill impairment charge associated with
the initial adoption of FAS No. 142. In the comparable 2001 period, net income
was $31.0 million, or $0.68 per diluted share, which included approximately
$19.0 million, or $0.42 per diluted share, of after-tax goodwill amortization
which is no longer being expensed under FAS No. 142. On a comparable basis,
before the cumulative effect of the change in accounting principle, net income
for the nine months ended September 30, 2002 was $1.31 per diluted share, up 19%
or $0.21 per diluted share, versus $1.10 per diluted share in the comparable
2001 period. The current and prior period results also include the impact of the
factors discussed in the following segment analysis.
21
Segment Analysis:
HOMEBUILDING
Net sales and revenues were $199.9 million for the nine months ended September
30, 2002, an increase of $25.4 million from the period ended September 30, 2001.
As compared to the prior year, for the nine months ended September 30, 2002, the
Company completed more homes and had an increase in average net selling price.
Average net selling price increased as a result of new product options, amenity
upgrades and consumer preference for more upscale models.
Nine months ended Nine months ended
September 30, 2002 September 30, 2001
------------------------------ ------------------ ------------------
Homes Completed 3,183 2,942
------------------------------ ------------------ ------------------
Average Net Selling Price $ 62,500 $ 59,100
------------------------------ ------------------ ------------------
Operating income was $11.9 million for the nine months ended September 30, 2002
compared to $1.6 million in the prior year period. The $10.3 million increase
was principally caused by a $6.7 million decrease in goodwill amortization,
higher average selling prices, improved operating margins on home sales and
increased unit completions. Margins increased principally from cost reductions
and productivity improvements.
FINANCING
Net sales and revenues were $178.6 million in the 2002 period, a decrease of
$2.0 million from $180.6 million for the prior year period. The decrease was
primarily attributable to lower portfolio yields, offset by higher insurance
income. Operating income was $41.2 million in the 2002 period, up significantly
from $36.7 million in the prior year, primarily as the result of faster
prepayment speeds of 6.9% in the 2002 period compared to 5.9% in the prior year
period, a $4.1 million lower provision for losses on instalment notes and $1.7
million higher insurance income. Repossession inventory units at September 30,
2002 was essentially flat versus December 31, 2001.
INDUSTRIAL PRODUCTS
Net sales and revenues were $531.1 million for the nine months ended September
30, 2002, a decrease of $36.6 million from $567.7 million for the nine months
ended September 30, 2002. The decrease is due to fewer ductile iron pipe
shipments and a decrease in average price per ton for pipe products attributable
to the pricing competition within the industry, and a decrease in pass-through
prime metal costs for aluminum products, which was partially offset by higher
aluminum shipments. Compared to the nine months ended September 30, 2001, U.S.
Pipe revenues were down 10% and pipe shipments decreased 5%, while aluminum
shipments for the 2002 period were 9% higher than the 2001 period.
Operating income of $33.1 million for the nine months ended September 30, 2002
was down $19.8 million from $52.9 million for the nine months ended September
30, 2001. Operating income decreased due to the lower volumes and decreases in
prices for ductile iron pipe products, higher scrap iron costs, increased legal
expenses and severance expenses related to a 14% workforce reduction at U.S.
Pipe. This was partially offset by a $7.8 million reduction in goodwill
amortization, increased aluminum shipments, and improved productivity.
CARBON AND METALS
Net sales and revenues were $355.9 million for the nine months ended September
30, 2002, a decrease of $5.3 million from the same period in the prior year. The
decrease in the current period is a result of lower petroleum and calcined coke
volumes due to renegotiated supplier contracts. This was partially offset by an
increase in calcined coke pricing, which reflects a pass-through of higher
product costs, additional revenues from in-refinery services at Gulf Coast
22
refineries, increases in tons of furnace coke sold and higher pricing for
furnace coke in the current period as compared to the prior year.
Operating income of $8.2 million was $7.3 million below the prior year.
Operating income decreased due to lower volumes and margins, a $2.6 million
charge to selling, general and administrative expense as a result of a customer
bankruptcy at Sloss and a pre-tax impairment charge of $1.7 million to write off
certain petroleum coke handling assets located in the Gulf Coast region. These
were partially offset by a $6.5 million reduction in goodwill amortization and
furnace coke volumes that more than doubled.
NATURAL RESOURCES
Net sales and revenues were $189.1 million for the nine months ended September
30, 2002, a decrease of $13.9 million from the $203.0 million in the prior year
period. The decrease in net sales and revenues in the current period is
attributable to an $11.2 million excise tax refund in the prior year, fewer coal
tons shipped and a decrease in methane gas selling prices, which was partially
offset by an increase in coal selling prices. The decrease in coal tons sold is
primarily due to the shutdown at Mine No. 5.
Nine months ended Nine months ended
September 30, 2002 September 30, 2001
---------------------------------------------------- ------------------ ------------------
Average Natural Gas Selling Price (per MCF) $ 2.83 $ 5.25
---------------------------------------------------- ------------------ ------------------
Billion Cubic Feet of Natural Gas Sold 7.2 7.4
---------------------------------------------------- ------------------ ------------------
Number of Natural Gas Wells 378 340
---------------------------------------------------- ------------------ ------------------
Average Coal Selling Price (per ton) $ 36.05 $ 30.15
---------------------------------------------------- ------------------ ------------------
Tons of Coal Sold 4.6 million 4.8 million
---------------------------------------------------- ------------------ ------------------
For the nine months ended September 30, 2002, Natural Resources had operating
income of $26.7 million, compared to $9.5 million for the nine months ended
September 30, 2001. Operating income improved due to a 4% decrease in average
cost per ton of coal produced and increased coal selling prices, which was
partially offset by the $11.2 million excise tax refund claim in the prior year
and a decrease in the selling price of natural gas as compared to the prior
year. The Company's business interruption insurance continued to offset the
impact of limited production and higher costs at Mine No. 5. For the nine months
ended September 30, 2002, operating income includes approximately $22.2 million
from business interruption insurance coverage.
GENERAL CORPORATE EXPENSES
General corporate expenses were $21.1 million during the nine months ended
September 30, 2002 compared to $23.8 million for the nine months ended September
30, 2001. The decrease was principally due to cost reduction efforts, which was
partially offset by higher professional fees related to converting time charge
income to the interest method.
FINANCIAL CONDITION
Restricted short-term investments of $136.0 million at September 30, 2002
increased $9.2 million compared to December 31, 2001 as $32 million of funds
were set aside during the third quarter to pay down Trust II on October 1,
2002. This was partially offset by a decrease in funds set aside at December
31, 2001 related to Trust X used to securitize additional notes in the first
quarter of 2002. On October 1, 2002, the remaining Trust II balance of $48
million was retired.
Instalment note receivables, generated from the financing of homes constructed
by the Homebuilding segment, were $1,709.3 million at September 30, 2002, an
increase of $19.5 million from December 31, 2001. The increase is due to higher
volumes and average note balances financed, which was partially offset by
customer repayments.
23
Net receivables, consisting principally of trade receivables, were $279.1
million at September 30, 2002, an increase of $55.5 million from December 31,
2001. Net receivables increased $22.3 million principally due to insurance
claims related to the accident at one of the Company's mines and also due to
higher net sales in the third quarter of 2002 compared to the fourth quarter of
2001.
Prepaid expenses of $15.8 million at September 30, 2002 increased $7.0 million
compared to December 31, 2001 as a result of prepayments on insurance.
Other long-term assets were $33.3 million at September 30, 2002, a decrease of
$11.2 million from December 31, 2001. Other long-term assets decreased due to
the liquidation of assets related to deferred compensation and other employee
related benefits.
Goodwill and other intangibles of $217.2 million at September 30, 2002 decreased
$206.5 million compared to December 31, 2001 due to the $201.0 million AIMCOR
transitional goodwill impairment charge as a result of adopting the FAS 142 and
continued amortization of intangibles. In conjunction with the impairment
charge, a deferred tax asset of $75.1 million was established, changing the
December 31, 2001 net tax liability of $45.0 million to a net deferred tax asset
of $18.3 million after adjustments for changes in normal temporary differences.
Accounts payable of $149.5 million at September 30, 2002 increased $34.2 million
compared to December 31, 2001 primarily as a result of timing of vendor payments
and efforts by the Company to improve management of accounts payable.
Accrued expenses of $124.0 million at September 30, 2002 decreased $18.5 million
compared to December 31, 2001 due to the timing of certain payroll related
expenses.
The allowance for losses on instalment notes receivable was $11.1 million at
September 30, 2002 and $11.0 million at December 31, 2001. Delinquencies (the
percentage of amounts outstanding over 30 days past due) declined from 7.6% at
December 30, 2001 to 7.0% at September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Since December 31, 2001, total debt has decreased by $2.1 million. During the
nine month period ended September 30, 2002, net borrowings under the Mid-State
Trust IX Variable Funding Loan Agreement were $131.5 million due to the
financing of new instalment notes for customers. Payments on the
mortgage-backed/asset-backed notes from instalment notes receivable amounted to
$157.1 million.
At September 30, 2002 borrowings under the $350 million Revolving Credit
Facility totaled $107.0 million, an increase of $23.5 million compared to
December 31, 2001. 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, 2002 letters of credit with a face amount
of $55.4 million were outstanding. At September 30, 2002 approximately $187.6
million was available under the Revolving Credit Facility.
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 certain corporate activities (including
change of control and asset sale transactions). In addition, under the Credit
Facilities, the Company and its Restricted Subsidiaries are required to maintain
specified financial ratios and comply with certain financial tests. The Company
was in compliance with these covenants at September 30, 2002.
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
24
in mergers or consolidations. The Company was in compliance with these
covenants at September 30, 2002. Trust IX originally matured on February 4,
2002, but was renewed to February 3, 2003.
At September 30, 2002 borrowings under the Term Loan totaled $225 million. A
payment under the Term Loan of $100 million was made on October 15, 2002
utilizing proceeds principally obtained under the Revolving Credit Facility. The
remaining $125 million balance of the Term Loan and the Revolving Credit
Facility is due October 15, 2003. The Company has the ability and the intent to
refinance the debt prior to the maturity date.
The Company believes that, based on current forecasts and anticipated market
conditions, the combination of existing availability under the Revolving
Credit Facility and operating cash flow that will be generated will be
sufficient to meet substantially all operating needs, to make planned capital
expenditures and to make all required interest and principal payments on
indebtedness.
On October 1, 2002, all outstanding indebtedness under the Trust II indenture
was retired under provisions that allowed the trust's indebtedness to be called
prior to its scheduled maturity. On August 30, 2002, Mid-State Homes deposited
approximately $32 million with the trustee of Trust II in accordance with the
outlined procedures in the Indenture to call the bonds on October 1, 2002. At
September 30, 2002, this $32 million recorded in Restricted Short-Term
Investments was combined with approximately $16 million in the Trust II
collection account and on October 1, 2002 all of the remaining Trust II
principal balance of $48 million was retired.
STATEMENT OF CASH FLOWS
Cash and cash equivalents were approximately $24.5 million at September 30,
2002. Operating cash flows for the nine months ended September 30, 2002 together
with borrowings under the Revolving Credit Facility were primarily used for
capital expenditures, repayment of mortgage-backed debt, dividends and to
purchase 118,000 shares of common stock under the stock repurchase program.
Cash flow from operating activities for the nine months ended September 30,
2002, was $60.8 million, principally representing the net loss for the period
and non-cash charges for depreciation, amortization, and the cumulative effect
of change in accounting principle related to the transitional goodwill
impairment charge and impairment charges, offset by an increase in working
capital. The increase in working capital reflected higher insurance receivables
related to the property and business interruption insurance claim at Natural
Resources and higher trade receivables in the Industrial Products segment, lower
accrued expenses and prepayments of insurance premiums.
Capital expenditures totaled $56.7 in the nine months ended September 30, 2002.
Commitments for capital expenditures at September 30, 2002 were not significant;
however, it is estimated that gross capital expenditures for the year ending
December 31, 2002 will approximate $70 - $80 million. Actual expenditures in
2002 may be more or less than this amount, depending upon the level of earnings
and cash flow, or expansion opportunities in certain markets.
In the nine months ended September 30, 2002, the Company spent $1.3 million to
repurchase 118,000 shares of its Common Stock. In February 2002, the Board of
Directors increased the Company's stock buyback authorization to $25.0 million,
of which $24.5 million remained at September 30, 2002.
On February 7, 2002, the Board of Directors approved a $0.03 per share
dividend payable March 20, 2002 to shareholders of record on February 20,
2002. On April 29, 2002, the Board of Directors declared a $0.03 per share
dividend payable on September 12, 2002 to shareholders of record on May 15,
2002. On August 5, 2002, the Board of Directors declared a $0.03 per share
dividend, payable on September 12, 2002, to shareholders of record on August
15, 2002. On November 11, 2002, the Board of Directors declared a $0.03 per
share dividend, payable on December 19, 2002, to shareholders of record on
November 21, 2002.
25
MARKET RISK
The Company is exposed to certain market risks inherent in the Company's
financial instruments. These instruments generally arise from transactions
entered into in the normal course of business. The Company's primary market risk
exposures relate to (i) interest rate risk on the instalment notes receivable
portfolio and (ii) interest rate risk on short- and long-term borrowings. The
Company has periodically used derivative financial instruments to manage
interest rate risk. At September 30, 2002 the Company has an interest rate cap
agreement to mitigate its exposure to interest rate risk on short-term
borrowings related to its Financing Segment.
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 anticipated purchases and sales of natural gas. The Company
occasionally utilizes derivative commodity instruments to manage certain of
these exposures when considered practical to do so. As of September 30, 2002,
swap contracts to hedge anticipated purchases in 2002 of natural gas totaling
233,815 mmbtu were outstanding at prices ranging from $2.67 to $3.45 per mmbtu.
At September 30, 2002, the net unrealized loss from these hedging instruments
was recorded in other assets and accumulated other comprehensive loss.
As of September 30, 2002, the Company has hedged anticipated natural gas
production of 3,200,000 mmbtu over the next 15 months at prices ranging from
$2.96 to $4.30 with swap contracts. These swap contracts effectively convert a
portion of forecasted sales at floating-rate natural gas prices to a fixed-rate
basis. If there are differences between natural gas prices and the swap
contracts during the year, these swap contracts may result in material net
payments from or to the Company that will be recognized and included in net
sales in the statement of operations.
The Company is also subject to a limited amount of foreign currency risk, but
does not currently utilize any significant derivative foreign currency
instruments to manage exposures for transactions denominated in currencies other
than the U.S. dollar.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued FAS No. 143,
"Accounting for Asset Retirement Obligations." FAS No. 143 applies to legal
obligations associated with the retirement of long-lived assets, 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 will be
adopting FAS No. 143 effective January 1, 2003 and is in the process of
analyzing any potential effect of applying this new standard.
In April 2002, the Financial Accounting Standards Board issued FAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". FAS 145 eliminates the requirement that
gains and losses from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect and
eliminates an inconsistency between the accounting for sale-leaseback
transactions and certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. Generally, FAS 145 is effective for
transactions occurring after May 15, 2002. As the Company considers its senior
debt refinancing options, the loss associated with refinancing will be recorded
as an operating expense and will not be presented as an extraordinary item in
the statement of operations.
In June 2002, the Financial Accounting Standards Board (FASB) issued FAS No.
146, "Accounting for Exit or Disposal Activities". FAS 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring". The scope of
26
FAS 146 also includes: (1) costs related to terminating a contract that is
not a capital lease and (2) termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. FAS 146 will be effective for exit or
disposal activities that are initiated after December 31, 2002. Early
application is encouraged.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Form 10-Q contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to the Company that is based on the beliefs of the management of the
Company, as well as assumptions made by and information currently available to
the management of the Company. When used in this Form 10-Q, the words
"estimate," "project," "believe," "anticipate," "intend," "expect," and similar
expressions are intended to identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events and are
subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated in such forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company does not undertake any
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
CONTROLS AND PROCEDURES
As of November 11, 2002, under the supervision and with the participation of the
Company's Chief Executive Officer (CEO) and the Chief Financial Officer (CFO),
management has evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the CEO
and CFO, concluded that the Company's disclosure controls and procedures were
effective as of November 11, 2002. There were no significant changes in the
Company's internal controls or in the other factors that could significantly
affect those controls subsequent to the date of the evaluation.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
A substantial controversy exists with regard to federal income taxes
allegedly owed by the Company. See Note 10 of Notes to Consolidated
Financial Statements contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2001.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item. 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27
Exhibit 99.1 Certification of Periodic Report- Chief Executive
Officer
Exhibit 99.2 Certification of Periodic Report- Chief Financial
Officer
(b) Reports on Form 8-k
Form 8-k filed on August 12, 2002, to record sworn statements of
the Registrant's Chief Executive Officer and Chief Financial
Officer pursuant to Section 21 (a) (1) of the Securities Exchange
Act of 1934.
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: November 14, 2002
28
WALTER INDUSTRIES, INC.
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Don DeFosset, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Walter Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Don DeFosset
-----------------------
Don DeFosset
Chief Executive Officer
29
WALTER INDUSTRIES, INC.
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William F. Ohrt, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Walter Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ William F. Ohrt
-----------------------
William F. Ohrt
Chief Financial Officer
30