<Page>
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, 2001
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-20537
WALTER INDUSTRIES, INC.
Incorporated in Delaware IRS Employer Identification No. 13-3429953
1500 North Dale Mabry, Tampa, Florida 33607
Telephone Number (813) 871-4811
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes /X/ No / /.
There were 44,406,926 shares of common stock of the registrant outstanding at
October 31, 2001.
<Page>
PART I - FINANCIAL INFORMATION
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
September 30, December 31,
2001 2000
(unaudited)
----------- ------------
(in thousands, except share amounts)
ASSETS
- ------
Cash and cash equivalents $ 18,495 $ 11,513
Short-term investments, restricted 109,727 100,901
Marketable securities 2,184 1,980
Instalment notes receivable, net 1,340,214 1,332,019
Receivables, net 266,592 239,620
Inventories 250,383 262,002
Prepaid expenses 12,363 13,079
Property, plant and equipment, net 485,542 480,361
Investments 13,082 13,226
Deferred income taxes 83,884 111,818
Unamortized debt expense 38,994 42,432
Other long-term assets, net 44,232 37,129
Goodwill, net 425,260 452,234
----------- -----------
$ 3,090,952 $ 3,098,314
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 169,328 $ 171,949
Accrued expenses 116,831 118,644
Income taxes payable 62,663 61,027
Debt
Mortgage-backed/asset-backed notes 1,751,853 1,769,833
Other senior debt 403,550 411,500
Accrued interest 31,518 28,231
Accumulated postretirement benefits obligation 294,806 286,903
Other long-term liabilities 48,965 54,679
Stockholders' equity
Common stock, $.01 par value per share:
Authorized - 200,000,000 shares
Issued - 55,376,518 and 55,355,184 shares 554 554
Capital in excess of par value 1,158,517 1,162,767
Accumulated deficit (816,451) (850,591)
Treasury stock - 10,899,392 and 9,296,592 shares, at cost (132,558) (116,113)
Accumulated other comprehensive income (loss) 1,376 (1,069)
----------- -----------
Total stockholders' equity 211,438 195,548
----------- -----------
$ 3,090,952 $ 3,098,314
=========== ===========
</Table>
See accompanying "Notes to Consolidated Financial Statements"
2
<Page>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
Three months ended
September 30,
------------------------
2001 2000
--------- ---------
(in thousands, except per share amounts)
Sales and revenues:
Net sales $ 419,957 $ 461,489
Time charges 54,567 51,537
Miscellaneous 10,380 9,081
Excise tax refund claim 11,227 --
--------- ---------
496,131 522,107
--------- ---------
Cost and expenses:
Cost of sales 337,068 378,039
Depreciation 15,808 18,954
Selling, general and administrative 50,139 48,923
Postretirement benefits 5,472 5,402
Interest and amortization of debt expense 41,040 47,798
Amortization of goodwill and other intangibles 9,282 9,568
Loss on mining accident 10,834 --
Restructuring charges -- 11,417
--------- ---------
469,643 520,101
--------- ---------
Income before income taxes 26,488 2,006
Income tax expense (12,895) (1,791)
--------- ---------
Net income $ 13,593 $ 215
========= =========
Basic net income per share $ .30 $ --
========= =========
Diluted net income per share $ .30 $ --
========= =========
</Table>
See accompanying "Notes to Consolidated Financial Statements"
3
<Page>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
Nine months ended
September 30,
----------------------------
2001 2000
----------- -----------
(in thousands, except per share amounts)
Sales and revenues:
Net sales $ 1,280,610 $ 1,307,581
Time charges 163,904 160,420
Miscellaneous 20,392 26,466
Excise tax refund claim 11,227 --
----------- -----------
1,476,133 1,494,467
----------- -----------
Cost and expenses:
Cost of sales 1,031,212 1,063,825
Depreciation 47,395 56,013
Selling, general and administrative 148,197 169,366
Postretirement benefits 13,877 16,308
Interest and amortization of debt expense 131,216 142,526
Amortization of goodwill and other intangibles 27,839 27,653
Loss on mining accident 10,834 --
Restructuring and impairment charges -- 179,283
----------- -----------
1,410,570 1,654,974
----------- -----------
Income (loss) before income taxes 65,563 (160,507)
Income tax benefit (expense) (31,423) 36,115
----------- -----------
Net income (loss) $ 34,140 $ (124,392)
=========== ===========
Basic net income (loss) per share $ .75 $ (2.64)
=========== ===========
Diluted net income (loss) per share $ .75 $ (2.64)
=========== ===========
</Table>
See accompanying "Notes to Consolidated Financial Statements"
4
<Page>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
<Table>
<Caption>
Accumulated
Comprehensive Other
Income Accumulated Comprehensive Common Capital in Treasury
Total (Loss) Deficit Income (Loss) Stock Excess Stock
----------- ----------- ----------- ----------- --------- ----------- -----------
Balance at December 31, 2000 $ 195,548 -- $ (850,591) $ (1,069) $ 554 $ 1,162,767 $ (116,113)
Comprehensive income:
Net income 34,140 $ 34,140 34,140
Other comprehensive income, net of tax:
Net unrealized gain on hedge 2,504 2,504 -- 2,504
Foreign currency translation adjustment (59) (59) -- (59)
-----------
Comprehensive income -- $ 36,585
===========
Stock issued on exercise of
stock options 274 -- -- -- -- 274
Purchases of treasury stock (16,445) -- -- -- -- -- (16,445)
Dividends paid (4,524) -- -- -- -- (4,524)
----------- ----------- ----------- ----------- --------- ----------- -----------
Balance at September 30, 2001 $ 211,438 -- $ (816,451) $ 1,376 $ 554 $ 1,158,517 $ (132,558)
=========== =========== =========== =========== ========= =========== ===========
</Table>
See accompanying "Notes to Consolidated Financial Statements"
5
<Page>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
Nine months ended
September 30,
------------------------
2001 2000
--------- ---------
(in thousands)
OPERATING ACTIVITIES
Net income (loss) $ 34,140 $(124,392)
Charges to income (loss) not affecting cash:
Depreciation 47,395 56,013
Provision for (benefit from) deferred income taxes 27,934 (58,370)
Accumulated postretirement benefits obligation 7,903 8,248
Provision for other long-term liabilities (5,714) (1,161)
Amortization of goodwill and other intangibles 27,839 27,653
Amortization of debt expense 3,481 5,047
Restructuring and impairment charges -- 179,283
--------- ---------
142,978 92,321
Decrease (increase) in assets:
Short-term investments, restricted (8,826) 15,098
Marketable securities (204) 39,143
Instalment notes receivable, net (a) (8,195) (28,544)
Trade and other receivables, net (26,972) (38,169)
Inventories 11,619 16,872
Prepaid expenses 716 4,492
Increase (decrease) in liabilities:
Accounts payable (2,621) (5,885)
Accrued expenses (1,813) 5,425
Income taxes payable 1,636 7,757
Accrued interest 3,287 (4,408)
--------- ---------
Cash flows from operating activities 111,605 104,102
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment, net of retirements (52,576) (77,078)
Decrease (increase) in investments and other assets (7,824) 865
--------- ---------
Cash flows used in investing activities (60,400) (76,213)
--------- ---------
FINANCING ACTIVITIES
Issuance of debt 534,314 940,164
Retirement of debt (560,244) (988,237)
Additions to unamortized debt expense (43) (2,337)
Purchases of treasury stock (16,445) (21,725)
Dividends paid (4,524) (4,268)
Net unrealized gain on hedge 2,504 --
Net unrealized gain on marketable securities -- 268
Exercise of employee stock options 274 510
--------- ---------
Cash flows used in financing activities (44,164) (75,625)
--------- ---------
EFFECT OF EXCHANGE RATE ON CASH (59) (651)
--------- ---------
Net increase (decrease) in cash and cash equivalents 6,982 (48,387)
Cash and cash equivalents at beginning of period 11,513 57,508
--------- ---------
Cash and cash equivalents at end of period $ 18,495 $ 9,121
========= =========
</Table>
(a) Consists of sales and resales, net of repossessions and provision for
possible losses, of $128.5 million and $138.6 million and cash collections
on account and payouts in advance of maturity of $120.0 million and $110.0
million, respectively.
See accompanying "Notes to Consolidated Financial Statements"
6
<Page>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 (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. Certain reclassifications have been made to conform prior year's
data to the current presentation. These reclassifications had no effect on
reported earnings. Operating results for the three and nine month periods ended
September 30, 2001 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2001.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Walter Industries, Inc. and Subsidiaries
Transition Report on Form 10-K for the transition period ended December 31,
2000.
NOTE 2 - RESTRICTED SHORT-TERM INVESTMENTS
Restricted short-term investments at September 30, 2001 and December 31, 2000
include (i) temporary investment of reserve funds and collections on instalment
notes receivable owned by Mid-State Trusts II, IV, VI, VII, VIII, and IX at
September 30, 2001 and Mid-State Trusts II, IV, V, VI, VII, and VIII at December
31, 2000, (the "Trusts") ($104.7 million and $94.1 million, respectively) which
are available only to pay expenses of the Trusts and principal and interest on
indebtedness of the Trusts and (ii) miscellaneous other segregated accounts
restricted to specific uses ($5.0 million and $6.8 million), respectively.
NOTE 3 - INSTALMENT NOTES RECEIVABLE
The instalment notes receivable is summarized as follows (in thousands):
<Table>
<Caption>
September 30, December 31,
2001 2000
----------- -----------
Gross Balance $ 4,500,668 $ 4,428,074
Less: Unearned time charges (3,133,375) (3,069,216)
Allowance for possible losses (27,079) (26,839)
----------- -----------
Net $ 1,340,214 $ 1,332,019
=========== ===========
</Table>
7
<Page>
The gross amount of instalment notes receivable and the economic balance by
trust are as follows (in thousands):
<Table>
<Caption>
September 30, 2001 December 31, 2000
---------------------------------------- ------------------------------------
Gross Economic Gross Economic
Balance Balance Balance Balance
----------------- ----------------- -------------- ---------------
Trust II $ 363,874 $ 238,438 $ 435,544 $ 284,182
Trust IV 908,979 445,189 1,002,526 480,353
Trust V -- -- 532,002 191,388
Trust VI 726,460 315,853 790,983 336,760
Trust VII 682,307 284,156 727,844 297,811
Trust VIII 849,103 370,578 917,154 394,885
Trust IX 948,126 342,681 -- --
Unpledged 21,819 8,494 22,021 8,509
----------------- ----------------- -------------- ---------------
Total $ 4,500,668 $ 2,005,389 $ 4,428,074 $ 1,993,888
================= ================= ============== ===============
<Caption>
NOTE 4 - INVENTORIES
Inventories are summarized as follows (in thousands):
September 30, December 31,
2001 2000
-------------- ---------------
Finished goods $ 151,955 $ 159,069
Goods in process 40,731 46,289
Raw materials and supplies 52,366 49,387
Houses held for resale 5,331 7,257
-------------- ---------------
Total inventories $ 250,383 $ 262,002
============== ===============
<Caption>
NOTE 5 - DEBT
Debt, in accordance with its contractual terms, consisted of the following (in
thousands):
September 30, December 31,
2001 2000
-------------- ---------------
Mortgage-Backed/Asset-Backed Notes:
Trust II Mortgage-Backed Notes $ 113,050 $ 161,500
Trust IV Asset Backed Notes 484,834 502,174
Trust V Variable Funding Loan -- 161,000
Trust VI Asset Backed Notes 293,302 309,803
Trust VII Asset Backed Notes 255,795 272,192
Trust VIII Asset Backed Notes 338,858 363,164
Trust IX Variable Funding Loan 266,014 --
-------------- ---------------
1,751,853 1,769,833
-------------- ---------------
Other senior debt:
Walter Industries, Inc.
Revolving Credit Facility 100,000 110,000
Term Loan 300,000 300,000
Other 3,550 1,500
-------------- ---------------
403,550 411,500
-------------- ---------------
Total $ 2,155,403 $ 2,181,333
============== ===============
</Table>
On October 15, 2001, the Company made its required $75.0 million principal
payment on the term loan.
8
<Page>
NOTE 6 - STOCKHOLDERS' EQUITY
Information relating to the Company's share repurchases is set forth in the
following table (in thousands):
<Table>
<Caption>
Shares Amount
-------- --------
Treasury stock at December 31, 2000 9,297 $116,113
Share repurchases for the nine months
ended September 30, 2001 1,602 16,445
-------- --------
Total held in treasury at September 30, 2001 10,899 $132,558
======== ========
</Table>
On April 2, 2001 the Board of Directors increased the authorization to
repurchase the Company's common stock to $25.0 million. As of September 30,
2001, $13.0 million remained available to repurchase shares under this
authorization.
NOTE 7 - EARNINGS PER SHARE
A reconciliation of the basic and diluted earnings per share computations for
the three and nine months ended September 30, 2001 and 2000 are as follows (in
thousands, except per share data):
<Table>
<Caption>
Three Months ended September 30,
----------------------------------------------------
2001 2000
----------------------- ------------------------
Basic Diluted Basic Diluted
--------- --------- --------- ---------
Net income (loss) $ 13,593 $ 13,593 $ 215 $ 215
========= ========= ========= =========
Shares of common stock outstanding:
Average number of common shares (a) 44,633 44,633 46,409 46,409
Effect of diluted securities:
Stock options (b) -- 407 -- 60
--------- --------- --------- ---------
44,633 45,040 46,409 46,469
========= ========= ========= =========
Net income (loss) per share $ .30 $ .30 $ -- $ --
========= ========= ========= =========
<Caption>
Nine Months ended September 30,
----------------------------------------------------
2001 2000
----------------------- ------------------------
Basic Diluted Basic Diluted
--------- --------- --------- ---------
Net income (loss) $ 34,140 $ 34,140 $(124,392) $(124,392)
========= ========= ========= =========
Shares of common stock outstanding:
Average number of common shares (a) 45,190 45,190 47,044 47,044
Effect of diluted securities:
Stock options (b) -- 293 -- 16
--------- --------- --------- ---------
45,190 45,483 47,044 47,060
========= ========= ========= =========
Net income (loss) per share $ .75 $ .75 $ (2.64) $ (2.64)
========= ========= ========= =========
</Table>
(a) The three and nine months ended September 30, 2001 and 2000 shares include
3,880,140 additional shares issued to an escrow account on September 13,
1995 pursuant to the Consensual Plan, but do not include shares held in
treasury.
9
<Page>
(b) Represents the number of shares of common stock issuable on the exercise
of dilutive employee stock options less the number of shares of common
stock which could have been purchased with the proceeds from the exercise
of such options. These purchases were assumed to have been made at the
higher of either the market price of the common stock at the end of the
period or the average market price for the period.
On February 1, 2001, the Company declared a $.04 per share dividend for the four
months ended December 31, 2000 payable to shareholders of record on February 15,
2001. On April 26, 2001, the Company declared a $.03 per share dividend for the
three months ended March 31, 2001 payable to shareholders of record on May 16,
2001. On July 30, 2001, the Company declared a $.03 per share dividend for the
three months ended June 30, 2001 payable to shareholders of record on August 15,
2001. On November 7, 2001, the Company declared a $.03 per share dividend for
the three months ended September 30, 2001 payable to shareholders of record on
November 21, 2001.
NOTE 8 - DERIVATIVES
Financial Accounting Standards Board Statement No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Statement 133), requires
companies to recognize all of its derivative instruments as either assets or
liabilities in the statement of financial position at fair value. The accounting
for changes in the fair value (i.e., gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and further, on the type of hedging relationship. For those
derivative instruments that are designated and qualify as hedging instruments, a
company must designate the hedging instrument based on the exposure being
hedged, as either a fair value hedge, cash flow hedge or a hedge of a net
investment in a foreign operation.
For derivative instruments that are designated and qualify as a cash flow hedge
(i.e., hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on
the derivative instrument is reported as a component of other comprehensive
income and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. The remaining gain or loss on the
derivative instrument in excess of the cumulative change in the present value of
future cash flows of the hedged item, if any, is recognized in current earnings
during the period of change.
The Company uses derivative instruments principally to manage exposures to
natural gas price fluctuations. The Company's objective for holding derivatives
is to minimize risk using the most effective methods to eliminate or reduce the
impacts of exposures. The Company documents all relationships between hedging
instruments and hedged items, and links all derivatives designated as fair
value, cash flow or foreign currency hedges to specific assets and liabilities
on the balance sheet or to specific firm commitments or forecasted transactions.
The Company also assesses and documents, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values or cash flows associated
with the hedged items.
To protect against the reduction in value of forecasted cash flows resulting
from sales of natural gas over the remainder of 2001, the Company has instituted
a natural gas hedging program. The Company hedges portions of its forecasted
revenues from sales of natural gas with swap contracts. The Company has entered
into natural gas swap agreements that effectively convert a portion of its
forecasted sales at floating-rate natural gas prices to a fixed-rate basis for
the remainder of 2001, thus reducing the impact of natural gas price changes on
future sales revenues. When natural gas prices fall, the decline in value of
future natural gas sales is offset by gains in the value of swap contracts
designated as hedges. Conversely, when natural gas prices rise, the increase in
the value of future cash flows from natural gas sales is offset by losses in the
value of the swap contracts. At September 30, 2001, approximately 50% of the
Company's forecasted natural gas sales for the remainder of the year were
designated as the hedged items to natural gas swap agreements.
10
<Page>
During the quarter ended September 30, 2001, the net loss from the ineffective
portion of the Company's hedging instruments, which was insignificant, was
recognized and included in net sales in the statement of operations.
The $2.5 million of net gains on derivative instruments included in accumulated
other comprehensive income at September 30, 2001 is expected to be reclassified,
along with any additional gains or losses that may be incurred after September
30, 2001, to earnings as actual natural gas sales occur during the remaining
three months of 2001.
NOTE 9 - OTHER ITEMS AND EVENTS
On September 23, 2001, an explosion and fire occurred at one of the Company's
coal mines. The quarter ended September 30, 2001 includes a $10.8 million
pre-tax charge related to this accident. The charge principally includes cost
and expenses associated with the accident and the idling of the mine that are
not expected to be covered by insurance. Additionally, revenues in the quarter
ended September 30, 2001 include a federal excise tax refund credit of $11.2
million related to coal export sales in prior years.
11
<Page>
NOTE 10 - SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable segments is
shown in the following tables (in thousands):
<Table>
<Caption>
Three months ended
September 30,
------------------------
2001 2000
--------- ---------
Sales and revenues:
Homebuilding and Financing $ 119,468 $ 117,747
Industrial Products 209,305 239,359
Energy Services 94,559 89,812
Natural Resources 69,597 72,517
Other 3,202 2,672
--------- ---------
Sales and revenues $ 496,131 $ 522,107
========= =========
Operating income (a) :
Homebuilding and Financing $ 14,580 $ 7,028
Industrial Products 15,635 25,766
Energy Services 5,509 2,188
Natural Resources 6,049 (10,547)
--------- ---------
Operating income (loss) 41,773 24,435
Less: General corporate expense 7,544 11,467
Senior debt interest expense 7,741 10,962
--------- ---------
Income (loss) before tax (expense) benefit 26,488 2,006
Income tax (expense) benefit (12,895) (1,791)
--------- ---------
Net income (loss) $ 13,593 $ 215
========= =========
Depreciation:
Homebuilding and Financing $ 1,098 $ 1,134
Industrial Products 9,130 9,572
Energy Services 1,682 1,708
Natural Resources 2,907 5,567
Other 991 973
--------- ---------
Total $ 15,808 $ 18,954
========= =========
<Caption>
(a) Operating income amounts are after deducting amortization of goodwill and
other intangibles. A breakdown of amortization by segment is as follows
(in thousands):
Three months ended
September 30,
------------------------
2001 2000
--------- ---------
Homebuilding and Financing $ 4,226 $ 4,371
Industrial Products 2,650 2,648
Energy Services 2,139 2,139
Natural Resources -- 143
Other 267 267
--------- ---------
$ 9,282 $ 9,568
========= =========
</Table>
12
<Page>
<Table>
<Caption>
Nine months ended
September 30,
----------------------------
2001 2000
----------- -----------
Sales and revenues:
Homebuilding and Financing $ 349,115 $ 359,612
Industrial Products 625,150 664,590
Energy Services 292,675 281,836
Natural Resources 203,039 174,292
Other 6,154 14,137
----------- -----------
Sales and revenues $ 1,476,133 $ 1,494,467
=========== ===========
Operating income (a) :
Homebuilding and Financing $ 39,736 $ 29,246
Industrial Products 48,024 49,231
Energy Services 20,327 14,395
Natural Resources 9,502 (189,759)
----------- -----------
Operating income (loss) 117,589 (96,887)
Less: General corporate expense 23,864 30,056
Senior debt interest expense 28,162 33,564
----------- -----------
Income (loss) before tax (expense) benefit 65,563 (160,507)
Income tax (expense) benefit (31,423) 36,115
----------- -----------
Net income (loss) $ 34,140 $ (124,392)
=========== ===========
Depreciation:
Homebuilding and Financing $ 3,247 $ 3,292
Industrial Products 27,692 25,522
Energy Services 4,808 5,235
Natural Resources 8,721 19,366
Other 2,927 2,598
----------- -----------
Total $ 47,395 $ 56,013
=========== ===========
<Caption>
(a) Operating income amounts are after deducting amortization of goodwill and
other intangibles. A breakdown of amortization by segment is as follows
(in thousands):
Nine months ended
September 30,
----------------------------
2001 2000
----------- -----------
Homebuilding and Financing $ 12,769 $ 13,483
Industrial Products 7,858 7,886
Energy Services 6,417 6,417
Natural Resources -- (8,314)
Other 795 8,181
----------- -----------
$ 27,839 $ 27,653
=========== ===========
</Table>
13
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 subsidiaries,
particularly Note 9 of "Notes to Consolidated Financial Statements" which
presents sales and revenues and operating income by operating segment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Net sales and revenues for the three months ended September 30, 2001 were $496.1
million, a decrease of $26.0 million from the comparable three month period in
2000. The current year included a federal excise tax refund credit of $11.2
million related to coal export sales in prior years. Excluding this credit, net
sales and revenues were down $37.2 million, or 7.1%. The decrease in revenues
primarily reflected decreased demand in the Company's Industrial Products
segment resulting from a weakened economy and lower shipments from the Natural
Resources segment resulting from large spot sales of excess coal inventories in
the prior year. These declines were partially offset by an increase in time
charges of $3.0 million in the Homebuilding and Financing segment principally as
the result of higher prepayments and higher coal selling prices in the Natural
Resources segment.
Cost of sales, exclusive of depreciation, of $337.1 million was 80.3% of net
sales in the 2001 period versus $378.0 million and 81.9% of net sales in the
comparable period of 2000. Cost of sales decreased in the current period
primarily due to decreased sales. The decrease in cost of sales as a percentage
of net sales reflects lower material costs at U.S. Pipe and Jim Walter Homes,
lower storage costs and reduced overhead at AIMCOR, and improved productivity
and cost reduction efforts in all business segments. These improvements were
partially offset by higher product costs for petcoke and aluminum, higher labor
costs at U.S. Pipe and higher material costs at Sloss.
Depreciation for the three months ended September 30, 2001 was $15.8 million, a
decrease of $3.1 million from the same period in 2000. This decrease was
primarily attributable to accelerated depreciation on certain assets during the
prior year period.
Selling, general and administrative expenses of $50.1 million were 10.1% of net
sales and revenues in the 2001 period, compared to $48.9 million and 9.4% in
2000. The increase was primarily due to higher losses on sales of repossessed
homes as Mid-State Homes actively sold repossessed home inventories at lower
values in anticipation of continued economic weaknesses.
Interest and amortization of debt expense was $41.0 million for the three months
ended September 30, 2001, as compared to $47.8 million in the same period of
2000. The average rate of interest for the three months ended September 30, 2001
was 7.3% as compared to 8.1% for the three months ended September 30, 2000. The
prime rate of interest was a range from 6.3% to 6.8% in the current year period
compared to 9.5% for the same period in 2000.
The Company's effective tax rate for the three months ended September 30, 2001
and 2000 differed from the federal statutory tax rate primarily due to
amortization of goodwill (excluding amounts related to the AIMCOR acquisition)
which is not deductible for tax purposes, the utilization of certain federal tax
credits, and the effect of state and local income taxes.
Net income for the three months ended September 30, 2001 was $13.6 million
compared to $0.2 million in the comparable 2000 period. The Company's diluted
earnings per share in the 2001 period was $.30 compared to break even in the
2000 period. In addition to the $11.2 million federal excise tax refund credit,
the current period included a $10.8 million pre-tax charge related to the coal
mining accident at Jim Walter Resources. This charge principally includes costs
and expenses associated with the accident and the idling of Mine No. 5 that are
not expected to be
14
<Page>
covered by insurance. The prior year results included pre-tax restructuring
charges totaling $11.4 million of which $5.2 million related to executive and
other personnel severance and $6.2 million was attributable to the restructuring
of AIMCOR'S European operations. The current and prior period results also
reflect the factors discussed in the following segment analysis.
Segment Analysis:
HOMEBUILDING AND FINANCING
Net sales and revenues were $119.5 million for the three months ended September
30, 2001, an increase of $1.7 million from the quarter ended September 30, 2000.
During the three months ended September 30, 2001, revenues increased principally
due a $3.0 million increase in time charge income principally associated with
higher prepayments. The average net selling price increased as a result of new
product options, amenity upgrades and consumer preference for more upscale
models. Offsetting these positives was a decline in unit completions.
<Table>
<Caption>
--------------------------------- ------------------------ -------------------------
Three months ended Three months ended
September 30, 2001 September 30, 2000
--------------------------------- ------------------------ -------------------------
Homes Completed 1,020 1,072
--------------------------------- ------------------------ -------------------------
Average Net Selling Price $60,200 $57,200
--------------------------------- ------------------------ -------------------------
</Table>
The prepayment rate increased to 6.2% for the quarter ended September 30, 2001
compared to 4.5% for the quarter ended September 30, 2000.
The estimated backlog of homes to be constructed at September 30, 2001 was
$116.9 million compared to $99.0 million at December 31, 2000 and $108.0 million
at September 30, 2000. Due to more aggressive marketing efforts, gross sales of
new construction contracts for the first nine months of the year increased 8.6%,
which is expected to translate into higher unit completions and revenues in the
fourth quarter of 2001 and the first quarter of 2002.
Operating income was $14.6 million for the three months ended September 30, 2001
compared to $7.0 million in the prior year period. The $7.6 million increase was
principally caused by the $3.0 million increase in time charges, a reduction in
net interest costs associated with the instalment note portfolio, higher average
net selling prices and improved operating margins, attributable to lower
material costs and productivity improvements. These improvements were partially
offset by lower revenues from fewer unit completions.
INDUSTRIAL PRODUCTS
Net sales and revenues were $209.3 million for the three months ended September
30, 2001, a decrease of $30.1 million from the $239.4 million for the three
months ended September 30, 2000. Recent weakness in the domestic steel industry,
caused by competition from foreign suppliers and a slower economy, has
significantly impacted sales at Sloss. Sloss' revenues decreased by $2.8 million
from the comparable period a year earlier, principally due to reduced sales of
furnace coke. JW Aluminum's revenues declined $9.4 million from the year earlier
period, principally due to lower shipments as a result of reduced demand for its
fin stock products used in air conditioners. The current economic downturn has
also resulted in decreased shipments at U.S. Pipe principally due to customers
delaying construction and water projects.
The order backlog for U.S. Pipe at September 30, 2001 was $91.4 million compared
to $94.0 million at September 30, 2000 and $82.0 million at December 31, 2000.
Operating income of $15.6 million for the third quarter of 2001 was down $10.1
million from the $25.8 million for the three months ended September 30, 2000.
Sloss' operating income declined $1.6 million from last year due to
15
<Page>
lower demand for furnace coke. JW Aluminum's operating income declined $6.3
million, due to reduced demand for fin stock products. In response to this lower
demand for fin stock products, production levels have been reduced and the
production mix has been changed to emphasize building products, where demand is
better but margins are lower. Lower material costs, cost reductions and improved
productivity at U.S. Pipe helped mitigate the effect of lower volumes and higher
labor costs on operating income.
ENERGY SERVICES
Net sales and revenues were $94.6 million for the three months ended September
30, 2001, an increase of $4.7 million from the three months ended September 30,
2000. Operating income of $5.5 million, was $3.3 million above the prior year
period. However, excluding the $6.2 million of restructuring charges in the
prior year, operating income declined $2.9 million. This decline is primarily
due to lower margins on petroleum coke sales as well as weaker performance by
the metals additive business which continues to be impacted by the distressed
domestic steel industry. Offsetting these declines in performance are
productivity improvements and cost reductions including restructuring of the
European operations, lower storage costs and reduced overhead.
NATURAL RESOURCES
Net sales and revenues were $69.6 million for the three months ended September
30, 2001, a decrease of $2.9 million from the $72.5 million in the prior year
period. Excluding the federal excise tax refund credit of $11.2 million, net
sales and revenues were down $14.1 million. This is attributable to a $23.5
million decline in coal shipments partially offset by in increase in average
coal selling prices.
<Table>
<Caption>
-------------------------------------------------------- ------------------------- ------------------------
Three months ended Three months ended
September 30, 2001 September 30, 2000
-------------------------------------------------------- ------------------------- ------------------------
Average Natural Gas Selling Price (per MCF) $ 4.01 $ 4.13
-------------------------------------------------------- ------------------------- ------------------------
Number of Natural Gas Wells 369 332
-------------------------------------------------------- ------------------------- ------------------------
Average Coal Selling Price (per ton) $34.77 $27.44
-------------------------------------------------------- ------------------------- ------------------------
Tons of Coal Sold 1.3 million 2.2 million
-------------------------------------------------------- ------------------------- ------------------------
</Table>
For the three months ended September 30, 2001, Natural Resources had operating
income of $6.0 million. Excluding both the impact of the mining accident and the
gain from excise tax refund claims, operating income was $5.7 million in the
2001 period compared to an operating loss of $10.5 million for the quarter ended
September 30, 2000. The improvement in operating income was principally driven
by higher coal selling prices and a 12% decline in average production costs from
productivity enhancements and successful cost reduction efforts in the mining
operation.
GENERAL CORPORATE EXPENSES
General corporate expenses were $7.5 million during the three months ended
September 30, 2001 compared to $11.5 million for the three months ended
September 30, 2000. This decline is principally attributable to the executive
severance during the prior year period.
16
<Page>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Net sales and revenues for the nine months ended September 30, 2001 were $1.48
billion, a 1.2% decline from the comparable nine month period in 2000. Revenue
growth within the Energy Services and Natural Resources segments and at U.S.
Pipe was partially offset by declines in unit sales of homes and lower demand
for furnace coke and aluminum products. Miscellaneous income decreased $6.1
million, primarily because of non-recurring revenues from life insurance
policies of $8.8 million in the prior year. Additionally, the current year
includes the federal excise tax refund credit of $11.2 million related to coal
export sales in prior years.
Cost of sales, exclusive of depreciation, of $1.03 billion was 80.5% of net
sales in the 2001 period versus $1.06 billion and 81.4% of net sales in the
comparable period of 2000. The prior year included approximately $13.2 million
of charges, primarily for inventory obsolescence and valuation reserves and
environmental liabilities in the Industrial Products and Natural Resources
segments. Excluding these charges, cost of sales as a percent of net sales was
relatively flat. Higher gross profit margins were driven by cost reductions and
productivity improvements, including lower materials cost for homebuilding,
lower scrap iron cost for U.S. Pipe, lower storage costs and reduced overhead at
AIMCOR and lower production costs at Jim Walter Resources. Offsetting these
improvements were lost fixed cost absorption in some of the Industrial Products
businesses, higher product costs for petcoke and aluminum, higher energy and
labor costs at U.S. Pipe and higher material costs at Sloss.
Depreciation for the nine months ended September 30, 2001 was $47.4 million, a
decrease of $8.6 million from the same period in 2000. This decrease was
primarily attributable to a lower depreciable asset base resulting from the
$166.7 million asset impairment charge to the Company's coal mining assets taken
in May 2000.
Selling, general and administrative expenses of $148.2 million were 10.0% of net
sales and revenues in the 2001 period, compared to $169.4 million and 11.3% in
2000. The prior year included charges of $11.4 million, primarily for an
increase in the provision for losses on trade receivables within the Energy
Services segment, and increased workers compensation expense. Productivity
improvement programs implemented in the last twelve months, including the
restructuring of the European operations in the Energy Services segment and
headcount reductions at the corporate headquarters and homebuilding, have
contributed to additional reductions in selling, general and administrative
expenses.
Interest and amortization of debt expense was $131.2 million for the nine months
ended September 30, 2001, as compared to $142.5 million in the same period of
2000. The average rate of interest was 7.7% for the nine months ended September
30, 2001 compared to 8.0% for the nine months ended September 30, 2000. The
prime rate of interest was a range from 6.3% to 9.0% in the current year period
compared to a range of 8.5% to 9.5% in 2000.
The Company's effective tax rate for the nine months ended September 30, 2001
differed from the federal statutory tax rate primarily due to amortization of
goodwill (excluding amounts related to the AIMCOR acquisition) which is not
deductible for tax purposes, the utilization of certain federal tax credits, and
the effect of state and local income taxes. The effective tax rate for the nine
months ended September 30, 2000 differed from the federal statutory tax rate
primarily due to amortization of goodwill, the utilization of certain federal
tax credits, the effect of state and local income taxes, recording of a
valuation allowance associated with certain tax benefits which are not likely to
be realized, the recognition of a tax reserve for the loss of certain tax
litigation relating to leveraged buyout costs and the effect of a gain from an
executive life insurance policy which is not subject to income taxes.
Net income for the nine months ended September 30, 2001 was $34.1 million
compared to a net loss of $124.4 million in the comparable 2000 period. The
Company's diluted earnings per share in the 2001 period was $.75 compared to a
loss of $2.64 per share in the 2000 period. In addition to the $11.2 million
federal excise tax credit, the current period included the $10.8 million pre-tax
charge related to the coal mining accident at Jim Walter Resources. Prior year
results also included pre-tax restructuring and impairment charges of $179.3
million. The
17
<Page>
current and prior period results also reflect the factors discussed in the
following segment analysis.
Segment Analysis:
HOMEBUILDING AND FINANCING
Net sales and revenues were $349.1 million for the nine months ended September
30, 2001, a decrease of $10.5 million from the quarter ended September 30, 2000.
During the nine months ended September 30, 2001, revenues decreased as the
Company completed fewer homes, but this was partially offset by an increase in
the average net selling price.
<Table>
<Caption>
--------------------------------- ------------------------ -------------------------
Nine months ended Nine months ended
September 30, 2001 September 30, 2000
--------------------------------- ------------------------ -------------------------
Homes Completed 2,942 3,239
--------------------------------- ------------------------ -------------------------
Average Net Selling Price $59,200 $57,600
--------------------------------- ------------------------ -------------------------
</Table>
Additionally, time charge income increased $3.5 million as the prepayment rate
increased to 5.9% for the nine months ended September 30, 2001 compared to 4.9%
for the comparable period in the prior year.
Operating income was $39.7 million for the nine months ended September 30, 2001
compared to $29.2 million in the prior year period. The $10.5 million increase
was principally caused by the increase in the time charge income, a reduction in
net interest cost associated with the instalment note portfolio, higher average
net selling prices and improved operating margins attributable to lower
materials costs and productivity improvements. These improvements were partially
offset by lower revenues from fewer unit completions.
INDUSTRIAL PRODUCTS
Net sales and revenues were $625.2 million for the nine months ended September
30, 2001, a decrease of $39.4 million from the $664.6 million for the nine
months ended September 30, 2000. This decrease is due to primarily to declines
in shipments at Sloss and JW Aluminum. Sloss' revenues decreased by $17.2
million from the comparable period a year earlier, principally due to reduced
sales of furnace coke. JW Aluminum also experienced lower shipments principally
due to the slowing economy and lower demand for its fin stock products used in
air conditioners. However, compared to the nine months ended September 30, 2000,
U.S. Pipe revenues were up 3% as shipments of fittings products increased and
the average selling price per ton for pipe products also increased.
Operating income of $48.0 million for the nine months ended September 30, 2001
was down $1.2 million from the $49.2 million for the nine months ended September
30, 2000. The 2000 period included $16.4 million of charges in the Industrial
Products segment taken in the second quarter primarily for inventory
obsolescence write-offs and environmental liabilities. Excluding these charges,
operating income at U.S. Pipe improved 9%, reflecting higher volume and improved
pricing for it's ductile iron pipe products. Higher energy and labor costs at
U.S. Pipe of approximately $7.8 million were offset by a $7.8 million reduction
in scrap iron costs. However, positive results at U.S. Pipe were offset by
decreases in operating income at JW Aluminum and Sloss, where declines in demand
for their products, primarily fin stock and furnace coke, were the primary
drivers for poor performance.
ENERGY SERVICES
Net sales and revenues were $292.7 million for the nine months ended September
30, 2001, an increase of $10.8 million from the nine months ended September 30,
2000. The increase is primarily due to increased prices and a change in sales
mix offset by a decline in volume. Operating income of $20.3 million, was $5.9
million above the
18
<Page>
prior year period due to ongoing productivity improvements, along with cost
reductions associated with last year's restructuring of its European operations
and a higher provision for losses on trade receivables in the prior year. These
improvements were offset by lower margins, as well as weaker performance by the
metals additive business.
NATURAL RESOURCES
Net sales and revenues were $203.0 million for the nine months ended September
30, 2001, an increase of $28.7 million from the $174.3 million in the prior year
period. Excluding the federal excise tax refund credit of $11.2 million, net
sales and revenues increased $17.5 million. This improvement is primarily
attributable to an increase in natural gas revenues, which rose $13.8 million,
resulting primarily from an increase in average selling price. Additionally,
coal revenues rose $3.7 million primarily due to an increase in average coal
selling prices, which was partially offset by a slight decrease in tons of coal
sold.
<Table>
<Caption>
-------------------------------------------------------- ------------------------- ------------------------
Nine months ended Nine months ended
September 30, 2001 September 30, 2000
-------------------------------------------------------- ------------------------- ------------------------
Average Natural Gas Selling Price (per MCF) $ 5.24 $ 3.34
-------------------------------------------------------- ------------------------- ------------------------
Average Coal Selling Price (per ton) $30.15 $28.23
-------------------------------------------------------- ------------------------- ------------------------
Tons of Coal Sold 4.8 million 5.0 million
-------------------------------------------------------- ------------------------- ------------------------
</Table>
For the nine months ended September 30, 2001, Natural Resources had operating
income of $9.5 million, compared to an operating loss of $189.8 million for the
nine months ended September 30, 2000. Excluding both the impact of the mining
accident and the gain from excise tax refund claims operating income was $9.1
million in the 2001 period. The loss in the prior year period included pre-tax
restructuring, impairment and other charges of $164.3 million. Excluding these
charges, the improvement in operating income was principally driven by
significant increases in natural gas prices, increased coal selling prices and a
7% decline in average production costs from improved productivity and successful
cost reduction efforts in the mining operation.
GENERAL CORPORATE EXPENSES
General corporate expenses were $23.9 million during the nine months ended
September 30, 2001 compared to $30.1 million for the nine months ended September
30, 2000. The prior year includes $4.9 million of restructuring costs
principally associated with executive severance. Excluding these charges, the
decline is principally attributable to cost reduction efforts, including a
reduction in headcount and other expenses at the corporate office.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Since December 31, 2000, total debt has decreased by $25.9 million. During the
nine month period ended September 30, 2001, net borrowings under the Mid-State
Trust IX Variable Funding Loan Agreement totaled $266.0 million. Payments on the
mortgage-backed/asset-backed notes amounted to $284.0 million. Other senior debt
decreased by $8.0 million. Since September 30, 2000 total debt has decreased by
$125.5 million. Subsequent to period end, on October 15, 2001 the Company made
its required $75.0 million principal payment on the term loan.
At September 30, 2001 borrowings under the Revolving Credit Facility totaled
$100.0 million. The Revolving Credit Facility includes a sub-facility for trade
and other standby letters of credit in an amount up to $75.0 million at any time
outstanding. At September 30, 2001 letters of credit with a face amount of $64.2
million were outstanding.
The Credit Facilities contain a number of significant covenants that, among
other things, restrict the ability of the Company and its subsidiaries to
dispose of assets, incur additional indebtedness, pay dividends, create liens on
assets, enter into capital leases, make investments or acquisitions, engage in
mergers or consolidations, or engage in certain transactions with subsidiaries
and affiliates and otherwise restrict corporate activities (including change of
19
<Page>
control and asset sale transactions). In addition, under the Credit Facilities,
the Company and its Restricted Subsidiaries is required to maintain specified
financial ratios and comply with certain financial tests. The most restrictive
of these limitations are requirements to maintain (a) a minimum interest
coverage ratio (the ratio of EBITDA to interest expense for the Company and its
Restricted Subsidiaries as defined in the Credit Facilities) of at least
2.50-to-1 and (b) a maximum leverage ratio (the ratio of indebtedness to EBITDA
for the Company and its Restricted Subsidiaries as defined in the Credit
Facilities) of not more than 3.75-to-1. The Company was in compliance with these
covenants at September 30, 2001.
The Trust IX Variable Funding Loan Agreement's covenants, among other things,
restrict the ability of Trust IX to dispose of assets, create liens and engage
in mergers or consolidations. The Company was in compliance with these covenants
at September 30, 2001.
Cash and cash equivalents were approximately $18.5 million at September 30,
2001. Operating cash flows for the nine months ended September 30, 2001 together
with issuance of long-term debt under the Mid-State Trust IX Variable Funding
Loan Agreement were primarily used for payments on the
mortgage-backed/asset-backed notes, capital expenditures, dividends and to
purchase 1.6 million shares of common stock under the stock repurchase program.
Cash provided by operating activities for the nine months ended September 30,
2001, was $111.6 million, principally reflecting operating income for the period
and non-cash charges for depreciation and amortization, offset by an increase in
working capital. The increase in working capital primarily reflected higher
receivables levels at U.S. Pipe from increased sales.
Because the Company's operating cash flow is significantly influenced by the
general economy and, in particular, levels of domestic construction activity,
current results should not necessarily be used to predict the Company's
liquidity, capital expenditures, investment in instalment notes receivable or
results of operations.
Capital expenditures totaled $54.5 million in the nine months ended September
30, 2001. These capital expenditures reflect the Company's ongoing commitment to
maintain safe, efficient plants and continually increase productivity.
Commitments for capital expenditures at September 30, 2001 were not significant;
however, it is estimated that gross capital expenditures for the year ending
December 31, 2001 will approximate $70-80 million. Actual expenditures in 2001
may be more or less than this amount, depending upon the level of earnings and
cash flow, or expansion opportunities in certain markets.
In the nine months ended September 30, 2001, the Company repurchased $16.4
million of its Common Stock. On April 2, 2001 the Board of Directors increased
the authorization to repurchase the Company's common stock to $25.0 million. As
of September 30, 2001, $13.0 million remained available for share repurchases
under this authorization.
The Board of Directors approved a $0.04 per share dividend payable March 15,
2001 to shareholders of record on February 15, 2001. The $0.04 per share
dividend reflects a one-time, non-recurring adjustment to the Company's regular
dividend rate of $0.03 per share because of a one-time dividend reporting period
of four months due to the change in fiscal year end. On April 26, 2001, the
Board of Directors declared a $0.03 per share dividend payable to shareholders
of record on May 16, 2001. On July 30, 2001, the Company declared a $0.3 per
share dividend for the three months ended June 30, 2001 payable to shareholders
of record on August 15, 2001. On November 7, 2001, the Company declared a $.03
per share dividend for the three months ended September 30, 2001 payable to
shareholders of record on November 21, 2001.
The Company believes that the Mid-State Trust IX Variable Funding Loan Agreement
will provide Mid-State Homes with the funds needed to purchase the instalment
notes and mortgages generated by Jim Walter Homes and its affiliates. It is
anticipated that one or more permanent financings similar to the previous
Mid-State Homes asset-
20
<Page>
backed financings will be required over the next several years to repay
borrowings under the Mid-State Trust IX Variable Funding Loan Agreement. In
order to facilitate these permanent financings, the Company completed a $750.0
million shelf offering effective on August 1, 2001. The Company believes that
under present operating conditions, sufficient cash flow will be generated to
make all required interest and principal payments on its indebtedness, to make
all its planned capital expenditures, to pay dividends, and meet substantially
all operating needs. It is further expected that amounts under the Revolving
Credit Facility will be sufficient to meet peak operating needs of the Company.
On November 9, 2001, Mid-State Trust X issued $394.1 million in Asset Backed
Note under its shelf issuance. The net proceeds from the transaction will be
used to repay borrowings under the Company's Mid-State Trust IX warehouse
facility, and will provide more than $50 million of liquidity for general
corporate purposes.
MARKET RISK
The Company is exposed to certain market risks inherent in the Company's
financial instruments. These instruments arise from transactions entered into in
the normal course of business. The Company is subject to interest rate risk on
its existing Credit Facilities, the Trust IX Variable Funding Loan Agreement,
and any future financing requirements.
The Company's primary market risk exposure relates to (i) the interest rate risk
on long-term and short-term borrowings and (ii) the impact of interest rate
movements on its ability to meet interest rate expense requirements and comply
with financial covenants. The Company has historically managed interest rate
risk through the periodic use of interest rate hedging instruments. There were
no such instruments outstanding at September 30, 2001. While the Company can not
predict its ability to refinance existing debt or the impact interest rate
movements will have on its existing debt, management continues to evaluate its
financial position on an ongoing basis.
The Company is at risk on its portfolio of instalment notes receivable. The
Company's instalment notes receivable are fixed rate and have terms ranging from
12 to 30 years. The Company manages its risk by periodically securitizing its
instalment notes into asset-backed trust agreements funded by fixed rate debt.
Therefore, the Company's asset/liability management requires a high degree of
analysis and estimation.
In the ordinary course of business, the Company is also exposed to commodity
price risks. These exposures primarily relate to the acquisition of raw
materials and the purchase and the sale of natural gas. The Company may
occasionally utilize derivative financial instruments to manage certain of these
exposures where it considers it practical to do so. In the first quarter of
2001, the Company entered into a commodity swap to hedge anticipated sales of
natural gas. At September 30, 2001, the Company had outstanding commodity swaps
with a notional amount of approximately 1.2 million cubic feet. These commodity
swaps, which cover the period from October through December of 2001, provide for
the Company to receive a weighted average fixed price of approximately $5.38 per
MMBTU and to pay a variable price that is substantially the same as the price to
be received by the Company from its sales contract with Southern Natural Gas.
For further information about the Company's use of derivative instruments, see
Note 8 of "Notes to Consolidated Financial Statements."
The Company is also subject to a limited amount of foreign currency risk, but
does not currently engage in any significant foreign currency hedging
transactions to manage exposure for transactions denominated in currencies other
than the U.S. dollar.
21
<Page>
NEW ACCOUNTING PRONOUNCEMENTS
On June 30, 2001, the Financial Accounting Standards Board finalized FAS 141,
"Business Combinations", and FAS 142, "Goodwill and Other Tangible Assets." FAS
141 requires all business combinations initiated after June 30, 2001, to be
accounted for using the purchase method of accounting. With the adoption of FAS
142 effective January 1, 2002, goodwill is no longer subject to amortization.
Rather, goodwill will be subject to at least an annual assessment for impairment
by applying a fair-value-based test. Under the new rules, an acquired intangible
asset should be separately recognized if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the intangible asset
can be sold, transferred, licensed, rented, or exchanged, regardless of the
acquirer's intent to do so. These intangible assets will be required to be
amortized over their useful lives. As of September 30, 2001, Walter had $425.3
million of goodwill, net of accumulated amortization of $548.3 million. The
Company estimates the adoption of FAS 142 effective January 1, 2002 will result
in the elimination of approximately $29.0 million of annual goodwill
amortization. However, the Company is in the process of analyzing the effect of
applying this new standard.
In June 2001, the Financial Accounting Standards Board issued FAS 143,
"Accounting for Asset Retirement Obligations." FAS 143 applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. This Statement
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. This Statement is effective
for financial statements issued for fiscal years beginning after June 15, 2002
with initial application required as of the beginning of an entity's fiscal
year. The Company is in the process of analyzing any potential effect of
applying this new standard.
In August 2001, the Financial Accounting Standards Board issued FAS 144,
"Accounting for Impairment or Disposal of Long-Lived Assets". This Statement
supersedes FAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-lived Assets to be Disposed of" and APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment." This
Statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company is in the process of analyzing
any potential effect of applying this new standard.
22
<Page>
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.
23
<Page>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item. 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) None
24
<Page>
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, 2001
25