Walter Industries, Inc.

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Walter Industries, Inc.

1500 North Dale Mabry Highway
Tampa, Florida 33607
U.S.A.
(813) 871-4811
Fax: (813) 871-4430

Wholly Owned Subsidiary of Hillsborough Holdings Corporation
Incorporated: 1955 as Jim Walter Corporation
Employees: 8,200
Sales: $1.4 billion

Walter Industries and its parent company, the Hillsborough Holdings Corporation (HHC), were organized in August and incorporated in September of 1987 by a group of investors led by Kohlberg Kravis Roberts & Company (KKR) to acquire Jim Walter Corporation. Jim Walter Corporation was a Florida-based corporation primarily engaged in residential and non-residential construction, renovation, and remodeling; water and waste-water transmission; industrial and consumer markets; and natural-resources development. When approached by KKR in 1987, Jim Walter Corporation was the nation’s fourth-largest home builder, a vigorous public corporation under stable leadership, well known throughout the southern United States for its affordable homes. By 1990, Walter Industries and Hillsborough Holdings stood at the center of controversial asbestos-related litigation and were operating under Chapter 11 bankruptcy court protection.

In 1946, James W. Walter borrowed $400 from his father, a citrus grower, and purchased a “shell,” or unfinished home, for $895 from Tampa, Florida, builder, O. L. Davenport. When, just three days later, the 23-year-old, newly married Walter sold the home to a passerby for a profit, he saw a way out of his $50-a-week truck-driving job and $50-a-month apartment. Walter convinced Davenport, also in his 20s, to take him on as a partner. As Walter remembered in Nation’s Business in 1970, “we made out all right, but I thought we could move faster.” Walter encouraged Davenport to run bigger advertisements featuring photographs of the homes; they sold more houses. Walter was enthusiastic about building the business even faster. Davenport was reluctant. After two years, they dissolved the partnership of Davenport & Walter. The men decided to divide the business: one of them would take the assets of about $50,000, the other the business. Since Davenport was the founder, he first opted to take the business. A day after he made his decision, he told his partner he had changed his mind and chose the assets instead. Davenport took his share and bought a motel and small construction firm in Troy, Alabama. Jim Walter continued the business, now called the Walter Construction Company.

In the post-World War II era, housing was scarce. Jim Walter sold unfinished, traditionally constructed homes as affordable, alternative housing. The wood homes were built on concrete foundations or wood pilings. Each home was completely finished on the outside with an unfinished interior. Buyers installed plumbing, electrical systems, insulation, walls, and doors themselves. Homes were sold directly to owners prior to construction, through one of Jim Walter Homes Division sales offices.

In 1955, Jim Walter incorporated the Walter Construction Company as the Jim Walter Corporation. Three men who would be pivotal to the company’s success through the coming decades had already joined the firm. James O. Alston came to the company in 1947 and was instrumental in its early growth. Alston was president of the corporation from 1963 to 1970, chairman of the homebuilding operation, and vice chairman of the corporation by 1970. Arnold F. Saraw, a partner in Walter Construction, was secretary-treasurer of the corporation from 1955 to 1970. In 1970, he was promoted to senior vice president, heading the corporate mortgage division. The third man, Joe B. Cordell, an accountant who joined the company in 1958 was vice president and chief financial officer, became president in 1974 and chief executive officer in 1983.

During the 1950s, the company expanded and entered the mortgage business. Initially financing was difficult. The turning point for the fledgling company came in 1956 when Chicago creditors Walter E. Heller & Company approved a $1 million line of credit. Jim Walter’s mortgages, like his homes, were attractive to buyers who found more conventional sources too costly. Jim Walter Corporation’s innovative financing plan was outlined in the May 19, 1987 edition of Financial World: ”... most of the houses... are financed on the basis of ten percent fixed mortgages or installment notes maturing in up to 20 years. Unlike a conventional mortgage,... Jim Walter’s buyers spread the interest and principal payments evenly across the term to lessen its risk of defaults. Such mortgages were possible because the company required the purchaser to own the land on which the house was to be built. The equity in the land substituted for the traditional cash down payment. The company’s mortgage portfolio was traditionally one of its strongest assets. The mortgage finance division maintained more than $1 billion in installment notes in the 1970s. By 1987, Jim Walter’s $1.6 billion mortgage portfolio was larger than those of most Florida savings and loans. An evaluation performed in 1988 by Financial Security Assurance, in a maneuver designed to help KKR and Walter Industries refinance $1.2 billion in bank debt, put the value of Walter’s mortgage portfolio at $1.75 billion.

Sales of Walter homes historically ran counter to other builders’ sales, due to the availability of low-cost financing. Low, fixed interest rates combined with an affordable product ensured that when housing starts were generally down and money was tight, buyers looked for alternatives like those offered by Jim Walter. During 1982, Jim Walter built 10,000 of the 300,000 homes constructed that year. In 1986, Walter homes accounted for just 6,500 of the half-million homes built. The company tallied some of it best years during recessions in the housing industry.

From 1955 to 1962, Jim Walter Corporation was primarily involved in the building industry. Walter’s only notable acquisition during the 1950s was the First National Bank in St. Petersburg, Florida, later sold. This foray was the start of a policy of diversification.

During the 1960s and 1970s, the company made a large number of acquisitions and mergers. Walter acquired no less than 15 different subsidiaries in the 1960s, ranging from building-materials and industrial-products manufacturers to a California savings and loan. The Celotex Corporation merger was initiated in 1962 and completed in 1964. A pioneer in sound insulation and a leading manufacturer of building products, Celotex also made a spray-on asbestos insulation. The company also acquired a sugar firm and an oil exploration company. Two paper companies acquired in 1968, Marquette Paper Corporation and Knight Paper Company, rounded out Jim Walter’s early acquisitions.

On March 9, 1964, Jim Walter Corporation was first listed on the New York Stock Exchange. Shares initially sold for 50¢. From 1969 until 1979, stockholders enjoyed positive results: dividends increased from 40¢ to $1.80 per share; book value increased from $6.46 to $34 per share. By 1970, the shares had twice split three ways. In 1986, Walter’s board of directors approved a five-for-four common stock split, in the form of a 25% stock dividend. In 1987, the KKR group brought the company for $60 a share, with bidding at one point reaching the heady number of $67 per share.

Throughout the 1960s, over 200 competitors tried to emulate the company’s success in the production of shell homes. By the end of the 1970s, Jim Walter, the originator of the concept, was the only one left and his “rags-to-riches” saga had become a part of Florida folklore. A Tampa cab driver, who did not recognize his passenger, regaled Jim Walter with the story of Jim’s life. In 1968, on the 20th anniversary of the founding of the company, Jim Walter, commemorated his beginnings by buying back the original shell house he had first owned for just three days in 1946.

In 1969, the company bought United States Pipe and Foundry Company of Birmingham, Alabama, for $135 million in stock and cash. By 1979, U.S. Pipe had increased profits five times over. In the July 13, 1979 issue of Forbes, Walter called it “the quickest deal I ever made.”

At the time of the purchase, U.S. Pipe’s modest coke operation and unmined coal reserves attracted little attention. By 1973, however, the Arab oil embargo made coal mining a potential bonanza. In 1976, the company created the subsidiary, Jim Walter Resources, to direct the company’s mine-development program. Since Jim Walter knew home building, but not mining, he hired experienced people to guide the mining division. The magnitude of the task that faced a company with no experience in difficult longwall mining, required due to the depth of the coal, was daunting. The company’s robust cash flow was able to absorb the crush of hefty capital expenditures during the nearly ten years it took to make the mines operational.

During the 1970s, Jim Walter continued the pattern of diversifying the company, adding another dozen subsidiaries. By the end of the decade, Jim Walter was involved in coal mining; marble, limestone, and granite quarrying; oil and gas production; gypsum and asbestos mining; a savings and loan association; an insurance company; a paper-marketing firm; water and waste-water pipe manufacturing; and retail jewelry. While the various mergers and acquisitions broadened Jim Walter’s base of operations, the bulk of its revenues remained in the building industry, with more than 200,000 shell homes completed by 1979. Sales in 1979 exceeded $2 billion a year.

In 1972, Panacon Corporation, the third-largest Canadian producer of asbestos, was merged into Celotex Corporation. As the link between asbestos and cancer became clear, lawsuits from workers began to accumulate. Jim Walter’s 1986 10-K form reported that two subsidiaries, Celotex and Carey Canada Inc., were co-defendants with a number of other miners, manufacturers, and distributors of asbestos products in a “substantial number” of lawsuits alleging work-related injuries. Many of the suits requested punitive as well as compensatory damages. According to the company, “the aggregate damages sought in these cases is substantial.” What followed was a series of convoluted machinations, suits, and counter suits, on behalf of both defendants and plaintiffs, with mixed results. The company thought its insurance carriers would handle the claims, but coverage after 1977 disallowed asbestos-related claims. In 1985, the subsidiaries and co-defendants entered into an agreement to resolve the claims. All claims filed after June 19, 1985, were to be referred to the Asbestos Claim Facility, set up by the agreement, with the cost of litigation or mediation to be shared by all the defendants according to a formula based on their asbestos litigation experiences.

The home-building division continued to produce strong results through the 1980s. In 1986, Walter maintained 103 sales offices scattered through 29 states, most of them in the South. The homes were constructed by local construction firms who were subcontracted to do the work. Shell homes accounted for 28% of units sold and the 90% completed homes totaled nearly 60%. In the same year, homebuilding and related financing accounted for 14% of total sales and revenues for the company, contributing $108.4 million.

At the same time, Celotex found itself staggering under an ever-mounting litigation load. In 1984, approximately 21,100 lawsuits representing 25,600 persons were pending against one or more of the subscribers of the Asbestos Claim Facility, including Celotex. In 1985, 28,800 lawsuits representing 34,900 persons were pending. As of August 31, 1986, there were approximately 43,900 bodily injury claims pending. By the time Kohlberg Kravis Roberts moved to acquire the company in 1987, pending lawsuits exceeded 50,000. By January 1988, they numbered 58,000.

The actions taken by the subsidiaries allowed KKR to proclaim the company’s litigation risk “manageable.” Under corporate law, the parent company could not be held liable for claims against its subsidiaries. KKR proceeded with its purchase of Jim Walter Corporation for $2.4 billion in August 1987. The company was a perfect takeover target; healthy profits, strong cash flow, and a raft of subsidiaries that could be sold to reduce debt. At KKR’s request, Jim Walter joined the group of investors who bought the company. He became a chairman of HHC and Walter Industries, retaining the existing management team.

The company was split into two holding companies following the sale. Jim Walter Corporation retained ownership of Celotex, and Hillsborough Holdings Corporation kept the other subsidiaries. Jim Walter Corporation was sold to Jasper Corporation. Walter Industries merged into HHC, all under the name of Walter Industries.

In 1989, Houston attorney Stephen D. Sussman, of Sussman Godfrey, filed a suit on behalf of asbestos victims in Beaumont, Texas, an industrial area where many of them lived. The new lawsuit named KKR, Hillsborough Holdings, and Walter Industries as principal defendants. The suit brought about the demise of KKR’s plan to restructure Hillsborough Holdings Corporation’s debt. Asset sales were blocked, and the price of HHC’s junk bonds plummeted. HHC was unable to meet the obligations imposed by the sales of junk bonds that funded the buyout. On December 27,

1989, Hillsborough Holdings Corporation and 31 of its subsidiaries each filed bankruptcy under Chapter 11 in Tampa. Only two subsidiaries, Cardem Insurance Co. and Jefferson Warrior Railroad Company, did not file petitions for court-protected reorganization.

In April 1990 Judge Alexander L. Paskay, Chief Bankruptcy Judge for the U.S. Bankruptcy Court in the Middle District of Florida, recommended that the asbestos suit filed in Texas be heard in his court. In July the U.S. District Court for the same district adopted his recommendation, and the case was moved to the Tampa federal bankruptcy court. In 1990, the company that Jim Walter had built into an empire on the strength of a simple idea like the shell home faced an uncertain future.

Principal Subsidiaries

Best Insurers, Inc.; Best Insurors of Mississippi, Inc.; Cardem Insurance Company, Ltd.; Coast to Coast Advertising, Inc.; Computer Holdings Corporation; Dixie Building Supplies, Inc.; Hamer Holdings Corporation; Hamer Properties, Inc.; Homes Holdings Corporation; Jefferson Warrior Railroad Company; Jim Walter Computer Services, Inc.; Jim Walter Homes, Inc.; Jim Walter Insurance Services, Inc.; Jim Walter Resources, Inc.; Jim Walter Window Component, Inc.; JW Aluminum Company; JW Resources Holdings Corporation; J.W.I. Holdings Corporation; J.W. Walter, Inc.; JW Window Components, Inc.; Land Holdings Corporation; Mid-State Homes, Inc.; Mid-State Holdings Corporation; Railroad Holdings Corporation; Sloss Industries Corporation; Southern Precision Corporation; United Land Corporation; United States Pipe and Foundry Company; U.S. Pipe Realty, Inc.; Vestal Manufacturing Company; Walter Home Improvement, Inc.; Walter Land Company.