Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q

Commission File Number 001-13711

WALTER INDUSTRIES, INC.

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 ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        There were 37,061,923 shares of common stock of the registrant outstanding at April 30, 2004.

PART I—FINANCIAL INFORMATION

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

See accompanying "Notes to Consolidated Financial Statements"

1

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

See accompanying "Notes to Consolidated Financial Statements"

2

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

For The Three Months Ended March 31, 2004

(UNAUDITED)

(in thousands)

See accompanying "Notes to Consolidated Financial Statements"

3

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See accompanying "Notes to Consolidated Financial Statements"

4

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2004

(Unaudited)

Note 1—Basis of Presentation

        The accompanying unaudited consolidated financial statements of Walter Industries, Inc. ("the Company") 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 month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

        The balance sheet at December 31, 2003 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.

        During December 2003, the Company completed the sales of Applied Industrial Materials Corporation ("AIMCOR") and JW Aluminum Company ("JW Aluminum") (see Note 2). The Notes to Consolidated Financial Statements, except where otherwise indicated, relate to continuing operations only. Certain reclassifications have been made to prior year's amounts to conform to the current period classifications.

Note 2—Discontinued Operations

        On December 3, 2003, the Company completed the sale of AIMCOR, previously a wholly-owned subsidiary of the Company, to Oxbow Carbon and Minerals LLC ("Oxbow") for $127.7 million, subject to certain post-closing adjustments. This resulted in a loss on the sale of approximately $71.5 million, net of $27.6 million of income tax benefit. Based on the Company's history of taxable earnings and expectations for future earnings, it is more likely than not that the Company will achieve sufficient future taxable income to recognize all of the tax benefits associated with the tax loss from the disposition of AIMCOR. The Company also completed the sale of JW Aluminum, previously a wholly-owned subsidiary of the Company, to Wellspring Capital Management LLC for $125.0 million, subject to certain post-closing adjustments, on December 5, 2003, resulting in a gain on the sale of approximately $20.1 million, net of $15.5 million of income taxes.

        Per the various sales agreements for the divestitures of businesses in 2003, the final sales prices are subject to certain post-closing cash and net working capital adjustments. These cash and working capital adjustments are defined in the sales agreements and are subject to resolution and arbitration processes provided for in the agreements. Receivables at March 31, 2004 and December 31, 2003 included $16.2 million for estimated net cash and working capital adjustments due to the Company. The ultimate recovery of these receivables is subject to the resolution and arbitration processes described above. Management believes it has a valid basis for its claims and intends to vigorously pursue recovery through these resolution and arbitration processes.

5

        Net sales and revenues and income from discontinued operations were as follows (in thousands):

        AIMCOR and JW Aluminum were each previously reported in the Carbon and Metals and the Industrial Products segments, respectively. As a result of the adoption of plans to dispose of these subsidiaries, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," their operations have been classified as discontinued operations in the accompanying statements of operations for the three months ended March 31, 2003.

Note 3—Stock Options & Stock Compensation

        The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for stock options using the intrinsic value method at the grant dates. Had compensation cost for the Company's stock option plans been determined based on fair value at the grant dates as prescribed by Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," the Company's net income (loss) and net income (loss) per share on a pro forma basis would have been (in thousands, except per share data):

(1)

Weighted average basic shares outstanding were used in 2004 as the use of fully diluted shares would have an anti-dilutive effect.

6

        The preceding pro forma results were calculated with the use of the Black Scholes option-pricing model. Weighted average assumptions used for the three months ended March 31 were:

        During the first quarter of 2004, the Company established the Long-Term Incentive Award Plan Restricted Stock Unit Award Agreement (the "Agreement") pursuant to the provisions of the 2002 Long-Term Incentive Award Plan. Under the Agreement, restricted stock units fully vest after seven years of continuous employment with the Company. The Agreement contains an acceleration provision for the vesting period if the stock price of the Company reaches certain established amounts. The Company records deferred compensation related to the restricted stock units as a component of capital in excess of par value in the period of grant based on the number of units granted and the market value of the Company's stock on the grant date and amortizes the deferred compensation to expense over the vesting period.

Note 4—Restructuring and Impairments

        On December 1, 2003, the Company announced that Jim Walter Resources expected to close Mine No. 5 during the fourth quarter of 2004 due to continuing adverse geologic conditions. The mine was originally scheduled to close in 2006. However, given the poor operating conditions, management concluded that it was not economically feasible to access Mine No. 5's remaining coal reserves beyond 2004. On April 6, 2004, the Company announced that it would extend its coal production schedule for Mine No. 5 to mid-2005 due to favorable increases in metallurgical coal prices around the world. The Company previously estimated total costs of the shutdown at approximately $17.8 million, of which approximately $12.7 million would qualify as restructuring costs. As a result of the delay in the shutdown of the mine, total expected costs have decreased to approximately $14.5 million, of which approximately $9.4 million would qualify as restructuring costs. Due to the change in the timing of the mine shutdown and the related decrease in estimated restructuring costs, the Company remeasured the liability, resulting in a $0.1 million reversal of amounts previously charged to restructuring expense in

7

2003. Estimated costs associated with the shutdown and amounts recorded as restructuring expenses are as follows (in thousands):

        Termination benefits consist primarily of one year's post-employment health benefits for UMWA employees and severance related to staff reductions of salaried personnel. Other employee-related costs includes approximately $5.8 million related to an increase in benefits costs associated with the curtailment of the UMWA other post-retirement benefits plan and increases in other employee-related costs, such as workers compensation, that will be expensed when incurred. Other costs primarily represent incremental costs related to the closure of the mine that will be charged to operating costs when incurred.

        Amounts recorded in accrued restructuring are as follows (in thousands):

        On April 29, 2003, U.S. Pipe, the primary component of the Industrial Products segment, ceased production and manufacturing operations at its castings plant in Anniston, Alabama. The decision to cease operations was the result of several years of declining financial results and resulted in the termination of approximately 80 employees. Exit costs associated with the plant closure were estimated to be $6.5 million of which approximately $6.2 million has already been recognized. The remaining costs to be incurred relate to site clean-up costs and a commitment to purchase electrical power that terminates in 2006. At March 31, 2004, approximately $0.3 million was recorded in accrued expenses

8

for restructuring, primarily for site cleanup costs that were incurred during the three months ended March 31, 2004. Estimated costs associated with the restructuring are as follows (in thousands):

        Other associated costs principally include site clean-up costs that will be expensed as restructuring charges as incurred.

        Amounts recorded in accrued restructuring are as follows (in thousands):

Note 5—Restricted Short-Term Investments

        Restricted short-term investments at March 31, 2004 and December 31, 2003 include (i) temporary investment of reserve funds and collections on instalment notes receivable owned by Mid-State Trusts IV, VI, VII, VIII, IX, X and XI (the "Trusts") ($90.9 million and $94.0 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 amounts restricted to specific uses ($6.8 million and $6.3 million), respectively.

9

Note 6—Instalment Notes Receivable

        Instalment notes receivable are summarized as follows (in thousands):

        During the three months ended March 31, 2004, the Company purchased portfolios of $8.3 million of seasoned mortgage loan receivables.

        Activity in the allowance for losses on instalment notes is summarized as follows (in thousands):

Note 7—Inventories

        Inventories are summarized as follows (in thousands):

10

Note 8—Debt

        Debt, in accordance with its contractual terms, consisted of the following (in thousands):

        In April 2003, the Company entered into a $500 million bank credit facility (the "2003 Credit Facility") which consists of a $245 million senior secured revolving credit facility that matures in April 2008 and a $255 million senior secured term loan originally maturing in April 2010. In April 2004, the Company issued $175 million of convertible senior subordinated notes and used a portion of the proceeds to repay the remaining balance of the term loan (see Note 14). The 2003 Credit Facility is secured by the stock of Walter Industries' subsidiaries and by certain assets (excluding real property) of the Company. The interest rate on the revolving credit facility is a floating rate of 350 basis points over LIBOR and on the term loan was a floating rate of 425 basis points over LIBOR. LIBOR was 1.1% and 1.2% at March 31, 2004 and December 31, 2003, respectively.

        In connection with the 2003 Credit Facility, the Company originally incurred debt issuance costs of approximately $5.4 million, which is being amortized over the life of the loans. In addition, the Company recorded a discount on the term loan of approximately $3.2 million, which was recorded as a reduction of the term loan and was being accreted to face value over the life of the loan. As the result of the previously noted repayment of the term loan, remaining term loan debt issue costs of $1.2 million and discount of $1.4 million will be charged to interest expense in the quarter ending June 30, 2004. At March 31, 2004, approximately $2.2 million of debt issue costs remain related to the revolving credit facility, which will continue to be amortized through its scheduled maturity in 2008.

        Effective March 24, 2004 and April 13, 2004, the Company entered into amendments of the 2003 Credit Agreement. These amendments were obtained to provide the Company with flexibility in the timing of its long term financing under mortgage-backed/asset-backed notes; to permit the issuance of

11

senior convertible notes; and to increase the amount of shares that could be repurchased under the Credit Agreement. These amendments modify the Credit Agreement as follows: (a) the definition of Consolidated EBITDA will not include any cash expenditure made on or after July 1, 2004 in connection with post employment benefits to the extent such expenditures are not deducted in computing Consolidated Net Income; (b) the Company's Consolidated Leverage Ratio as defined in the Agreement is not permitted to be greater than 2.75 to 1.00, or in the event that there have been no CMO Financing Cash Proceeds during the Four-Quarter period ending June 30, 2004, the Consolidated Leverage Ratio cannot be greater than 3.30 to 1.00; (c) the requirement that the Consolidated Fixed Charge Coverage Ratio be tested as of the end of the Four-Quarter Period ending June 30, 2004 in the event there have been no CMO Financing Cash Proceeds during the Four-Quarter Period ending June 30, 2004 has been deleted; and (d) the Company is permitted to incur additional indebtedness related to the issuance of convertible senior subordinated notes and to repurchase additional shares of the Company's common stock.

        The Revolving Credit Facility includes a sub-facility for trade and other standby letters of credit in an amount up to $100.0 million at any time outstanding. At March 31, 2004 letters of credit with a face amount of $61.1 million were outstanding and approximately $169.1 million was available under the Revolving Credit Facility.

        The Mid-State Trust IX Variable Funding Loan Facility is a $400.0 million warehouse facility with Bank of America as lender and as Administrative Agent. Interest is based on the cost of A-1 and P-1 rated commercial paper plus .35% and a facility fee on the committed amount of .40%. The weighted average interest rate was 1.78% as of March 31, 2004. Trust IX matured on February 2, 2004 and was then renewed to January 31, 2005.

Note 9—Pension and Other Employee Benefits

        The components of net periodic benefit cost are as follows (in thousands):

12

        In January 2004, the Financial Accounting Standards Board ("FASB") issued Staff Position ("FSP") SFAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") introduced a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The FSP provides a one-time election to defer the accounting for the effects of the Act until further guidance is provided by the FASB. The Company has made such election. Accordingly, measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost in these financial statements or accompanying notes do not reflect the effects of the Act on the other postretirement plans. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require the Company to change previously reported information.

Note 10—Earnings Per Share

        Calculations of basic and diluted net income (loss) per share for the three months ended March 31, 2004 and 2003 are as follows (in thousands, except per share data):

(1)

Weighted average basic shares outstanding were used in 2004 as the use of fully diluted shares would have an anti-dilutive effect.

13

Note 11—Segment Information

        Summarized financial information concerning the Company's reportable segments is shown in the following tables (in thousands):

(a)

During the quarter ended March 31, 2004, the Company revised its methodology of allocating certain corporate overhead expenses to all segments. Operating income for each segment now includes an allocation of corporate overhead expenses that are directly attributable to each segment's operations. Prior year amounts have been reclassified to conform to the current year presentation.

14

(b)

Operating income amounts are net of amortization of other intangibles of $1,485 and $1,474 for the three months ended March 31, 2004 and 2003, respectively, and interest expense on the mortgage-backed/asset-backed notes of $31,726 and $31,456 for the three months ended March 31, 2004 and 2003, respectively.

Note 12—Asset Retirement Obligations—Adoption of SFAS Statement 143

        The Company adopted SFAS 143, Accounting for Asset Retirement Obligations, as of January 1, 2003. Under SFAS 143, liabilities are recognized at fair value for an asset retirement obligation in the period in which it is incurred and the carrying amount of the related long-lived asset is correspondingly increased. Over time, the liability is accreted to its future value. The corresponding asset capitalized at inception is depreciated over the useful life of the asset. The adoption of SFAS 143 in the first quarter of 2003 resulted in an increase to net property, plant and equipment of approximately $0.9 million, a net increase to the asset retirement obligation of approximately $0.4 million, and as a cumulative effect of a change in accounting principle, a pretax increase in income of approximately $0.5 million ($0.4 million, net of taxes).

Note 13—Commitments and Contingencies

        A controversy exists with regard to federal income taxes allegedly owed by the Company for fiscal years 1980 through 1994. In connection with the bankruptcy proceedings, the Internal Revenue Service (the "IRS") filed a proof of claim in the Bankruptcy Court (the "Proof of Claim") for a substantial amount of taxes, interest and penalties with respect to fiscal years ended August 31, 1980 and August 31, 1983 through May 31, 1994. The Company filed an adversary proceeding in the Bankruptcy Court disputing the Proof of Claim (the "Adversary Proceeding") and the various issues have been and are being litigated in the Bankruptcy Court.

        The amounts initially asserted by the Proof of Claim do not reflect the subsequent resolution of various issues through settlements or concessions by the parties. After adjustment for these items, the Company estimates that the amount of tax presently claimed by the IRS is approximately $34 million for issues currently in dispute in the Adversary Proceeding. This amount is subject to interest and penalties. Of the $34 million in claimed tax, $21 million represents issues in which the IRS is not challenging the deductibility of the particular expense but only whether such expense is deductible in a particular year. Substantially all of the issues in the Proof of Claim which have not been settled or conceded have been litigated before the Bankruptcy Court and are subject to appeal but only at the conclusion of the entire Adversary Proceeding.

        The Company believes that those portions of the Proof of Claim which remain in dispute or are subject to appeals substantially overstate the amount of taxes allegedly owing. However, because of the complexity of the issues presented and the uncertainties associated with litigation, the Company is unable to predict the ultimate outcome of the Adversary Proceeding.

        The Company believes that its tax filing positions have substantial merit and intends to defend vigorously any tax claims asserted. The Company believes that it has sufficient accruals to address any claims, including interest and penalties.

15

Miscellaneous Litigation

        In 2003, the Company increased its accruals for outstanding litigation by approximately $6.5 million, principally related to the settlement of a class action employment matter at U.S. Pipe. While settlement remains subject to court approval and other formalities, the settlement amount was paid into escrow in May of 2004. The settlement is expected to be finalized in June or July of 2004.

        The Company and its subsidiaries are parties to a number of other lawsuits arising in the ordinary course of their businesses. 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 material adverse effect on its consolidated financial position.

Note 14—Subsequent Events

        On April 20, 2004, the Company issued convertible senior subordinated notes in the aggregate principal amount of $175 million. The notes were issued in a private placement at an issue price of $1,000 per note (100% of the principal amount at maturity) and will mature on May 1, 2024, unless earlier converted, redeemed or repurchased. The notes are redeemable by the Company at par on or after May 6, 2011. The holders of the notes may require the Company to repurchase some or all of the notes at par plus accrued and unpaid interest, including contingent interest, if any, initially on May 1, 2014, and subsequently on May 1 of 2019, or at any time prior to their maturity following a fundamental change, as defined in the indenture.

        The notes bear interest at 3.75% per annum. Also, during certain periods commencing on May 1, 2011, the Company will pay contingent interest for the applicable interest period if the average trading price of the notes during the specified five trading days in the applicable interest period equals or exceeds 120% of the principal amount of the notes. The contingent interest payable per note will equal 0.40% per year of the average trading price of such note during the applicable five trading-day reference period. The notes are convertible into shares of the Company's common stock, initially at a conversion rate of 56.0303 shares of common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of approximately $17.85 per share), subject to adjustment and under certain circumstances as outlined in the indenture. Holders can surrender their notes for conversion in any fiscal quarter after the quarter ending June 30, 2004 (and only during such fiscal quarter) if the last reported sale price per share of Walter Industries' common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous fiscal quarter is greater than or equal to 130% of the applicable conversion price per share of Walter Industries' common stock on such last trading day. Holders may also convert the notes if certain trading price conditions are met, the notes are called for redemption, upon the occurrence of certain corporate transactions or if future credit ratings are three or more subcategories below the initial credit rating.

        The notes are unsecured senior subordinated obligations and are junior in right of payment to any senior debt of the Company and the Company's subsidiaries' and other liabilities, including trade payables.

16

        Proceeds upon issuance of the notes were $168.5 million, net of approximately $6.5 million of underwriting fees and expenses. A portion of the proceeds was used to repay in full the Term Loan, which had a principal balance outstanding of $111.7 million. Using the remaining proceeds and net borrowings under the Revolving Credit Facility, the Company repurchased approximately five million shares of its common stock for approximately $63.0 million of which approximately four million shares were repurchased from certain affiliates of Kohlberg, Kravis, Roberts and Co ("KKR"). After the repurchase, KKR affiliates own approximately 27% of the Company's outstanding stock.

        On April 22, 2004, the Board of Directors declared a $0.03 per share dividend, payable on June 11, 2004, to shareholders of record on May 13, 2004.

        On April 28, 2004, the Company announced the resignation of Brad Kitterman, President, United States Pipe and Foundry Company, Inc. effective May 10, 2004.

        On April 30, 2004, the Company completed the sale of the assets of Vestal Manufacturing Company, a wholly-owned subsidiary, for $6.0 million, subject to certain post-closing adjustments. The sale is expected to result in an after tax loss of approximately $0.8 million, to be recorded in the second quarter of 2004. Michael T. Tokarz, a member of the Company's Board of Directors, is also the chairman and investment manager of MVC Capital, an investment fund that participated in the acquisition of Vestal's assets. Mr. Tokarz owns less than five percent of the equity of MVC Capital. There were no fees paid to Mr. Tokarz in connection with the sale. The Company's Board of Directors received a fairness opinion in respect of the transaction and Mr. Tokarz took no part in the consideration of the transaction by, or the vote of, the Board.

Note 15—New Accounting Pronouncements

        In December 2003 the FASB released revised FASB Statement No. 132 ("SFAS 132"), Employers' Disclosures about Pensions and Other Postretirement Benefits. The revised standard provides required disclosures for pensions and other postretirement benefit plans and is designed to improve disclosure transparency in financial statements. The revised standard replaces existing pension disclosure requirements. Required disclosures for the interim period ended March 31, 2004 have been incorporated in Note 9 to these consolidated financial statements.

17

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS,
FINANCIAL CONDITION, LIQUIDITY 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 Notes 2 and 11 of "Notes to Consolidated Financial Statements," which describe the Company's discontinued operations recorded in 2003, as well as sales and revenues and operating income by operating segment.

RESULTS OF OPERATIONS

Summary Operating Results of Continuing Operations for the Three Months ended March 31, 2004 and 2003

(1)

Excludes senior debt interest expense.

18