<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 March 31, 2002
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-20537
WALTER INDUSTRIES, INC.
Incorporated in Delaware IRS Employer Identification No. 13-3429953
4211 W. Boy Scout Boulevard, Tampa, Florida 33607
Telephone Number (813) 871-4811
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes /X/ No / /.
There were 44,212,462 shares of common stock of the registrant outstanding at
April 30, 2002.
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PART I - FINANCIAL INFORMATION
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
March 31,
2002 December 31,
(unaudited) 2001
----------- -----------
ASSETS (in thousands, except share amounts)
- ------
Cash and cash equivalents $ 13,511 $ 11,536
Short-term investments, restricted 115,358 126,751
Marketable securities 1,874 1,499
Instalment notes receivable, net 1,692,063 1,689,773
Receivables, net 246,890 223,630
Inventories 258,804 252,781
Prepaid expenses 9,513 8,778
Property, plant and equipment, net 473,678 476,686
Assets held for sale 12,622 12,622
Investments 13,146 13,116
Unamortized debt expense 38,584 39,918
Other long-term assets, net 34,844 44,550
Goodwill and other intangibles, net 414,359 416,239
----------- -----------
$ 3,325,246 $ 3,317,879
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable $ 123,118 $ 115,293
Accrued expenses 131,442 142,565
Income taxes payable 67,995 68,536
Debt
Mortgage-backed/asset-backed notes 1,817,219 1,833,442
Other senior debt 324,000 308,500
Accrued interest 31,822 30,512
Deferred income taxes 32,234 33,656
Accumulated postretirement benefits obligation 296,802 296,178
Other long-term liabilities 48,086 48,546
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value per share:
Authorized - 200,000,000 shares
Issued - 55,389,654 and 55,379,270 shares 554 554
Capital in excess of par value 1,155,971 1,157,202
Accumulated deficit (563,955) (577,438)
Treasury stock - 11,178,292 and 11,103,292 shares, at cost (135,291) (134,565)
Accumulated other comprehensive loss (4,751) (5,102)
----------- -----------
Total stockholders' equity 452,528 440,651
----------- -----------
$ 3,325,246 $ 3,317,879
=========== ===========
</Table>
See accompanying "Notes to Consolidated Financial Statements"
2
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WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
For the three months ended
March 31,
------------------------
2002 2001
-------- --------
(in thousands, except per share amounts)
Sales and revenues:
Net sales $388,038 $404,867
Time charges 53,754 55,248
Miscellaneous 3,633 4,873
-------- --------
445,425 464,988
-------- --------
Cost and expenses:
Cost of sales 313,123 325,462
Depreciation 16,558 16,118
Selling, general and administrative 51,087 48,271
Provision for losses on instalment notes 1,481 2,444
Postretirement benefits 4,379 5,472
Interest and amortization of debt expense 40,341 46,767
Amortization of goodwill and other intangibles 1,880 9,262
-------- --------
428,849 453,796
-------- --------
Income before income tax expense 16,576 11,192
Income tax expense 3,093 5,765
-------- --------
Net income $ 13,483 $ 5,427
======== ========
Basic net income per share $ .30 $ .12
======== ========
Diluted net income per share $ .30 $ .12
======== ========
</Table>
See accompanying "Notes to Consolidated Financial Statements"
3
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WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
<Table>
<Caption>
Accumulated
Other
Comprehensive Accumulated Comprehensive Common Capital in Treasury
Total Income Deficit Income (Loss) Stock Excess Stock
-------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 $440,651 $ (577,438) $ (5,102) $ 554 $ 1,157,202 $ (134,565)
Comprehensive income:
Net income 13,483 $ 13,483 13,483
Other comprehensive income,
net of tax
Net unrealized gain on hedge 259 259 259
Foreign currency translation
adjustment 92 92 92
-----------
Comprehensive income $ 13,834
===========
Stock issued from option exercises 96 96
Dividends paid (1,327) (1,327)
Purchases of treasury stock (726) (726)
-------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2002 $452,528 $ (563,955) $ (4,751) $ 554 $ 1,155,971 $ (135,291)
======== =========== =========== =========== =========== ===========
</Table>
See accompanying "Notes to Consolidated Financial Statements"
4
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WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
For the three months ended
March 31,
---------------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES (in thousands)
Net income $ 13,483 $ 5,427
Charges to income not affecting cash:
Depreciation 16,558 16,118
Provision for deferred income taxes (1,424) (1,175)
Accumulated postretirement benefits obligation 624 3,801
Provision for other long-term liabilities (460) 117
Amortization of goodwill and other intangibles 1,880 9,262
Amortization of debt expense 1,386 1,440
--------- ---------
32,047 34,990
Decrease (increase) in assets:
Short-term investments, restricted 11,393 (4,450)
Marketable securities (375) (200)
Instalment notes receivable, net (a) (2,290) (2,842)
Trade and other receivables, net (23,260) 494
Inventories (6,023) (19,857)
Prepaid expenses (735) 124
Increase (decrease) in liabilities:
Accounts payable 7,825 (13,766)
Accrued expenses (11,123) 6,481
Income taxes payable (541) 6,186
Accrued interest 1,310 2,089
--------- ---------
Cash flows from operating activities 8,228 9,249
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment, net of retirements (13,548) (14,924)
Decrease (increase) in investments and other assets 9,676 (1,731)
--------- ---------
Cash flows used in investing activities (3,872) (16,655)
--------- ---------
FINANCING ACTIVITIES
Issuance of debt 160,601 302,803
Retirement of debt (161,324) (286,865)
Additions to unamortized debt expense (52) (333)
Purchases of treasury stock (726) (4,453)
Dividends paid (1,327) (1,831)
Net unrealized gain on hedge 259 369
Exercise of employee stock options 96 --
--------- ---------
Cash flows from (used in) financing activities (2,473) 9,690
--------- ---------
EFFECT OF EXCHANGE RATE ON CASH 92 (185)
--------- ---------
Net increase in cash and cash equivalents 1,975 2,099
Cash and cash equivalents at beginning of period 11,536 11,513
--------- ---------
Cash and cash equivalents at end of period $ 13,511 $ 13,612
========= =========
</Table>
(a) Consists of sales and resales, net of repossessions and provision
for losses of $105.8 million and $94.1 million and cash
collections on account and payouts in advance of maturity of
$103.5 million and $91.3 million, for the three months ended March
31, 2002 and 2001, respectively.
See accompanying "Notes to Consolidated Financial Statements"
5
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WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 2002
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
Certain reclassifications have been made to prior year's amounts to conform to
the current period classifications.
NOTE 2 - RESTRICTED SHORT-TERM INVESTMENTS
Restricted short-term investments at March 31, 2002 and December 31, 2001
include (i) temporary investment of reserve funds and collections on instalment
notes receivable owned by Mid-State Trusts II, IV, VI, VII, VIII, IX and X (the
"Trusts") ($109.5 million and $102.5 million, respectively), which are available
only to pay expenses of the Trusts and principal and interest on indebtedness of
the Trusts and (ii) miscellaneous other segregated accounts restricted to
specific uses ($5.8 million and $24.3 million), respectively.
NOTE 3 - MINE ACCIDENT RECEIVABLE
In September 2001, an explosion and fire occurred at one of the Company's mines
in Alabama. The accident caused extensive damage to the mine and resulted in the
deaths of thirteen employees. For the three months ended March 31, 2002,
approximately $7.3 million is expected to be recovered from business
interruption insurance and has been recorded in the statement of operations.
Approximately $21.6 million and $13.8 million of business interruption and
property and casualty insurance receivables were included in the consolidated
balance sheet at March 31, 2002 and December 31, 2001, respectively. Through
March 31, 2002, approximately $5.0 million of insurance proceeds had been
received.
NOTE 4 - INSTALMENT NOTES RECEIVABLE
The instalment notes receivable is summarized as follows (in thousands):
<Table>
<Caption>
March 31, December 31,
2002 2001
----------- -----------
Instalment Notes Receivable $ 1,703,063 $ 1,700,773
Less: Allowance for losses on instalment notes (11,000) (11,000)
----------- -----------
Net $ 1,692,063 $ 1,689,773
=========== ===========
</Table>
6
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Activity in the allowance for losses on instalment notes is summarized as
follows (in thousands):
<Table>
<Caption>
For the three months ended
--------------------------
March 31, March 31,
2002 2001
-------- --------
Balance at beginning of period $ 11,000 $ 10,300
Provisions charged to income 1,481 2,444
Charge-offs, net of recoveries (1,481) (3,144)
-------- --------
Balance at end of period $ 11,000 $ 9,600
======== ========
</Table>
NOTE 5 - INVENTORIES
Inventories are summarized as follows (in thousands):
<Table>
<Caption>
March 31, December 31,
2002 2001
-------- --------
Finished goods $152,412 $155,898
Goods in process 43,837 34,630
Raw materials and supplies 57,254 56,425
Houses held for resale 5,301 5,828
-------- --------
Total inventories $258,804 $252,781
======== ========
</Table>
NOTE 6 - DEBT
Debt, in accordance with its contractual terms, consisted of the following (in
thousands):
<Table>
<Caption>
March 31, December 31,
2002 2001
---------- ----------
Mortgage-Backed/Asset-Backed Notes and
Variable Funding Loan:
Trust II Mortgage-Backed Notes $ 80,750 $ 96,900
Trust IV Asset Backed Notes 471,879 477,803
Trust VI Asset Backed Notes 279,788 286,131
Trust VII Asset Backed Notes 244,660 250,558
Trust VIII Asset Backed Notes 320,088 330,797
Trust IX Variable Funding Loan 34,501 --
Trust X Asset Backed Notes 385,553 391,253
---------- ----------
1,817,219 1,833,442
---------- ----------
Other senior debt:
Walter Industries, Inc.
Revolving Credit Facility 99,000 83,500
Term Loan 225,000 225,000
---------- ----------
324,000 308,500
---------- ----------
Total $2,141,219 $2,141,942
========== ==========
</Table>
NOTE 7 - INCOME TAXES
During the first quarter of 2002, the Company's capital loss carryforward
increased, which resulted in a $2.8 million decrease in income tax expense. This
increase was due to a change in the consolidated return loss disallowance rules
which favorably affected the Company's previous treatment of the November 1998
sale of JW Window Components.
7
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NOTE 8 - 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, 2001 11,103 $134,565
Share repurchases for the three months
ended March 31, 2002 75 726
-------- --------
Total held in treasury at March 31, 2002 11,178 $135,291
======== ========
</Table>
NOTE 9 - EARNINGS PER SHARE
A reconciliation of the basic and diluted earnings per share computations for
the three months ended March 31, 2002 and 2001 are as follows (in thousands,
except per share data):
<Table>
<Caption>
For the three months ended March 31,
----------------------------------------------------
2002 2001
---------------------- ----------------------
Basic Diluted Basic Diluted
------- ------- ------- -------
Net income $13,483 $13,483 $ 5,427 $ 5,427
======= ======= ======= =======
Shares of common stock outstanding:
Average number of common shares(a) 44,242 44,242 45,733 45,733
Effect of diluted securities:
Stock options (b) 331 129
------- ------- ------- -------
44,242 44,573 45,733 45,862
======= ======= ======= =======
Net income per share $ .30 $ .30 $ .12 $ .12
======= ======= ======= =======
</Table>
(a) Average shares include 3,880 shares issued to an escrow account on
September 13, 1995 pursuant to the Consensual Plan, but do not include
shares held in treasury.
(b) Represents the number of shares of common stock issuable on the exercise
of dilutive employee stock options less the number of shares of common
stock which could have been purchased with the proceeds from the exercise
of such options. These purchases were assumed to have been made at the
higher of either the market price of the common stock at the end of the
period or the average market price for the period.
On February 7, 2002, the Company declared a $.03 per share dividend for the
three months ended December 31, 2001 payable to shareholders of record on
February 20, 2002. On April 29, 2002, the Company declared a $.03 per share
dividend for the three months ended March 31, 2002 payable to shareholders of
record on May 15, 2002.
8
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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
March 31,
---------------------------
2002 2001
--------- ---------
Sales and revenues:
Homebuilding $ 63,511 $ 54,157
Financing 58,801 62,037
Industrial Products 147,790 181,694
Carbon and Metals 121,746 105,098
Natural Resources 56,917 66,307
Other 1,588 1,827
Consolidating Eliminations (4,928) (6,132)
--------- ---------
Sales and revenues $ 445,425 $ 464,988
========= =========
Operating income (a) :
Homebuilding $ 3,125 $ (960)
Financing 11,906 11,718
Industrial Products 7,322 16,285
Carbon and Metals 3,942 3,716
Natural Resources 5,047 607
Consolidating Eliminations (828) (1,283)
--------- ---------
Operating income 30,514 30,083
Less: General corporate expense 9,030 7,575
Senior debt interest expense 4,908 11,316
--------- ---------
Income before tax expense 16,576 11,192
Income tax expense 3,093 5,765
--------- ---------
Net income $ 13,483 $ 5,427
========= =========
Depreciation:
Homebuilding $ 940 $ 1,054
Financing 51 34
Industrial Products 8,217 8,158
Carbon and Metals 2,987 3,006
Natural Resources 3,349 2,907
Other 1,014 959
--------- ---------
Total $ 16,558 $ 16,118
========= =========
</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
March 31,
---------------------------
2002 2001
--------- ---------
Homebuilding $ -- $ 2,219
Financing 1,692 2,051
Industrial Products -- 2,572
Carbon and Metals -- 2,157
Natural Resources -- --
Other 188 263
--------- ---------
$ 1,880 $ 9,262
========= =========
</Table>
9
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NOTE 11 - GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF FAS STATEMENT 142
The Company adopted FAS No. 142, "Goodwill and Other Intangible Assets" on
January 1, 2002 and no longer amortizes goodwill with an indefinite life. The
Company continues to amortize Goodwill applicable to Mid-State Home's
installment note assets which have a definite life. The Company is still in the
process of analyzing any potential impairment of Goodwill and expects to
conclude its assessment in the second quarter of 2002. The following is a
reconciliation of reported net income to adjusted net income after adding back
all amortization that has been discontinued effective January 1, 2002:
<Table>
<Caption>
For the three For the three
Months ended Months ended
March 31, 2002 March 31, 2001
-------------- --------------
Reported net income $ 13,483 $ 5,427
Add back: Goodwill amortization (net of tax) -- 6,272
---------- ----------
Adjusted net income $ 13,483 $ 11,699
========== ==========
Basic and Diluted Earnings Per Share:
Reported earnings per share $ 0.30 $ 0.12
Add back: Goodwill amortization (net of tax) -- 0.14
---------- ----------
Adjusted earnings per share $ 0.30 $ 0.26
========== ==========
</Table>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Income Tax Litigation - A substantial controversy exists with regard to federal
income taxes allegedly owed by the Company. See Note 10 of Notes to Consolidated
Financial Statements contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
Miscellaneous Litigation - The Company and its subsidiaries are parties to a
number of other lawsuits arising in the ordinary course of their businesses.
Most of these cases are in a preliminary stage and the Company is unable to
predict a range of possible loss, if any. The Company provides for costs
relating to these matters when a loss is probable and the amount is reasonably
estimable. The effect of the outcome of these matters on the Company's future
results of operations cannot be predicted because any such effect depends on
future results of operations and the amount and timing of the resolution of such
matters. While the results of litigation cannot be predicted with certainty, the
Company believes that the final outcome of such other litigation will not have a
materially adverse effect on the Company's consolidated financial condition.
10
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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 its subsidiaries,
particularly Note 10 of "Notes to Consolidated Financial Statements," which
presents sales and revenues and operating income by operating segment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
Net sales and revenues for the three months ended March 31, 2002 were $445.4
million, a decrease of $19.6 million from the quarter ended March 31, 2001.
Revenue decline within the Industrial Products and Natural Resources segments
were partially offset by increases in the Homebuilding and Carbon and Metals
segments. Industrial Products shipped fewer tons of pipe and aluminum products,
reflecting the impact the national recession is having on demand for these
products. Revenues were lower in Natural Resources due to a decline in natural
gas prices and fewer tons of coal being shipped due to the Mine No. 5 shutdown.
Homebuilding revenues increased on higher unit completions and average selling
prices, while Carbon and Metals had an increase in shipments and new terminal
business.
Cost of sales, exclusive of depreciation, of $313.1 million was 80.7% of net
sales in the 2002 period versus $325.5 million and 80.4% of net sales in the
comparable period of 2001. The decrease of $12.3 million is primarily due to
reduced volumes in the Industrial Products and Natural Resources segments.
Depreciation for the three months ended March 31, 2002 was $16.6 million, an
increase of $0.4 million from the same period in 2001.
Selling, general and administrative expenses of $51.1 million were 11.5% of net
sales and revenues in the 2002 period, compared to $48.3 million and 10.4% in
2001. The increase in expenses for the current period was due to a $2.6 million
charge to bad debt expense related to a Carbon and Metal's customer that filed
for bankruptcy protection during the quarter, as well as an increase in
professional fees related to converting Mid-State Homes accounting for time
charge income to the interest method. These increases were partially offset by
decreases related to various productivity and cost reduction projects in place
throughout the Company.
Provision for losses on instalment notes decreased to $1.5 million in the 2002
period, compared to $2.4 million in 2001 due to improved portfolio performance.
Interest and amortization of debt expense was $40.3 million in the 2002 period,
a decrease of $6.4 million from the same period in 2001 primarily due to lower
interest rates and reduced borrowings. The average rate of interest for the
three months ended March 31, 2002 was 7.27% as compared to 7.97% for the three
months ended March 31, 2001.
Amortization expense for goodwill and other definite-lived intangibles was $1.9
million in the 2002 period, compared to $9.3 million from the same period in
2001. The decrease of $7.4 million was due to the adoption of FAS No. 142
"Goodwill and Other Intangible Assets" as of January 1, 2002 which requires the
discontinuance of amortization for all goodwill and indefinite-lived assets.
The Company's effective tax rate for the three months ended March 31, 2002
differed from the federal statutory tax rate primarily due to a $2.8 million tax
benefit related to the November 1998 sale of JW Window Components, amortization
of intangible assets, the utilization of certain federal tax credits, and the
effect of state and local income taxes. The $2.8 million tax benefit was from an
increased capital loss carryforward due to a change in the
11
<Page>
consolidated return loss disallowance rules, which favorably affected the
Company's previous treatment of the November 1998 sale of JW Window Components.
The effective tax rate for the three months ended March 31, 2001 differed from
the federal statutory tax rate primarily due to amortization of goodwill, the
utilization of certain federal tax credits, and the effect of state and local
income taxes.
Net income for the three months ended March 31, 2002 was $13.5 million compared
to $5.4 million in the comparable 2001 period. The Company's diluted earnings
per share in the 2002 period was $0.30 compared to $0.12 in the 2001 period. The
current and prior period results also include the impact of the factors
discussed in the following segment analysis.
Segment Analysis:
HOMEBUILDING
Net sales and revenues were $63.5 million for the three months ended March 31,
2002, an increase of $9.4 million from the quarter ended March 31, 2001. As
compared to the prior year, for the three months ended March 31, 2002, the
Company completed more homes and had an increase in average net selling price.
Average net selling price increased as a result of new product options, amenity
upgrades and consumer preference for more upscale models.
<Table>
<Caption>
----------------------------- ------------------------ -------------------------
Three months ended Three months ended
March 31, 2002 March 31, 2001
----------------------------- ------------------------ -------------------------
Homes Completed 1,020 924
----------------------------- ------------------------ -------------------------
Average Net Selling Price $61,800 $58,600
----------------------------- ------------------------ -------------------------
</Table>
The estimated backlog of homes to be constructed at March 31, 2002 was $123.2
million compared to $110.9 million at December 31, 2001 and $101.7 million at
March 31, 2001.
Operating income was $3.1 million for the three months ended March 31, 2002
compared to an operating loss of $1.0 million in the prior year period. The $4.1
million increase was principally caused by a $2.2 million decrease in goodwill
amortization, improved operating margins on home sales and increased unit
completions. Margins increased principally from higher average selling prices
and productivity improvements.
FINANCING
Net sales and revenues were $58.8 million in the 2002 period, a decrease of $3.2
million from $62.0 million for the prior year period. The decrease was primarily
attributable to lower interest income generated from restricted cash balances.
Operating income was $11.9 million in the 2002 period, up slightly from $11.7
million in the prior year, primarily as the result of a lower loss provision due
to better portfolio performance. Repossession inventory units declined by 12%
during the quarter, primarily reflecting lower foreclosure activity and a heavy
emphasis on selling slow-moving units. Delinquencies (the percentage of amounts
outstanding over 30 days past due) declined from 7.6% at December 31, 2001 to
6.5% at March 31, 2002.
INDUSTRIAL PRODUCTS
Net sales and revenues were $147.8 million for the three months ended March 31,
2002, a decrease of $33.9 million from $181.7 million for the three months ended
March 31, 2001. The decrease is due primarily to fewer shipments and a decrease
in average price per ton for pipe products, as well as a decrease in aluminum
product shipments, all of which are attributable to the national recession.
Compared to the quarter ended March 31, 2001, U.S. Pipe revenues were down 18%
and pipe shipments decreased 22% , while aluminum shipments for the 2002 period
were 9% lower than the 2001 period.
12
<Page>
The order backlog for U.S. Pipe at March 31, 2002 was $98.2 million compared to
$75.2 million at December 31, 2001.
Operating income of $7.3 million for the first quarter of 2002 was down $9.0
million from $16.3 million for the three months ended March 31, 2001. Operating
income decreased due to the lower volume of pipe and aluminum sales, as well as
a decrease in prices for pipe and a shift in the mix of aluminum products from
higher margin fin stock to lower margin building products. These were partially
offset by a $2.6 million reduction in goodwill amortization, improved
productivity and decreases in scrap iron and other costs.
CARBON AND METALS
Net sales and revenues were $121.7 million for the three months ended March 31,
2002, an increase of $16.6 million from the same period in the prior year. The
increase in the current period is a result of higher calcined coke revenues,
which reflect a pass-through of higher product costs, the launch of in-refinery
services at two Gulf Coast refineries, and an increase in furnace coke sales.
This was partially offset by a decrease in average selling price of furnace coke
in the current quarter as compared to the prior year.
Operating income of $3.9 million, was $0.2 million above the prior year.
Operating income increased as a result of the higher volumes in the 2002 period,
cost reduction initiatives and the $2.1 million reduction in goodwill
amortization. These were offset by lower margins and a $2.6 million charge to
selling, general and administrative expense as a result of a customer bankruptcy
at Sloss.
NATURAL RESOURCES
Net sales and revenues were $56.9 million for the three months ended March 31,
2002, a decrease of $9.4 million from the $66.3 million in the prior year
period. The decrease in net sales and revenues in the current period is
attributable to fewer coal tons shipped and a decrease in methane gas selling
prices, which was partially offset by an increase in coal selling prices. The
decrease in coal tons sold is primarily due to the continued shutdown at Mine
No. 5. The Company anticipates being fully operational at this mine by the end
of the second quarter of 2002.
<Table>
<Caption>
----------------------------------------------- ------------------------- ------------------------
Three months ended Three months ended
March 31, 2002 March 31, 2001
----------------------------------------------- ------------------------- ------------------------
Average natural gas selling price (per MCF) $2.25 $6.84
----------------------------------------------- ------------------------- ------------------------
Billion cubic feet of natural gas sold 9.7 9.9
----------------------------------------------- ------------------------- ------------------------
Number of natural gas wells 363 325
----------------------------------------------- ------------------------- ------------------------
Average coal selling price (per ton) $35.57 $28.11
----------------------------------------------- ------------------------- ------------------------
Tons of Coal Sold 1.4 million 1.7 million
----------------------------------------------- ------------------------- ------------------------
</Table>
For the three months ended March 31, 2002, Natural Resources had operating
income of $5.0 million, compared to $0.6 million for the quarter ended March 31,
2001. Operating income improved due to a 18% decrease in average cost per ton of
coal produced and increased coal selling prices, which was partially offset by a
decrease in the selling price of natural gas as compared to prior year. The
Company's business interruption insurance continues to offset the impact of
limited production and shipments at Mine No. 5. During the first quarter of
2002, operating income includes approximately $7.3 million of income from
business interruption insurance.
13
<Page>
GENERAL CORPORATE EXPENSES
General corporate expenses were $9.0 million during the three months ended March
31, 2002 compared to $7.6 million for the three months ended March 31, 2001. The
increase was principally due to higher professional fees related to converting
Mid-State Homes' accounting for time charge income to the interest method.
FINANCIAL CONDITION
Net receivables, consisting principally of trade receivables, were $246.9
million at March 31, 2002, an increase of $23.3 million from December 31, 2001.
Net receivables increased $15.0 million due to insurance claims related to the
accident at one of the Company's mines and also increased due to the increase in
net sales from the fourth quarter of 2001 to the first quarter of 2002.
Accrued expenses of $131.4 million at March 31, 2002 decreased $11.1 million
compared to December 31, 2002 due to the timing of certain payroll related
expenses.
The allowance for losses on instalment notes receivable was $11.0 million at
March 31, 2002 and December 31, 2001. Delinquencies (the percentage of amounts
outstanding over 30 days past due) declined from 7.6% at December 30, 2001 to
6.5% at March 31, 2002. Activity in the allowance for losses on instalment notes
is summarized as follows (in thousands):
<Table>
<Caption>
For the three months ended
--------------------------
March 31, March 31,
2002 2001
-------- --------
Balance at beginning of period $ 11,000 $ 10,300
Provisions charged to income 1,481 2,444
Charge-offs, net of recoveries (1,481) (3,144)
-------- --------
Balance at end of period $ 11,000 $ 9,600
======== ========
</Table>
LIQUIDITY AND CAPITAL RESOURCES
Since December 31, 2001, total debt has decreased by $0.7 million. During the
three month period ended March 31, 2002, net borrowings under the Mid-State
Trust IX Variable Funding Loan Agreement totaled $34.5 million. Payments on the
mortgage-backed/asset-backed notes amounted to $50.7 million. Other senior debt
increased by $15.5 million, principally to fund the increased insurance
receivable outstanding at Jim Walter Resources.
At March 31, 2002 borrowings under the Revolving Credit Facility totaled $99.0
million, an increase of $15.5 million compared to December 31, 2001. The
Revolving Credit Facility includes a sub-facility for trade and other standby
letters of credit in an amount up to $75.0 million at any time outstanding. At
March 31, 2002 letters of credit with a face amount of $62.0 million were
outstanding. At March 31, 2002 approximately $189.0 million was available under
the revolving credit facility.
The Credit Facilities contain a number of significant covenants that, among
other things, restrict the ability of the Company and its subsidiaries to
dispose of assets, incur additional indebtedness, pay dividends, create liens on
assets, enter into capital leases, make investments or acquisitions, engage in
mergers or consolidations, or engage in certain transactions with subsidiaries
and affiliates and otherwise restrict corporate activities (including change of
control and asset sale transactions). In addition, under the Credit Facilities,
the Company and its Restricted Subsidiaries are required to maintain specified
financial ratios and comply with certain financial tests. The Company was in
compliance with these covenants at March 31, 2002.
The Trust IX Variable Funding Loan Agreement's covenants, among other things,
restrict the ability of Trust IX to dispose of assets, create liens and engage
in mergers or consolidations. The Company was in compliance with these covenants
at March 31, 2002. Trust IX originally expired February 4, 2002, but was renewed
to February 23, 2003.
14
<Page>
STATEMENT OF CASH FLOWS
Cash and cash equivalents were approximately $13.5 million at March 31, 2002.
Operating cash flows for the three months ended March 31, 2002 together with
borrowings under the Revolving Credit Facility were primarily used for capital
expenditures, dividends and to purchase 75,000 shares of common stock under the
stock repurchase program.
Cash flow from operating activities for the three months ended March 31, 2002,
were $8.2 million, principally representing 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 reflected higher inventory
levels at U.S. Pipe and JW Aluminum, higher receivables at Natural Resources and
lower accrued expenses.
Capital expenditures totaled $14.3 in the three months ended March 31, 2002.
Commitments for capital expenditures at March 31, 2002 were not significant;
however, it is estimated that gross capital expenditures for the year ending
December 31, 2002 will approximate $75 - $85 million. Actual expenditures in
2002 may be more or less than this amount, depending upon the level of earnings
and cash flow, or expansion opportunities in certain markets.
In the three months ended March 31, 2002, the Company spent $0.7 million to
repurchase 75,000 shares of its Common Stock. In February 2002, the Board of
Directors increased the Company's stock buyback authorization to $25.0 million.
During the first quarter of 2002, the Board of Directors approved a $0.03 per
share dividend payable March 20, 2002 to shareholders of record on February 20,
2002. On April 29, 2002, the Board of Directors declared a $0.03 per share
dividend payable on June 12, 2002 to shareholders of record on May 15, 2002.
MARKET RISK
The Company is exposed to certain market risks inherent in the Company's
financial instruments. These instruments generally arise from transactions
entered into in the normal course of business. The Company's primary market risk
exposures relate to (i) interest rate risk on the instalment notes receivable
portfolio and (ii) interest rate risk on short- and long-term borrowings. In the
past, the Company has periodically used derivative financial instruments to
manage interest rate risk. At March 31, 2002 there were no such instruments
outstanding.
In the ordinary course of business, the Company is also exposed to commodity
price risks. These exposures primarily relate to the acquisition of raw
materials and anticipated purchases and sales of natural gas. The Company
occasionally utilizes derivative commodity instruments to manage certain of
these exposures where considered practical to do so. As of March 31, 2002, swap
contracts to hedge anticipated purchases in 2002 of natural gas totaling 330,116
mmbtu were outstanding at prices ranging from $2.87 to $3.45 per mmbtu. At March
31, 2002, the net unrealized loss from these hedging instruments, was recorded
in other liabilities and accumulated other comprehensive (loss). In April 2002,
the Company entered into another swap contract to hedge anticipated purchases in
2002 of natural gas totaling 200,000 mmbtu at prices ranging from $2.51 to
$3.11.
During April 2002, the Company hedged natural gas production of 1,800,000 mmbtu
at prices ranging from $2.73 to $3.47 with swap contracts. These swap contracts
effectively convert a portion of forecasted sales at floating-rate natural gas
prices to a fixed-rate basis. If there are differences between natural gas
prices and the swap contracts during the year, these swap contracts may result
in material net payments from or to the Company that will be recognized and
included in net sales in the statement of operations.
The Company is also subject to a limited amount of foreign currency risk, but
does not currently utilize any significant derivative foreign currency
instruments to manage exposures for transactions denominated in currencies other
than the U.S. dollar.
15
<Page>
NEW ACCOUNTING PRONOUNCEMENTS
On April 30, the Financial Accounting Standards Board issued FAS 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". FAS 145 eliminates the requirement that
gains and losses from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect and
eliminates an inconsistency between the accounting for sale-leaseback
transactions and certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. Generally, FAS 145 is effective for
transactions occurring after May 15, 2002. The adoption of the standard will
have no impact to the Company.
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.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
A substantial controversy exists with regard to federal income taxes
allegedly owed by the Company. See Note 10 of Notes to Consolidated
Financial Statements contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2001.
The Company and its subsidiaries are parties to a number of other
lawsuits arising in the ordinary course of their businesses. Most of
these cases are in a preliminary stage and the Company is unable to
predict a range of possible loss, if any. The Company provides for
costs relating to these matters when a loss is probable and the amount
is reasonably estimable. The effect of the outcome of these matters on
the Company's future results of operations cannot be predicted because
any such effect depends on future results of operations and the amount
and timing of the resolution of such matters. While the results of
litigation cannot be predicted with certainty, the Company believes
that the final outcome of such other litigation will not have a
materially adverse effect on the Company's consolidated financial
condition.
16
<Page>
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on April 25, 2002,
the following proposals were submitted to the Stockholders:
1. The election of the following directors:
<Table>
<Caption>
DIRECTOR FOR WITHHELD BROKER NON-VOTES
-------- --- -------- ----------------
Donald N. Boyce 38,893,173 468,092 0
Howard L. Clark, Jr. 39,044,684 316,581 0
Don DeFosset 39,043,977 317,288 0
Perry Golkin 39,039,826 321,439 0
Scott C. Nuttall 39,044,298 316,967 0
Bernard G. Rethore 39,039,284 321,981 0
Wayne W. Robinson 39,044,084 317,181 0
Neil A. Springer 39,036,984 324,281 0
Michael T. Tokarz 39,010,616 350,649 0
</Table>
2. A proposal to ratify the appointment of PricewaterhouseCoopers
LLP as independent certified public accountants for the year
ending December 31, 2002: For, 38,734,983; Against, 621,966;
Abstain, 1,059,915; and Broker Non-Votes, 0.
3. A proposal to approve the 2002 Long-term Incentive Award Plan of
Walter Industries, Inc.: For, 25,963,876; Against, 8,717,677;
Abstain, 2,425,481; and Broker Non-Votes, 3,309,830.
Item. 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) None
17
<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: May 14, 2002
18