WALTER INDUSTRIES INC /NEW/ - 10-Q Quarterly Report

Back to GetFilings.com

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 June 30, 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 44,383,456 shares of common stock of the registrant outstanding at
July 31, 2002.

PART I - FINANCIAL INFORMATION
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

See accompanying "Notes to Consolidated Financial Statements"

2

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying "Notes to Consolidated Financial Statements"

3

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying "Notes to Consolidated Financial Statements"

4

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)

See accompanying "Notes to Consolidated Financial Statements"

5

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)

(a) Consists of sales and resales, net of repossessions and provision for
losses, of $211.4 million and $193.3 million and reduced by cash
collections on account and payouts in advance of maturity of $200.9 million
and $190.8 million, for the six months ended June 30, 2002 and 2001,
respectively.

See accompanying "Notes to Consolidated Financial Statements"

6

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 and six month periods ended June
30, 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, including reclassifications as a result of
adopting FAS No. 142, "Goodwill and Other Intangible Assets". These
reclassifications had no effect on reported earnings.

NOTE 2 - RESTRICTED SHORT-TERM INVESTMENTS

Restricted short-term investments at June 30, 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") ($101.3 million and $120.5 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 ($6.0 million and $6.3 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 and six months ended June 30,
2002, approximately $7.4 million and $14.7 million, respectively, that is
expected to be recovered from business interruption insurance was recorded as a
reduction to cost of sales in the statement of operations. In addition, for the
three months and six months ended June 30, 2002, approximately $5.8 million and
$14.0 million, respectively, have been incurred for re-entry costs and
replacement of property and equipment. These expenses are not recorded in the
accompanying statement of operations as the amounts are expected to be recovered
through property and casualty insurance. Approximately $22.1 million and $8.2
million of business interruption and property and casualty insurance receivables
were included in the consolidated balance sheet at June 30, 2002 and December
31, 2001, respectively. Through June 30, 2002, approximately $17.8 million of
insurance proceeds had been received.

7

NOTE 4 - INSTALMENT NOTES RECEIVABLE

The instalment notes receivable is summarized as follows (in thousands):

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

NOTE 5 - INVENTORIES

Inventories are summarized as follows (in thousands):

8

NOTE 6 - DEBT

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

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.

NOTE 8 - STOCKHOLDERS' EQUITY

Information relating to the Company's share repurchases is set forth in the
following table (in thousands):

9

NOTE 9 - NET INCOME (LOSS) PER SHARE

A reconciliation of the basic and diluted earnings per share computations for
the three and six months ended June 30, 2002 and 2001 are as follows (in
thousands, except per share data):

(a) The three and six months ended June 30, 2002 and 2001 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 7, 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. On August 5, 2002, the
Board of Directors declared a $0.03 per share dividend, payable on September 12,
2002, to shareholders of record on August 15, 2002.

10

NOTE 10 - SEGMENT INFORMATION

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

(a) Operating income amounts are after deducting amortization of goodwill and
other intangibles. A breakdown of amortization by segment is as follows
(in thousands):

(a) Operating income amounts are after deducting amortization of goodwill and
other intangibles. A breakdown of amortization by segment is as follows
(in thousands):

12

NOTE 11 - GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF FAS STATEMENT 142

The Company adopted FAS No. 142, "Goodwill and Other Intangible Assets"
effective on January 1, 2002. Under FAS 142, goodwill and intangible assets that
have an indefinite useful life are no longer subject to amortization. Instead,
FAS 142 requires goodwill and intangible assets that have an indefinite life to
be reviewed for impairment on an annual basis, or more frequently if events or
circumstances indicate possible impairment.

GOODWILL
As of December 31, 2001, the Company had $423.7 million of goodwill, net of
accumulated amortization of $592.9 million related to the 1987 acquisition of
Jim Walter Corporation and related subsidiaries, and subsequent acquisitions of
AIMCOR and three home building companies.

The fair value of each of the Company's reporting units was individually
determined using valuation models reflecting the expected future cash flow
projections related to each reporting unit, which were discounted using a
risk-adjusted discount rate and adjusted for comparable industry earnings
multiples. The Company's reporting units are similar, although not identical, to
its reporting segments. This analysis indicated that the AIMCOR reporting units'
carrying value, including tax deductible goodwill, exceeded its fair value. The
Company then determined that the carrying value of the AIMCOR reporting units'
goodwill exceeded the fair value of its goodwill.

As a result of implementing this new goodwill impairment testing standard, the
Company recorded a goodwill impairment loss of $125.9 million, net of taxes of
$75.1 million, related to the AIMCOR reporting units which was accounted for as
a cumulative effect of a change in accounting principle. This goodwill
impairment resulted from a change in the profitability of the business since its
acquisition due to increased competition and eroding industry margins.

The following is a reconciliation of reported net income to adjusted net income
after adding back discontinued amortization:

DEFINITE LIVED INTANGIBLES
The Company identified and reclassified definite lived intangible assets, which
met recognition criteria under FAS No. 141, "Business Combinations", from
goodwill to definite lived intangibles. These intangible assets have
historically been amortized by the Company and will continue to be amortized
over their useful lives.

Definite lived intangible assets at January 1, 2002 and June 30, 2002 consisted
of intangibles associated with the instalment notes receivable portfolio of
$30.8 million and $27.0 million, net of accumulated amortization, respectively.
Definite lived intangible assets amortization expense was $1.9 million and $2.2
million for the three-months ended June 30, 2002 and 2001 and $3.8 million and
$4.5 million for the six-months ended June 30, 2002 and 2001. Estimated
intangible asset amortization expense based on current payment schedules
adjusted for current prepayment speeds for the full year 2002 is expected to be
approximately $7.0 million and approximately $6.0 million, $5.0 million, $4.0
million, and $3.0 million for 2003, 2004, 2005 and 2006, respectively.

14

CHANGES IN CARRYING AMOUNT
The changes in the carrying amount of goodwill and intangibles by reportable
segment for the six months ended June 30, 2002 are as follows (in thousands):

Goodwill and definite lived intangible assets will be reviewed for impairment on
an annual basis, or more frequently if significant events occur that indicate
that an impairment could exist. The Company will perform its annual impairment
review as of the beginning of each fiscal year, commencing with January 1, 2003.

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.

NOTE 13 - NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued FAS No. 143,
"Accounting for Asset Retirement Obligations." FAS No. 143 applies to legal
obligations associated with the retirement of long-lived assets, except for
certain obligations of lessees. This Statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002 with initial application
required as of the beginning of an entity's fiscal year. The Company is in the
process of analyzing any potential effect of applying this new standard.

In April 2002, the Financial Accounting Standards Board issued FAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". FAS No. 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 No. 145 is effective for
transactions occurring after May 15, 2002.

15

In June 2002, the Financial Accounting Standards Board (FASB) issued FAS No.146,
"Accounting for Exit or Disposal Activities". FAS No. 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring". The scope of FAS
No. 146 also includes: (1) costs related to terminating a contract that is not a
capital lease and (2) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred-compensation contract.
FAS No. 146 will be effective for exit or disposal activities that are initiated
after December 31, 2002.

16

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION AND LIQUIDITY AND CAPITAL RESOURCES
AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This discussion should be read in conjunction with the consolidated financial
statements and notes thereto of Walter Industries, Inc. and its subsidiaries,
particularly 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, 2002 AND 2001

Net sales and revenues for the three months ended June 30, 2002 were $501.4
million, a decrease of $15.4 million from the quarter ended June 30, 2001.
Revenue declines within the Industrial Products, Financing, Carbon and Metals,
and Natural Resources segments were partially offset by an increase in the
Homebuilding segment. Industrial Products shipped fewer tons of pipe, reflecting
the impact of the economic slowdown on demand, and received lower prices for
these products, which was partially offset by increased shipments of aluminum
products. Financing revenue decreased due to lower portfolio yields and slower
prepayment speeds. Revenues were lower in Carbon and Metals due to fewer
shipments, which were partially offset by increased calcined coke pricing and
new terminal business. Natural Resources revenues were lower due to lower gas
prices and fewer tons of coal shipments, which were partially offset by higher
coal prices. Homebuilding revenues improved on higher unit completions and
increased average selling prices.

Cost of sales, exclusive of depreciation, of $352.1 million was 79.7% of net
sales in the 2002 period versus $368.7 million and 80.9% of net sales in the
comparable period of 2001. The decrease of $16.6 million is primarily due to
reduced volumes in the Industrial Products and Natural Resources segments
combined with cost reductions and productivity improvements across the Company.

Depreciation for the three months ended June 30, 2002 was $16.8 million, an
increase of $1.3 million from the same period in 2001.

Selling, general and administrative expenses were $49.4 million in the 2002
period, compared to $48.0 million in 2001. The increase in expenses for the
current period was due to the Homebuilding segment's continued expansion into
new markets and higher legal and other professional expenses in the Industrial
Products segment and included in general corporate expense.

Provision for losses on instalment notes decreased to $1.4 million in the 2002
period, compared to $2.4 million in 2001 due to improved portfolio performance.

Interest and amortization of debt expense was $38.9 million in the 2002 period,
a decrease of $4.5 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 June 30, 2002, was 7.1% as compared to 7.6% for the three
months ended June 30, 2001.

Amortization expense for goodwill and other 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 intangible assets.

The Company's effective tax rate for the three months ended June 30, 2002
differed from the federal statutory tax rate primarily due to the utilization of
certain federal tax credits and the effect of state and foreign income taxes.
The effective tax rate for the three months ended June 30, 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 foreign
income taxes.

17

Net income for the three months ended June 30, 2002 was $24.2 million, or $0.54
per diluted share, compared to $14.3 million, or $0.32 per diluted share, in the
comparable 2001 period. The 2001 period included approximately $6.3 million, or
$0.14 per share, of after-tax goodwill amortization, which is no longer being
expensed under FAS 142. On a comparable basis, the three months ended June 30,
2002 was up 17%, or $0.08 per share, versus $0.46 per share in the comparable
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 $67.5 million for the three months ended June 30,
2002, an increase of $8.6 million from the quarter ended June 30, 2001. As
compared to the same quarter in the prior year, 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.

The estimated backlog of homes to be constructed at June 30, 2002 was $127.6
million compared to $110.9 million at December 31, 2001 and $116.0 million at
June 30, 2001.

Operating income was $4.0 million for the three months ended June 30, 2002
compared to $1.2 million in the prior year period. The $2.8 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 $58.9 million in the 2002 period, a decrease of $1.7
million from $60.6 million for the prior year period. The decrease was primarily
attributable to lower interest income generated from restricted cash balances.
Operating income was $13.6 million in the 2002 period, down slightly from $14.4
million in the prior year, primarily as the result of lower portfolio yields and
slower prepayment speeds of 6.4% in the 2002 period compared to 6.7% in the
prior year period. Repossession inventory units at June 30, 2002 increased by
11% compared to March 31, 2002, primarily reflecting slower sales attributable
to the economic slowdown. Delinquencies (the percentage of amounts outstanding
over 30 days past due) improved to 6.8% at June 30, 2002 from 7.1% at June 30,
2001.

INDUSTRIAL PRODUCTS

Net sales and revenues were $192.4 million for the three months ended June 30,
2002, a decrease of $6.3 million from $198.7 million for the three months ended
June 30, 2002. The decrease is due to fewer ductile iron pipe shipments and a
decrease in average price per ton for ductile iron pipe products attributable to
the economic slowdown and pricing competition within the industry. Partially
offsetting the decreases in ductile iron pipe was an increase in shipments of
aluminum products compared to the prior year due to increased sales of building
products. Compared to the quarter ended June 30, 2001, U.S. Pipe revenues were
down 9% and pipe shipments decreased 5%, while aluminum shipments for the 2002
period were 24% higher than the 2001 period.

18

U.S. Pipe has implemented a new ERP System, revising the method of calculating
order backlog. The order backlog consisting of pressure pipe, valves and
hydrants, fittings and castings, calculated under the revised method at June 30,
2002 was $88.8 million, compared to $94.8 million at March 31, 2002 and $75.2
million at December 31, 2001.

Operating income of $16.2 million for the six months ended June 30, 2002 was
down $4.1 million from $20.3 million for the three months ended June 30, 2001.
Operating income decreased due to the lower volume and decrease in prices for
ductile iron pipe products. This was partially offset by an increase in shipped
pounds of aluminum products by 24% due to a shift in mix to building products
from fin stock products because of an increase in building products demand, a
$2.6 million reduction in goodwill amortization, improved productivity and
decreases in other costs.

CARBON AND METALS

Net sales and revenues were $118.6 million for the three months ended June 30,
2002, a decrease of $17.3 million from the same period in the prior year. The
decrease in the current period is a result of lower petroleum and calcined coke
volumes due to the ongoing economic weakness affecting both supply and demand.
This was partially offset by an increase in calcined coke pricing which reflects
a pass through of higher product costs, additional revenues from in-refinery
services at two Gulf Coast refineries that began operation in the first quarter
of 2002, increases in tons of furnace coke sold and higher pricing for furnace
coke in the current quarter as compared to the prior year.

Operating income of $3.6 million was $3.3 million below the prior year.
Operating income decreased as a result of supply and demand decreases for
petcoke due to ongoing economic weakness affecting the marketplace. Partially
offsetting the decreases were higher shipments and increased selling prices of
furnace coke and a $2.2 million reduction in goodwill amortization.

NATURAL RESOURCES

Net sales and revenues were $65.6 million for the three months ended June 30,
2002, a decrease of $1.5 million from the $67.1 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 temporary shutdown at Mine
No. 5 caused by the accident on September 23, 2001. The mine had substantially
returned to full operation by the end of June 2002.

For the three months ended June 30, 2002, Natural Resources had operating income
of $10.4 million, compared to $2.8 million for the quarter ended June 30, 2001.
Operating income improved due to a 9.2% 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 the prior year. The
Company's business interruption insurance continued to offset the impact of
limited production and shipments at Mine No. 5. During the second quarter of
2002, operating income includes approximately $7.4 million from business
interruption insurance coverage.

19

GENERAL CORPORATE EXPENSES

General corporate expenses were $5.8 million during the three months ended June
30, 2002 compared to $8.7 million for the three months ended June 30, 2001. This
decrease is principally attributable to reduced headcount, lower professional
fees and other cost reduction efforts at the corporate office.

RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

Net sales and revenues for the six months ended June 30, 2002 were $946.9
million, a decrease of $34.1 million from the comparable six month period in
2001. Revenue declines within the Industrial Products, Financing and Natural
Resources segments were partially offset by increases in the Homebuilding
segment. Financing revenues decreased due to lower portfolio yields and slower
prepayment speeds. Industrial Products shipped fewer tons of ductile iron pipe
during the first six months of 2002, reflecting the impact the national
recession had on demand for these products, combined with lower selling prices
during the first six months of 2002 due to competitive pressures. 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
improved on higher unit completions and increased average selling price.

Cost of sales, exclusive of depreciation, of $665.2 million was 80.2% of net
sales in the 2002 period versus $694.1 million and 80.7% of net sales in the
comparable period of 2001. The decrease of $28.9 million is primarily due to
reduced volumes in the Industrial Products and Natural Resources segments,
partially offset by an increase in completed homes at the Homebuilding segment.

Depreciation for the six months ended June 30, 2002 was $33.4 million, an
increase of $1.8 million from the same period in 2001.

Selling, general and administrative expenses were $100.5 million in the 2002
period, compared to $95.3 million 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, an increase in
professional fees related to converting Mid-State Homes accounting for time
charge income to the interest method, continued expansion of Homebuilding into
new markets and higher legal and other professional expenses in the Industrial
Products segment and at Corporate. 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 $2.9 million in the 2002
period, compared to $4.9 million in 2001 due to improved portfolio performance.

Interest and amortization of debt expense was $79.3 million in the 2002 period,
a decrease of $10.9 million from the same period in 2001 primarily due to lower
interest rates and reduced borrowings. The average rate of interest for the six
months ended June 30, 2002, was 7.2% as compared to 7.9% for the three months
ended June 30, 2001.

Amortization expense for goodwill and other intangibles was $3.8 million in the
2002 period, compared to $18.6 million from the same period in 2001. The
decrease of $14.8 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 six months ended June 30, 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, the utilization of
certain federal tax credits, and the effect of state and foreign income taxes.
The $2.8 million tax benefit was from an increased capital loss carryforward 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.

20

The effective tax rate for the six months ended June 30, 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 foreign
income taxes.

Net loss for the six months ended June 30, 2002 was $88.3 million, or $1.97 per
diluted share, which included a charge of $125.9 million, net of tax, or $2.81
per diluted share, from the cumulative effect of a change in accounting
principle related to the transitional goodwill impairment charge associated with
the initial adoption of FAS No. 142. In the comparable 2001 period, net income
was $19.8 million, or $0.43 per diluted share, which included approximately
$12.6 million, or $0.28 per diluted share, of after-tax goodwill amortization
which is no longer being expensed under FAS No. 142. On a comparable basis,
before the cumulative effect of the change in accounting principle, net income
for the six months ended June 30, 2002 was $0.84 per diluted share, up 18% or
$0.13 per diluted share, versus $0.71 per diluted share in the comparable 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 $131.0 million for the six months ended June 30,
2002, an increase of $18.0 million from the quarter ended June 30, 2001. As
compared to the prior year, for the six months ended June 30, 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.

Operating income was $7.1 million for the six months ended June 30, 2002
compared to $0.3 million in the prior year period. The $6.8 million increase was
principally caused by a $4.5 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 $117.7 million in the 2002 period, a decrease of
$4.0 million from $121.7 million for the prior year period. The decrease was
primarily attributable to lower interest income generated from restricted cash
balances. Operating income was $25.5 million in the 2002 period, down slightly
from $26.1 million in the prior year, primarily as the result of lower portfolio
yields partially offset by faster prepayment speeds of 7.03% in the 2002 period
compared to 5.72% in the prior year period. Repossession inventory units at June
30,2002 decreased by 2% compared to December 31, 2001, primarily reflecting
lower foreclosure activity and a heavy emphasis on selling slow-moving units.

INDUSTRIAL PRODUCTS

Net sales and revenues were $340.2 million for the six months ended June 30,
2002, a decrease of $40.2 million from $380.4 million for the six months ended
June 30, 2002. The decrease is due to fewer ductile iron pipe shipments and a
decrease in average price per ton for pipe products attributable to the economic
slowdown and pricing competition within the industry, and a decrease in
pass-through prime metal costs for aluminum products, which was partially offset
by higher aluminum shipments. Compared to the six months ended June 30, 2001,
U.S. Pipe revenues were

21

down 14% and pipe shipments decreased 22%, while aluminum shipments for the 2002
period were 7% higher than the 2001 period.

Operating income of $23.5 million for the six months ended June 30, 2002 was
down $13.1 million from $36.6 million for the six months ended June 30, 2001.
Operating income decreased due to the lower volumes and decreases in prices for
ductile iron pipe products, higher scrap iron costs, increased legal expenses
and severance expenses related to a 14% workforce reduction at U.S. Pipe. This
was partially offset by a $5.2 million reduction in goodwill amortization,
higher aluminum sales volumes, improved productivity and decreases in other
costs.

CARBON AND METALS

Net sales and revenues were $240.3 million for the six months ended June 30,
2002, a decrease of $0.7 million from the same period in the prior year. The
decrease in the current period is a result of lower petroleum and calcined coke
volumes due to the ongoing economic weakness affecting both supply and demand.
This was partially offset by an increase in calcined coke pricing, which
reflects a pass-through of higher product costs, additional revenues from
in-refinery services at Gulf Coast refineries, increases in tons of furnace coke
sold and higher pricing for furnace coke in the current period as compared to
the prior year.

Operating income of $7.5 million was $3.0 million below the prior year.
Operating income decreased due to lower volumes and margins and a $2.6 million
charge to selling, general and administrative expense as a result of a customer
bankruptcy at Sloss. These were partially offset by a $4.3 million reduction in
goodwill amortization and an increase in volumes and prices for furnace coke.

NATURAL RESOURCES

Net sales and revenues were $122.5 million for the six months ended June 30,
2002, a decrease of $10.9 million from the $133.4 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 shutdown at Mine No. 5. The
mine had returned to full operation by the end of June 2002.

For the six months ended June 30, 2002, Natural Resources had operating income
of $15.5 million, compared to $3.5 million for the six months ended June 30,
2001. Operating income improved due to a 13.4% 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 the prior year.
The Company's business interruption insurance continued to offset the impact of
limited production and shipments at Mine No. 5. For the six months ended June
30, 2002, operating income includes approximately $14.7 million from business
interruption insurance coverage.

GENERAL CORPORATE EXPENSES

General corporate expenses were $14.8 million during the six months ended June
30, 2002 compared to $16.3 million for the six months ended June 30, 2001. The
decrease was principally due to cost reduction efforts which was partially

22

offset by higher professional fees related to converting Mid-State Homes'
accounting for time charge income to the interest method.

FINANCIAL CONDITION

Short-term investments, restricted of $107.3 million at June 30, 2002 decreased
$19.5 million compared to December 31, 2001 due to additional notes securitized
during the six months ended June 30, 2002 under a pre-funding agreement related
to the creation of Mid-State Trust X which required funds to be set aside during
2001 in a restricted account until additional notes were securitized.

Installment note receivables, generated from the financing of homes constructed
by the Homebuilding segment, were $1,700.3 million at June 30, 2002, an increase
of $10.5 million from December 31, 2001. The increase is due to higher volumes
and average note balances financed, which was partially offset by customer
repayments.

Net receivables, consisting principally of trade receivables, were $280.1
million at June 30, 2002, an increase of $56.5 million from December 31, 2001.
Net receivables increased $13.9 million principally due to insurance claims
related to the accident at one of the Company's mines and also increased due to
higher net sales in the first half of 2002.

Prepaid expenses of $17.9 million at June 30, 2002 increased $9.1 million
compared to December 31, 2001 as a result of prepayments on insurance.

Other long-term assets were $33.9 million at June 30, 2002, a decrease of $10.7
million from December 31, 2001. Other long-term assets decreased due to the
liquidation of assets related to deferred compensation and other employee
related benefits.

Goodwill of $218.9 million at June 30, 2002 decreased $204.8 million compared to
December 31, 2001 due to the $201.0 million AIMCOR transitional goodwill
impairment charge as a result of adopting the FAS 142. In conjunction with the
impairment charge, a deferred tax asset of $75.1 million was established,
changing the December 31, 2001 net tax liability of $45.0 million to a net
deferred tax asset of $21.1 million after adjustments for changes in normal
temporary differences.

Accounts payable of $142.2 million at June 30, 2002 increased $26.9 million
compared to December 31, 2001 primarily as a result of timing of vendor payments
and efforts by the Company to improve management of accounts payable.

Accrued expenses of $136.5 million at June 30, 2002 decreased $6.0 million
compared to December 31, 2001 due to the timing of certain payroll related
expenses.

The allowance for losses on instalment notes receivable was $11.2 million at
June 30, 2002 and $11.0 million at December 31, 2001. Delinquencies (the
percentage of amounts outstanding over 30 days past due) declined from 7.6% at
December 30, 2001 to 6.8% at June 30, 2002.

LIQUIDITY AND CAPITAL RESOURCES

Since December 31, 2001, total debt has decreased by $24.3 million. During the
six month period ended June 30, 2002, net borrowings under the Mid-State Trust
IX Variable Funding Loan Agreement increased to $83.0 million due to the
financing of new instalment notes for customers. Payments on the
mortgage-backed/asset-backed notes from instalment notes receivable amounted to
$105.2 million. Other senior debt decreased by $2.1 million.

At June 30, 2002 borrowings under the $350 million Revolving Credit Facility
totaled $81.4 million, a decrease of $2.1 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 June 30, 2002 letters of

23

credit with a face amount of $58.9 million were outstanding. At June 30, 2002
approximately $209.7 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 certain 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 June 30, 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 June 30, 2002. Trust IX originally matured on February 4, 2002, but was
renewed to February 3, 2003.

At June 30, 2002 borrowings under the Term Loan totaled $225 million. A payment
under the Term Loan of $100 million is payable on October 15, 2002.

The Company believes that, based on current forecasts and anticipated market
conditions, the combination of existing availability under the Revolver and
operating cash flow that will be generated will be sufficient to meet
substantially all operating needs, to make planned capital expenditures and to
make all required interest and principal payments on indebtedness.

STATEMENT OF CASH FLOWS

Cash and cash equivalents were approximately $13.6 million at June 30, 2002.
Operating cash flows for the six months ended June 30, 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 six months ended June 30, 2002, were
$47.7 million, principally representing the net loss for the period and non-cash
charges for depreciation, amortization and the cumulative effect of change in
accounting principle related to the transitional goodwill impairment charge,
offset by an increase in working capital. The increase in working capital
reflected higher insurance receivables related to the pending property and
business interruption insurance claim at Natural Resources and higher trade
receivables in the Industrial Products segment, lower accrued expenses and
prepayments of insurance premiums.

Capital expenditures totaled $31.7 in the six months ended June 30, 2002.
Commitments for capital expenditures at June 30, 2002 were not significant;
however, it is estimated that gross capital expenditures for the year ending
December 31, 2002 will approximate $70 - $80 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 six months ended June 30, 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.

On February 7, 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. On August 5, 2002, the
Board of Directors declared a $0.03 per share dividend, payable on September 12,
2002, to shareholders of record on August 15, 2002.

24

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. The
Company has periodically used derivative financial instruments to manage
interest rate risk. At June 30, 2002 the Company has entered into an interest
rate cap agreement to mitigate its exposure to interest rate risk on short-term
borrowings related to its Financing Segment.

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 when considered practical to do so. As of June 30, 2002, swap
contracts to hedge anticipated purchases in 2002 of natural gas totaling 590,975
mmbtu were outstanding at prices ranging from $2.65 to $3.45 per mmbtu. At June
30, 2002, the net unrealized gain from these hedging instruments was recorded in
other assets and accumulated other comprehensive loss.

As of June 30, 2002, the Company has hedged anticipated natural gas
production of 4,200,000 mmbtu over the next 18 months at prices ranging from
$2.89 to $4.36 per mmbtu 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.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued FAS No. 143,
"Accounting for Asset Retirement Obligations." FAS No. 143 applies to legal
obligations associated with the retirement of long-lived assets, except for
certain obligations of lessees. This Statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002 with initial application
required as of the beginning of an entity's fiscal year. The Company is in the
process of analyzing any potential effect of applying this new standard.

In April 2002, the Financial Accounting Standards Board issued FAS No. 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.

In June 2002, the Financial Accounting Standards Board (FASB) issued FAS No.
146, "Accounting for Exit or Disposal Activities". FAS 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring". The scope of FAS
146 also includes: (1) costs related to terminating a

25

contract that is not a capital lease and (2) termination benefits that employees
who are involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. FAS 146 will be effective for exit or disposal
activities that are initiated after December 31, 2002.

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.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

Item. 6 EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit 99.1 Certification of Periodic Report- Chief Executive
Officer
Exhibit 99.2 Certification of Periodic Report- Chief Financial
Officer

(b) None

26

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: August 12, 2002

27