<Page>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-Q/A
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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
4211 W. Boy Scout Boulevard, Tampa, Florida 33607
Telephone Number (813) 871-4811
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /.
There were 44,705,826 shares of common stock of the registrant outstanding
at July 31, 2001.
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<Page>
PART I--FINANCIAL INFORMATION
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
RESTATED
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
(UNAUDITED) (NOTE 1)
----------- -------------
(IN THOUSANDS, EXCEPT SHARE
AMOUNTS)
ASSETS
Cash and cash equivalents................................... $ 12,083 $ 11,513
Short-term investments, restricted.......................... 112,602 100,901
Marketable securities....................................... 3,905 1,980
Instalment notes receivable, net............................ 1,688,770 1,686,277
Receivables, net............................................ 270,504 239,620
Inventories................................................. 261,067 261,441
Prepaid expenses............................................ 11,579 13,079
Property, plant and equipment, net.......................... 478,097 480,361
Investments................................................. 12,956 13,226
Unamortized debt expense.................................... 40,310 42,432
Other long-term assets, net................................. 42,510 37,129
Goodwill, net............................................... 434,420 452,234
---------- ----------
$3,368,803 $3,340,193
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 160,738 $ 171,949
Accrued expenses............................................ 113,615 118,644
Income taxes payable........................................ 62,066 61,027
Debt
Mortgage-backed/asset-backed notes........................ 1,757,625 1,769,833
Other senior debt......................................... 435,550 411,500
Accrued interest............................................ 30,847 28,231
Deferred income taxes....................................... 27,365 11,976
Accumulated postretirement benefits obligation.............. 293,063 286,903
Other long-term liabilities................................. 54,961 54,679
Stockholders' equity
Common stock, $.01 par value per share:
Authorized--200,000,000 shares
Issued--55,366,518 and 55,355,184 shares................ 554 554
Capital in excess of par value............................ 1,159,728 1,162,767
Accumulated deficit....................................... (600,931) (620,688)
Treasury stock--10,550,692 and 9,296,592 shares, at
cost.................................................... (128,341) (116,113)
Accumulated other comprehensive income (loss)............. 1,963 (1,069)
---------- ----------
Total stockholders' equity............................ 432,973 425,451
---------- ----------
$3,368,803 $3,340,193
========== ==========
</Table>
See accompanying "Notes to Consolidated Financial Statements"
2
<Page>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
RESTATED
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
----------------------
2001 2000
--------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Sales and revenues:
Net sales................................................. $455,786 $ 444,641
Time charges.............................................. 56,080 53,593
Miscellaneous............................................. 5,822 10,820
-------- ---------
517,688 509,054
======== =========
Cost and expenses:
Cost of sales............................................. 368,133 370,971
Depreciation.............................................. 15,469 17,588
Selling, general and administrative....................... 49,357 64,369
Provision for losses on instalment notes.................. 2,424 2,532
Postretirement benefits................................... 2,933 5,441
Interest and amortization of debt expense................. 43,409 47,909
Amortization of goodwill and other intangibles............ 9,295 8,873
Restructuring and impairment charges...................... -- 167,866
-------- ---------
491,020 685,549
-------- ---------
Income (loss) before income taxes........................... 26,668 (176,495)
Income tax benefit (expense)................................ (12,337) 44,509
-------- ---------
Net income (loss)........................................... $ 14,331 $(131,986)
======== =========
Basic net income (loss) per share........................... $ .32 $ (2.80)
-------- ---------
Diluted net income (loss) per share......................... $ .32 $ (2.80)
======== =========
</Table>
See accompanying "Notes to Consolidated Financial Statements"
3
<Page>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
RESTATED
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
----------------------
2001 2000
--------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Sales and revenues:
Net sales................................................. $860,653 $ 846,092
Time charges.............................................. 110,778 108,573
Miscellaneous............................................. 10,695 18,043
-------- ---------
982,126 972,708
-------- ---------
Cost and expenses:
Cost of sales............................................. 693,045 684,601
Depreciation.............................................. 31,587 37,059
Selling, general and administrative....................... 97,628 119,576
Provision for losses on instalment notes.................. 4,868 5,269
Postretirement benefits................................... 8,405 10,906
Interest and amortization of debt expense................. 90,176 94,728
Amortization of goodwill and other intangibles............ 18,557 18,085
Restructuring and impairment charges...................... -- 167,866
-------- ---------
944,266 1,138,090
-------- ---------
Income (loss) before income taxes........................... 37,860 (165,382)
Income tax benefit (expense)................................ (18,103) 38,910
-------- ---------
Net income (loss)........................................... $ 19,757 $(126,472)
-------- ---------
Basic net income (loss) per share........................... $ .43 $ (2.67)
-------- ---------
Diluted net income (loss) per share......................... $ .43 $ (2.67)
-------- ---------
</Table>
See accompanying "Notes to Consolidated Financial Statements"
4
<Page>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
RESTATED
(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....................... $425,451 $(620,688) $(1,069) $554 $1,162,767 $(116,113)
Comprehensive income:
Net income................. 19,757 $19,757 19,757
Other comprehensive income,
net of tax:
Net unrealized gain on
hedge.................. 3,193 3,193 3,193
Foreign currency
translation
adjustment............. (161) (161) (161)
-------
Comprehensive income......... $22,789
-------
Stock issued on exercise of
stock options.............. 144 144
Purchases of treasury
stock...................... (12,228) (12,228)
Dividends paid............... (3,183) (3,183)
-------- --------- ------- ---- ---------- ---------
Balance at June 30, 2001..... $432,973 $(600,931) $ 1,963 $554 $1,159,728 $(128,341)
======== ========= ======= ==== ========== =========
</Table>
See accompanying "Notes to Consolidated Financial Statements"
5
<Page>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
RESTATED
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
---------------------
2001 2000
--------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss)......................................... $ 19,757 $(126,472)
Charges to income (loss) not affecting cash:
Depreciation............................................ 31,587 37,059
Provision for (benefit from) deferred income taxes...... 15,389 (54,370)
Accumulated postretirement benefits obligation.......... 6,160 4,883
Provision for other long-term liabilities............... 282 12,054
Amortization of goodwill and other intangibles.......... 18,557 18,085
Amortization of debt expense............................ 2,622 3,568
Restructuring and impairment charges.................... -- 167,866
--------- ---------
94,354 62,673
Decrease (increase) in assets:
Short-term investments, restricted...................... (11,701) 12,894
Marketable securities................................... (1,925) 36,819
Instalment notes receivable, net (a).................... (2,493) (16,324)
Trade and other receivables, net........................ (30,884) (20,617)
Inventories............................................. 374 (16,768)
Prepaid expenses........................................ 1,500 6,007
Increase (decrease) in liabilities:
Accounts payable........................................ (11,211) (10,769)
Accrued expenses........................................ (5,029) (8,293)
Income taxes payable.................................... 1,039 6,639
Accrued interest........................................ 2,616 (2,337)
--------- ---------
Cash flows from operating activities.................. 36,640 49,924
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment, net of
retirements............................................. (29,323) (42,358)
Decrease (increase) in investments and other assets....... (5,854) 1,099
--------- ---------
Cash flows used in investing activities............... (35,177) (41,259)
--------- ---------
FINANCING ACTIVITIES
Issuance of debt.......................................... 443,207 786,764
Retirement of debt........................................ (431,365) (804,536)
Additions to unamortized debt expense..................... (500) (1,950)
Purchases of treasury stock............................... (12,228) (15,191)
Dividends paid............................................ (3,183) (2,867)
Net unrealized gain on hedge.............................. 3,193 192
Exercise of employee stock options........................ 144 509
--------- ---------
Cash flows used in financing activities............... (732) (37,079)
--------- ---------
EFFECT OF EXCHANGE RATE ON CASH............................. (161) (475)
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 570 (28,889)
Cash and cash equivalents at beginning of period............ 11,513 57,508
--------- ---------
Cash and cash equivalents at end of period.................. $ 12,083 $ 28,619
========= =========
</Table>
- --------------------------
(a) Consists of sales and resales, net of repossessions and provision for losses
of $77.2 million and $58.9 million and cash collections on account and
payouts in advance of maturity of $79.7 million and $75.2 million,
respectively.
See accompanying "Notes to Consolidated Financial Statement"
6
<Page>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 (UNAUDITED)
RESTATED
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 six month periods ended
June 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/A for the transition period ended December 31,
2000.
NOTE 2--RESTATEMENTS
The following amounts have been restated for certain accounting policy
changes, collectively referred to as the "revised accounting policies" including
use of the interest method of revenue recognition on the instalment note
portfolio, related provision for losses on instalment notes, deferral and
amortization of note origination costs and the deferral of gains recognized upon
the sale of repossessed properties. Previously, time charges were included in
equal parts in each monthly payment (i.e. straight-line method) and taken into
income as collected.
Generally, the effect of the revised accounting policies was to reduce
revenues, including principally time-charge income which is reflected in net
sales and revenues, and to increase provision for losses on instalment notes.
The restatements reflect deferral and amortization of nominal gains on the sale
of repossessed properties and nominal deferral and amortization of note
origination costs. In addition, stockholders' equity increased by
$229.9 million as of December 31, 2000 the earliest date presented as a result
of the impact of the restatements discussed above, net of tax. Previously
reported selling, general and administrative expense amounts have been reduced
in each period presented to reflect the amount of provision for losses on
instalment notes that has been reclassified to a separate line item in the
restated format. All financial data in the Form 10-Q/A reflects the impact of
the
7
<Page>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001 (UNAUDITED)
RESTATED
NOTE 2--RESTATEMENTS (CONTINUED)
restatement. The following table summarizes the impact of applying the interest
method on the statement of operations and balance sheet:
<Table>
<Caption>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 2001 ENDED JUNE 30, 2001
------------------------ ------------------------
AS PREVIOUSLY AS AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
------------- -------- ------------- --------
Statement of operations data:
Net sales and revenues.......................... $516,547 $517,688 $980,002 $982,126
Cost of sales................................... 368,682 368,133 694,144 693,045
Selling, general and administrative............. 49,475 49,357 98,058 97,628
Provision for losses on instalment notes........ -- 2,424 -- 4,868
Income before income taxes...................... 27,284 26,668 39,075 37,860
Income tax expense.............................. (12,553) (12,337) (18,528) (18,103)
Net income...................................... $ 14,731 $ 14,331 $ 20,547 $ 19,757
Basic and diluted net income per share.......... $ .32 $ .32 $ .45 $ .43
</Table>
<Table>
<Caption>
AS OF JUNE 30, 2001
---------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
Balance sheet data:
Instalment notes receivable................................. $1,362,670 $1,698,070
Allowance for losses on instalment notes.................... (26,964) (9,300)
Inventories................................................. 261,649 261,067
Deferred income taxes--asset (liability).................... 96,004 (27,365)
Total assets................................................ 3,112,325 3,368,803
Accumulated deficit......................................... (830,044) (600,931)
Stockholders' equity........................................ 203,860 432,973
</Table>
8
<Page>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001 (UNAUDITED)
RESTATED
NOTE 2--RESTATEMENTS (CONTINUED)
<Table>
<Caption>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 2000 ENDED JUNE 30, 2000
------------------------- -------------------------
AS PREVIOUSLY AS AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
------------- --------- ------------- ---------
Statement of operations data:
Net sales and revenues......................... $ 507,658 $ 509,054 $ 972,360 $ 972,708
Cost of sales.................................. 371,553 370,971 685,786 684,601
Selling, general and administrative............ 64,703 64,369 120,443 119,576
Provision for losses on instalment notes....... -- 2,532 -- 5,269
Loss before income taxes....................... (176,275) (176,495) (162,513) (165,382)
Income tax benefit............................. 44,432 44,509 37,906 38,910
Net income (loss).............................. $(131,843) $(131,986) $(124,607) (126,472)
Basic and diluted net income (loss) per
share........................................ $ (2.79) $ (2.80) $ (2.63) $ (2.67)
</Table>
<Table>
<Caption>
DECEMBER 31, 2000
---------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
Balance sheet data:
Instalment notes receivable................................. $1,358,858 $1,696,577
Allowance for losses on instalment notes.................... (26,839) (10,300)
Inventories................................................. 262,002 261,441
Deferred income taxes--asset (liability).................... 111,818 (11,976)
Total assets................................................ 3,098,314 3,340,193
Accumulated deficit......................................... (850,591) (620,688)
Stockholders' equity........................................ 195,548 425,451
</Table>
NOTE 3--RESTRICTED SHORT-TERM INVESTMENTS
Restricted short-term investments at June 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
June 30, 2001 and Mid-State Trusts II, IV, V, VI, VII, and VIII at December 31,
2000 (the "Trusts") ($107.7 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 ($4.9 million and $6.8 million), respectively.
9
<Page>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001 (UNAUDITED)
RESTATED
NOTE 4--INSTALMENT NOTES RECEIVABLE--RESTATED (SEE NOTE 2)
The instalment notes receivable is summarized as follows (in thousands):
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
---------- -------------
Instalment Notes Receivable......................... $1,698,070 $1,696,577
Less: Allowance for losses on instalment notes...... (9,300) (10,300)
---------- ----------
Net................................................. $1,688,770 $1,686,277
========== ==========
</Table>
Activity in the allowance for losses on instalment notes is summarized as
follows (in millions):
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
--------- -------------
Balance at beginning of period......................... $10,300 $10,700
Provisions charged to income........................... 4,868 5,310
Charge-offs, net of recoveries......................... (5,868) (5,710)
------- -------
Balance at end of period............................... $ 9,300 $10,300
======= =======
</Table>
NOTE 5--INVENTORIES--RESTATED (SEE NOTE 2)
Inventories are summarized as follows (in thousands):
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
--------- -------------
Finished goods........................................ $159,654 $159,069
Goods in process...................................... 44,147 46,289
Raw materials and supplies............................ 51,797 49,387
Houses held for resale................................ 5,469 6,696
-------- --------
Total inventories..................................... $261,067 $261,441
======== ========
</Table>
10
<Page>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001 (UNAUDITED)
RESTATED
NOTE 6--DEBT
Debt, in accordance with its contractual terms, consisted of the following
(in thousands):
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
---------- -------------
Mortgage-Backed/Asset-Backed Notes:
Trust II Mortgage-Backed Notes.................... $ 129,200 $ 161,500
Trust IV Asset Backed Notes....................... 492,559 502,174
Trust V Variable Funding Loan..................... -- 161,000
Trust VI Asset Backed Notes....................... 299,612 309,803
Trust VII Asset Backed Notes...................... 261,842 272,192
Trust VIII Asset Backed Notes..................... 347,905 363,164
Trust IX Variable Funding Loan.................... 226,507 --
---------- ----------
1,757,625 1,769,833
---------- ----------
Other senior debt:
Walter Industries, Inc.
Revolving Credit Facility....................... 135,000 110,000
Term Loan....................................... 300,000 300,000
Other........................................... 550 1,500
---------- ----------
435,550 411,500
---------- ----------
Total............................................... $2,193,175 $2,181,333
========== ==========
</Table>
NOTE 7--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 six months ended June 30,
2001.................................................... 1,254 12,228
------ --------
Total held in treasury at June 30, 2001................... 10,551 $128,341
====== ========
</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 June 30, 2001,
$17.2 million remained available to repurchase shares under this authorization.
11
<Page>
NOTE 8--EARNINGS PER SHARE--RESTATED (SEE NOTE 2)
A reconciliation of the basic and diluted earnings per share computations
for the three and six months ended June 30, 2001 and 2000 are as follows (in
thousands, except per share data):
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------
2001 2000
------------------- ---------------------
BASIC DILUTED BASIC DILUTED
-------- -------- --------- ---------
Net income (loss).................... $14,331 $14,331 $(131,986) $(131,986)
======= ======= ========= =========
Shares of common stock outstanding:
Average number of common shares (a).. 44,974 44,974 47,179 47,179
Effect of diluted securities:
Stock options (b).................... -- 345 -- --
------- ------- --------- ---------
44,974 45,319 47,179 47,179
======= ======= ========= =========
Net income (loss) per share.......... $ .32 $ .32 $ (2.80) $ (2.80)
======= ======= ========= =========
</Table>
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
2001 2000
------------------- ---------------------
BASIC DILUTED BASIC DILUTED
-------- -------- --------- ---------
Net income (loss).................... $19,757 $19,757 $(126,472) $(126,472)
======= ======= ========= =========
Shares of common stock outstanding:
Average number of common shares (a).. 45,455 45,455 47,374 47,374
Effect of diluted securities:
Stock options (b).................... -- 241 -- --
------- ------- --------- ---------
45,455 45,696 47,374 47,374
======= ======= ========= =========
Net income (loss) per share.......... $ .43 $ .43 $ (2.67) $ (2.67)
======= ======= ========= =========
</Table>
- ------------------------
(a) The three and six months ended June 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.
(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.
NOTE 9--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
12
<Page>
NOTE 9--DERIVATIVES (CONTINUED)
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 June 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.
During the quarter ended June 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 $3.2 million of net gains on derivative instruments included in
accumulated other comprehensive income at June 30, 2001 is expected to be
reclassified, along with any additional gains or losses that may be incurred
after June 30, 2001, to earnings as actual natural gas sales occur during the
remaining six months of 2001.
13
<Page>
NOTE 10--SEGMENT INFORMATION--RESTATED (SEE NOTE 2)
Summarized financial information concerning the Company's reportable
segments is shown in the following tables (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
--------------------
2001 2000
-------- ---------
Sales and revenues:
Homebuilding and Financing........................... $118,055 $ 121,017
Industrial Products.................................. 218,180 228,756
Energy Services...................................... 112,496 99,773
Natural Resources.................................... 67,135 51,168
Other................................................ 1,822 8,340
-------- ---------
Sales and revenues................................. $517,688 $ 509,054
======== =========
Operating income (a):
Homebuilding and Financing........................... $ 14,437 $ 9,600
Industrial Products.................................. 17,552 5,271
Energy Services...................................... 9,654 3,437
Natural Resources.................................... 2,846 (170,961)
-------- ---------
Operating income (loss)............................ 44,489 (152,653)
Less: General corporate expense 8,716 12,523
Senior debt interest expense..................... 9,105 11,319
-------- ---------
Income (loss) before tax (expense) benefit........... 26,668 (176,495)
Income tax (expense) benefit......................... (12,337) 44,509
-------- ---------
Net income (loss).................................. $ 14,331 $(131,986)
======== =========
Depreciation:
Homebuilding and Financing........................... $ 1,061 $ 1,070
Industrial Products.................................. 9,069 7,539
Energy Services...................................... 1,456 1,819
Natural Resources.................................... 2,907 6,175
Other................................................ 976 985
-------- ---------
Total.............................................. $ 15,469 $ 17,588
======== =========
</Table>
- ------------------------
(a) Operating income amounts are after deducting amortization of goodwill and
other intangibles. A breakdown of amortization by segment is as follows (in
thousands):
<Table>
<Caption>
THREE MONTHS
ENDED
JUNE 30,
-------------------
2001 2000
-------- --------
Homebuilding and Financing............................... $4,272 $ 4,350
Industrial Products...................................... 2,617 2,635
Energy Services.......................................... 2,139 2,139
Natural Resources........................................ -- (8,021)
Other.................................................... 267 7,770
------ -------
$9,295 $ 8,873
====== =======
</Table>
14
<Page>
NOTE 10--SEGMENT INFORMATION--RESTATED (SEE NOTE 2) (CONTINUED)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
--------------------
2001 2000
-------- ---------
Sales and revenues:
Homebuilding and Financing........................... $231,771 $ 242,213
Industrial Products.................................. 415,845 425,231
Energy Services...................................... 198,116 192,024
Natural Resources.................................... 133,442 101,775
Other................................................ 2,952 11,465
-------- ---------
Sales and revenues................................. $982,126 $ 972,708
-------- ---------
Operating income (a):
Homebuilding and Financing........................... $ 23,941 $ 19,349
Industrial Products.................................. 32,389 23,465
Energy Services...................................... 14,818 12,207
Natural Resources.................................... 3,453 (179,212)
-------- ---------
Operating income (loss)............................ 74,601 (124,191)
Less: General corporate expense 16,320 18,589
Senior debt interest expense..................... 20,421 22,602
-------- ---------
Income (loss) before tax (expense) benefit........... 37,860 (165,382)
Income tax (expense) benefit......................... (18,103) 38,910
-------- ---------
Net income (loss).................................. $ 19,757 $(126,472)
======== =========
Depreciation:
Homebuilding and Financing........................... $ 2,149 $ 2,158
Industrial Products.................................. 18,562 15,950
Energy Services...................................... 3,126 3,527
Natural Resources.................................... 5,814 13,799
Other................................................ 1,936 1,625
-------- ---------
Total.................................................. $ 31,587 $ 37,059
======== =========
</Table>
- ------------------------
(a) Operating income amounts are after deducting amortization of goodwill and
other intangibles. A breakdown of amortization by segment is as follows (in
thousands):
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-------------------
2001 2000
-------- --------
Homebuilding and Financing.............................. $ 8,542 $ 9,112
Industrial Products..................................... 5,208 5,238
Energy Services......................................... 4,278 4,278
Natural Resources....................................... -- (8,457)
Other................................................... 529 7,914
------- -------
$18,557 $18,085
======= =======
</Table>
15
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION AND
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As more fully described in Note 2 of "Notes to Consolidated Financial
Statements," on January 28, 2002, the Company restated its previously issued
financial statements for certain accounting policy changes, collectively
referred to as the "revised accounting policies." Accordingly, all prior period
information presented herein has been restated to reflect these changes. Total
assets, net instalment notes receivable, allowance for losses, equity, certain
income statement amounts and net income were restated on this Form 10-Q/A from
amounts previously reported in the Company's Form 10-Q, as filed August 14,
2001. The principal differences result from a change in the method of
recognizing time charge income from the straight-line method to the interest
method, which also has a related impact on the allowance for losses. These
changes are reflected in the Homebuilding and Financing segment. The following
discussion of operating results includes the impact of these restatements.
This discussion should be read in conjunction with the consolidated
financial statements and notes thereto of Walter Industries, Inc. and
subsidiaries, particularly Note 10 of "Notes to Consolidated Financial
Statements," which presents sales and revenues and operating income by operating
segment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
Net sales and revenues for the three months ended June 30, 2001 were
$517.7 million, an increase of $8.6 million from the comparable three month
period in 2000. This increase in revenues primarily reflected approximately
$18 million of product shipments by the Energy Services segment that were
delayed from the first quarter to the second quarter of 2001. Additionally,
revenue growth at U.S. Pipe and in the Natural Resources segment was offset by
declines in unit sales of homes and lower demand for furnace coke and aluminum
products. Also, time charges increased $2.5 million principally as the result of
higher prepayments. Miscellaneous income decreased primarily because of
non-recurring revenue from life insurance policies of $6.4 million included in
the prior year.
Cost of sales, exclusive of depreciation, of $368.1 million was 80.8% of net
sales in the 2001 period versus $371.0 million and 83.4% 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. Exclusive of these charges, cost of sales increased in the current
period due to increased sales and higher energy costs. The decrease in cost of
sales as a percentage of net sales reflects lower material costs at U.S. Pipe
and Jim Walter Homes, improved productivity, cost reduction efforts and an
improved product mix. These improvements were partially offset by lost fixed
cost absorption in some of the Industrial Products businesses, lower gross
profit margins on petcoke sales and higher energy costs.
Depreciation for the three months ended June 30, 2001 was $15.5 million, a
decrease of $2.1 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 $49.4 million were 9.5% of
net sales and revenues in the 2001 period, compared to $64.4 million and 12.6%
in 2000. The prior year included approximately $11.4 of charges, 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, have contributed to
additional reductions in selling, general and administrative expenses.
16
<Page>
Provision for losses on instalment notes of $2.4 million were 4.3% of time
charges in the 2001 period, compared to $2.5 million and 4.7% in 2000.
Interest and amortization of debt expense was $43.4 million for the three
months ended June 30, 2001, as compared to $47.9 million in the same period of
2000. The average rate of interest for the three months ended June 30, 2001 was
7.6% as compared to 8.0% for the three months ended June 30, 2000. The prime
rate of interest was a range from 7.0% to 7.8% in the current year period
compared to a range of 9.0% to 9.5% in 2000.
The Company's effective tax rate for the three months ended June 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 three
months ended June 30, 2000 differed from the federal statutory tax rate
primarily due to amortization of goodwill, the utilization of certain federal
tax credits, recording of a valuation allowance associated with certain tax
benefits which are not likely to be realized and the recognition of a tax
reserve for the loss of certain tax litigation relating to leveraged buyout
costs.
Net income for the three months ended June 30, 2001 was $14.3 million
compared to a net loss of $132.0 million in the comparable 2000 period. The
Company's diluted earnings per share in the 2001 period was $0.32 compared to a
loss of $2.80 per share in the 2000 period. 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 $118.1 million for the three months ended
June 30, 2001, a decrease of $2.9 million from the quarter ended June 30, 2000.
During the three months ended June 30, 2001, revenues decreased as the Company
completed fewer homes, but this was partially offset by an increase in the
average net selling price. The average net selling price increased as a result
of new product options, amenity upgrades and consumer preference for more
upscale models.
<Table>
<Caption>
THREE MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001 2000
--------------- ---------------
Homes Completed........................... 998 1,092
Average Net Selling Price................. $58,400 $57,500
</Table>
In addition, time charge income increased $2.5 million principally as the
result of higher prepayments. The prepayment speed increased to 6.7% for the
quarter ended June 30, 2001 compared to 4.9% for the quarter ended June 30,
2000. Prepayment activity is expected to decrease in the third quarter as
refinancing applications have declined and mortgage rates have bottomed out.
The estimated backlog of homes to be constructed at June 30, 2001 was
$116.0 million compared to $99.0 million at December 31, 2000 and
$108.2 million at June 30, 2000. Due to more aggressive marketing efforts, gross
sales of new construction contracts for the first six months of the year
increased 12%, which is expected to translate into higher unit completions and
revenues in the second half of the year.
Operating income was $14.4 million for the three months ended June 30, 2001
compared to $9.6 million in the prior year period. The $4.8 million increase was
principally caused by the $2.5 million increase in time charges as well as
improved operating margins on home sales, attributable to lower materials cost
and productivity improvements. These improvements were partially offset by lower
revenues from fewer unit completions.
17
<Page>
INDUSTRIAL PRODUCTS
Net sales and revenues were $218.2 million for the three months ended
June 30, 2001, a decrease of $10.6 million from the $228.8 million for the three
months ended June 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
$7.7 million from the comparable period a year earlier, principally due to
reduced sales of furnace coke. JW Aluminum also experienced fewer shipments
during the current quarter, principally due to lower demand for its fin stock
products used in air conditioners. However, compared to the quarter ended
June 30, 2000, U.S. Pipe revenues were up 10% as shipment tonnage increased by
13,200 tons, or 7.5%, and the average selling price per ton for pipe products
increased with a slightly more favorable product mix.
The order backlog for U.S. Pipe at June 30, 2001 was $66.0 million compared
to $87.0 million at June 30, 2000 and $82.0 million at December 31, 2000.
Operating income of $17.6 million for the second quarter of 2001 was up
$12.3 million from the $5.3 million for the three months ended June 30, 2000.
The second quarter of 2000 included $16.4 million of charges in the Industrial
Product segment, primarily for inventory obsolescence write-offs and
environmental liabilities. Excluding these charges, operating income at U.S.
Pipe improved 28% reflecting strong demand for it's ductile iron pipe products
and continuing cost reductions and productivity improvements. Higher energy
costs at U.S. Pipe of approximately $1.4 million were more than offset by a
$3.0 million reduction in materials costs. However, strong results at U.S. Pipe
were more than offset by other decreases in operating income at Sloss Industries
and JW Aluminum. Sloss' operating income declined $4.5 million from last year,
due to lower demand for furnace coke. Sloss has recently received orders for
over 120,000 tons of furnace coke for the second half of this year, enabling a
return to more normal levels of production for the balance of the year. JW
Aluminum's operating income declined $3.1 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.
ENERGY SERVICES
Net sales and revenues were $112.5 million for the three months ended
June 30, 2001, an increase of $12.7 million from the three months ended
June 30, 2000. The increase in revenues primarily reflected product shipments
that were delayed from the first quarter to the second quarter of 2001.
Operating income of $9.7 million, was $6.2 million above the 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--a number of higher-priced contracts were replaced by
contracts with lower margins in the current period--as well as weaker
performance by its metals additive business. The metals additive business
continues to be impacted by the distressed domestic steel industry.
NATURAL RESOURCES
Net sales and revenues were $67.1 million for the three months ended
June 30, 2001, an increase of $15.9 million from the $51.2 million in the prior
year period. This improvement is attributable to an increase in natural gas
revenues, which rose $3.7 million due to an increase in average selling price.
18
<Page>
Additionally, coal revenues rose $12.6 million due to an increase in tons of
coal sold and an increase in average coal selling prices.
<Table>
<Caption>
THREE MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001 2000
--------------- ---------------
Average Natural Gas Selling Price (per
MCF).................................... $ 4.84 $ 3.36
Number of Natural Gas Wells............... 362 320
Average Coal Selling Price (per ton)...... $ 28.73 $ 27.82
Average Cost Per Ton Produced............. $ 27.74 $ 28.69
Tons of Coal Sold......................... 1.8 million 1.4 million
</Table>
For the three months ended June 30, 2001, Natural Resources had operating
income of $2.8 million, compared to an operating loss of $171.0 million for the
quarter ended June 30, 2000. The prior year included pre-tax restructuring,
impairment and other charges of $164.3 million. Excluding these charges, the
improvement in operating income was principally driven by higher coal and
natural gas selling prices, increased shipments and a 3.3% decline in average
production costs from successful cost reduction efforts in the mining
operations.
In the second half of 2001, coal prices are expected to increase
substantially as new contracts take effect. This is somewhat offset by weakness
in natural gas prices which are expected to be lower in the second half of 2001.
However, the Company has protected 50% of the natural gas revenue stream through
December 31, 2001 by entering into hedges earlier this year.
GENERAL CORPORATE EXPENSES
General corporate expenses were $8.7 million during the three months ended
June 30, 2001 compared to $12.5 million for the three months ended June 30,
2000. This decline is principally attributable to cost reduction efforts,
including a reduction in headcount and other expenses at the corporate office.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Net sales and revenues for the six months ended June 30, 2001 were
$982.1 million, an increase of $9.4 million from the comparable six month period
in 2000. Revenue growth at U.S. Pipe and within the Energy Services and Natural
Resources segments was partially offset by declines in unit sales of homes and
lower demand for furnace coke and aluminum products. Miscellaneous income
decreased $7.3 million, primarily because of non-recurring revenues from life
insurance policies of $8.8 million in the prior year.
Cost of sales, exclusive of depreciation, of $693.0 million was 80.5% of net
sales in the 2001 period versus $684.6 million and 80.9% 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. Exclusive of these charges, the increase in cost of sales was
principally the result of increased sales and higher energy costs. The decrease
in cost of sales as a percent of net sales reflects higher gross profit margins
driven by cost reductions and productivity improvements, including lower
materials cost for homebuilding and lower scrap iron cost for U.S. Pipe. This
was partially offset by lost fixed cost absorption in some of the Industrial
Products businesses, lower gross profit margins realized on petcoke sales and
higher energy costs.
Depreciation for the six months ended June 30, 2001 was $31.6 million, a
decrease of $5.5 million from the same period in 2000. This decrease was
primarily attributable to a lower depreciable asset
19
<Page>
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 $97.6 million were 9.9% of
net sales and revenues in the 2001 period, compared to $119.6 million and 12.3%
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, have contributed to
additional reductions in selling, general and administrative expenses.
Provision for losses on instalment notes of $4.9 million were 4.4% of time
charges in the 2001 period compared to $5.3 million and 4.9% in 2000.
Interest and amortization of debt expense was $90.2 million for the six
months ended June 30, 2001, as compared to $94.7 million in the same period of
2000. The average rate of interest was 7.9% for both the six months ended
June 30, 2001 and for the six months ended June 30, 2000. The prime rate of
interest was a range from 7.0% to 9.1% 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 six months ended June 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 six
months ended June 30, 2000 differed from the federal statutory tax rate
primarily due to amortization of goodwill, the utilization of certain federal
tax credits, 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 six months ended June 30, 2001 was $19.8 million compared
to a net loss of $126.5 million in the comparable 2000 period. The Company's
diluted earnings per share in the 2001 period was $.43 compared to a loss of
$2.67 per share in the 2000 period. 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 $231.8 million for the six months ended
June 30, 2001, a decrease of $10.4 million from the quarter ended June 30, 2000.
During the six months ended June 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>
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001 2000
--------------- ---------------
Homes Completed............................... 1,922 2,157
Average Net Selling Price..................... $58,500 $57,600
</Table>
Time charge income increased $2.2 million as the prepayment speed increased
slightly to 5.5% for the six months ended June 30, 2001 compared to 5.1% for the
comparable period in the prior year.
Operating income was $23.9 million for the six months ended June 30, 2001
compared to $19.3 million in the prior year period. The $4.6 million increase
was principally caused by improved operating margins on home sales, attributable
to lower materials costs and productivity improvements. These improvements were
partially offset by lower revenues from fewer unit completions.
20
<Page>
INDUSTRIAL PRODUCTS
Net sales and revenues were $415.8 million for the six months ended
June 30, 2001, a decrease of $9.4 million from the $425.2 million for the six
months ended June 30, 2000. The decrease is due primarily to declines in
shipments at Sloss and JW Aluminum. Sloss' revenues decreased by $14.4 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 six months ended June 30, 2000, U.S. Pipe
revenues were up 11% as shipment tonnage increased by 24,700 tons, or 7.9%, and
the average selling price per ton for pipe products increased with a slightly
more favorable product mix.
Operating income of $32.4 million for the six months ended June 30, 2001 was
up $8.9 million from the $23.5 million for the six months ended June 30, 2000.
The 2000 period included $16.4 million of charges in the Industrial Products
segment taken in the second quarter as described in "Results of Operations for
the Three Months ended June 30, 2001 and June 30, 2000" section. Excluding these
charges, operating income at U.S. Pipe improved 26%, reflecting strong demand
for it's ductile iron pipe products and continuing productivity improvements.
Higher energy costs at U.S. Pipe of approximately $5.0 million were more than
offset by a $6.5 million reduction in scrap iron costs. However, strong results
at U.S. Pipe were offset by decreases in operating income at JW Aluminum and
Sloss Industries 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 $198.1 million for the six months ended
June 30, 2001, an increase of $6.1 million from the six months ended June 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 $14.8 million, was
$2.6 million above the 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 $133.4 million for the six months ended
June 30, 2001, an increase of $31.7 million from the $101.8 million in the prior
year period. This improvement is primarily attributable to an increase in
natural gas revenues, which rose $13.9 million, resulting primarily from an
increase in average selling price. Additionally, coal revenues rose
$17.7 million primarily due to an increase in tons of coal sold, which was
partially offset by a slight decrease in average coal selling prices.
<Table>
<Caption>
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001 2000
--------------- ---------------
Average Natural Gas Selling Price (per MCF)... $ 5.91 $ 2.94
Average Coal Selling Price (per ton).......... $ 28.43 $ 28.83
Average Cost Per Ton Produced................. $ 28.91 $ 30.42
Tons of Coal Sold............................. 3.5 million 2.8 million
</Table>
For the six months ended June 30, 2001, Natural Resources had operating
income of $3.5 million, compared to an operating loss of $179.2 million for the
six months ended June 30, 2000. 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
21
<Page>
increases in natural gas prices, increased coal shipments and a 5% decline in
average production costs from successful cost reduction efforts in the mining
operations.
GENERAL CORPORATE EXPENSES
General corporate expenses were $16.3 million during the six months ended
June 30, 2001 compared to $18.6 million for the six months ended June 30, 2000.
This 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 increased by $11.8 million. During
the six month period ended June 30, 2001, net borrowings under the Mid-State
Trust IX Variable Funding Loan Agreement totaled $226.5 million. Payments on the
mortgage-backed/asset-backed notes amounted to $238.7 million. Other senior debt
increased by $24.1 million.
At June 30, 2001 borrowings under the Revolving Credit Facility totaled
$135.0 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 June 30, 2001 letters of credit with a face amount of
$58.4 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
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 June 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 June 30, 2001.
Cash and cash equivalents were approximately $12.1 million at June 30, 2001.
Operating cash flows for the six months ended June 30, 2001 together with
issuance of long-term debt under the Mid-State Trust IX Variable Funding Loan
Agreement and borrowings under the Revolving Credit Facility were primarily used
for payments on the mortgage-backed/asset-backed notes, capital expenditures,
dividends and to purchase 1.3 million shares of common stock under the stock
repurchase program.
Cash flow from operating activities for the six months ended June 30, 2001,
were $36.6 million, principally reflecting net 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.
22
<Page>
Capital expenditures totaled $30.4 million in the six months ended June 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 June 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 six months ended June 30, 2001, the Company repurchased
$12.2 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 June 30, 2001, $17.2 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 $0.03 per share dividend for the three months ended June 30, 2001
payable to shareholders of record on August 15, 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-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.
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 June 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.
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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 June 30, 2001, the Company had outstanding commodity swaps with
a notional amount of approximately 2.5 million cubic feet. These commodity
swaps, which cover the period from July through December of 2001, provide for
the Company to receive a weighted average fixed price of approximately $5.30 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 9 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.
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 June 30, 2001, Walter
had $434.5 million of goodwill, net of accumulated amortization of
$539.1 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 has not fully analyzed or
determined the effect of applying this new standard.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Form 10-Q/A 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/A, 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.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A substantial controversy exists with regard to federal income taxes
allegedly owed by the Company. See Note 11 of Notes to Consolidated Financial
Statements contained in the Company's Annual Report on Form 10-K/A for the
transition period ended December 31, 2000.
In July 2001, in a civil action pending in Jefferson County, Mississippi
involving the Company's homebuilding subsidiary (Jim Walter Homes, Inc.), a jury
awarded four plaintiffs compensatory damages aggregating $13.3 million. The case
involves three houses constructed by Jim Walter Homes and alleges that the
plaintiffs were promised quality, well-built houses and that Jim Walter Homes
failed to deliver on its promises. The houses had an average price of
approximately $45,000. Jim Walter Homes believes the verdict is not supported by
the evidence and has requested the trial judge to set aside or reduce the
verdict or order a new trial. While the final outcome of this matter cannot be
predicted with certainty, the Company believes that it will not have a material
adverse effect on the Company's consolidated financial condition.
The Company and its subsidiaries are parties to a number of other lawsuits
arising in the ordinary course of their businesses. Most of these cases are in a
preliminary stage and the Company is unable to predict a range of possible loss,
if any. The Company provides for costs relating to these matters when a loss is
probable and the amount is reasonably estimable. The effect of the outcome of
these matters on the Company's future results of operations cannot be predicted
because any such effect depends on future results of operations and the amount
and timing of the resolution of such matters. While the results of litigation
cannot be predicted with certainty, the Company believes that the final outcome
of such other litigation will not have a material adverse effect on the
Company's consolidated financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) None
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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.
<Table>
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 AND
PRINCIPAL FINANCIAL OFFICER PRINCIPAL ACCOUNTING OFFICER
Date: January 28, 2002
</Table>
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