UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to ____________
Commission file number 0-14787
WATTS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2916536
(State of incorporation) (I.R.S. Employer Identification No.)
815 Chestnut Street, North Andover, MA 01845
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 688-
1811
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 (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at October 29, 1999
Class A Common, $.10 par value 16,988,507
Class B Common, $.10 par value 9,485,247
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Page #
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1999 and June 30, 1999 3
Consolidated Statements of Income for
the Three Months Ended September 30, 1999 and
September 30, 1998 4
Consolidated Statements of Cash Flows
for the Three Months Ended September 30, 1999 and
September 30, 1998 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
Part II. Other Information
Item 1. Legal Proceedings 15-18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
Exhibit 10.1 -Amendment No. 3 dated October 18, 1999, to
Letter of Credit, Reimbursement and Guaranty
Agreement dated September 1, 1994.
Exhibit 10.2 - First Amendment dated October 18, 1999 to
Amended and Restated Revolving Credit
Agreement dated March 27, 1998.
Exhibit 27 - Financial Data Schedule - September 30, 1999 42
Exhibit 27.1 - Restated Financial Data Schedule -September 30, 1998 43
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
----------------------
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share information)
(Unaudited)
Sept. 30, June 30,
1999 1999
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,038 $ 12,774
Trade accounts receivable, less allowance for doubtful
accounts of $6,971 at September 30, 1999 and $7,747
at June 30, 1999 95,675 89,315
Inventories, net:
Raw materials 41,456 36,543
Work in process 8,386 7,569
Finished goods 63,608 66,440
--------- ---------
Total Inventories 113,450 110,552
Prepaid expenses and other assets 13,424 10,193
Deferred income taxes 21,909 21,271
Net current assets of discontinued operations 130,045 122,971
--------- ---------
Total Current Assets 379,541 367,076
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 226,072 218,715
Accumulated depreciation (94,333) (89,552)
--------- ---------
Property, plant and equipment, net 131,739 129,163
--------- ---------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $13,399 at
March 31, 1999 and $11,708 at June 30, 1998 97,032 96,285
Other 8,884 9,027
Net noncurrent assets of discontinued operations 35,162 36,191
--------- ---------
TOTAL ASSETS $ 652,358 $ 637,742
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 39,693 $ 35,579
Accrued expenses and other liabilities 48,335 48,843
Accrued compensation and benefits 11,652 12,692
Income taxes payable 5,076 0
Current portion of long-term debt 1,656 2,050
--------- ---------
Total Current Liabilities 106,412 99,164
--------- ---------
LONG-TERM DEBT, NET OF CURRENT PORTION 117,197 118,916
DEFERRED INCOME TAXES 13,238 13,070
OTHER NONCURRENT LIABILITIES 11,387 11,450
MINORITY INTEREST 7,703 7,487
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value; 5,000,000 shares
authorized; no shares issued or outstanding - -
Class A Common Stock, $.10 par value; 80,000,000 shares
authorized; 1 vote per share; issued and outstanding:
16,972,507 shares at Sept.30, 1999 and 16,158,807
shares at June 30, 1999 1,697 1,616
Class B Common Stock, $.10 par value; 25,000,000 shares
authorized; 10 votes per share; issued and outstanding:
9,485,247 at Sept.30, 1999 and 10,285,247
shares at June 30, 1999 949 1,029
Additional paid-in capital 36,438 36,069
Retained earnings 370,050 364,089
Accumulated other comprehensive income (12,713) (15,148)
--------- ---------
Total Stockholders' Equity 396,421 387,655
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 652,358 $ 637,742
========= =========
See accompanying notes to consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share information)
(Unaudited)
Three Months Ended
--------------------
Sept. 30, Sept. 30,
1999 1998
--------- ---------
Net sales $ 130,330 $ 113,269
Cost of goods sold 83,436 72,183
--------- ---------
GROSS PROFIT 46,894 41,086
Selling, general & administrative expenses 31,281 27,763
--------- ---------
OPERATING INCOME 15,613 13,323
--------- ---------
Other (income) expense:
Interest income (139) (186)
Interest expense 2,136 1,558
Other, net 66 231
--------- ---------
2,063 1,603
--------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 13,550 11,720
Provision for income taxes 4,508 3,827
--------- ---------
INCOME FROM CONTINUING OPERATIONS 9,042 7,893
Income from discontinued operations, net of taxes (745) 4,495
--------- ---------
NET INCOME $ 8,297 $ 12,388
========= =========
Basic earnings per share :
Continuing operations $ 0.34 $ 0.29
Discontinued operations (0.03) 0.17
--------- ---------
NET INCOME $ 0.31 $ 0.46
========= =========
Weighted average number of shares (thousands) 26,448 27,018
========= =========
Diluted earnings per share :
Continuing operations $ 0.34 $ 0.29
Discontinued operations (0.03) 0.17
--------- ---------
NET INCOME $ 0.31 $ 0.46
========= =========
Weighted average number of shares (thousands) 26,635 27,177
========= =========
Dividends per common share $ 0.0875 $ 0.0875
========= =========
See accompanying notes to consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Three Months Ended
--------------------
Sept. 30, Sept. 30,
1999 1998
--------- ---------
OPERATING ACTIVITIES
Net income from continuing operations $ 9,042 $ 7,893
Adjustments to reconcile net income from continuing
operations to net cash provided by continuing
operating activities:
Depreciation 4,240 3,432
Amortization 779 893
Deferred income taxes (550) 192
Loss on disposal of assets 9 0
Equity in undistributed earnings of affiliates (61) (86)
Changes in operating assets and liabilities, net of
effects from acquisitions and dispositions:
Accounts receivable (5,257) (6,852)
Inventories (2,038) 5,580
Prepaid expenses and other assets (3,009) 1,085
Accounts payable, accrued expenses and
other liabilities 6,661 12,107
--------- ---------
Net cash provided by continuing operations 9,816 24,244
Net cash used by discontinued operations (7,559) (8,922)
--------- ---------
Net cash provided by operating activities 2,257 15,322
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment (5,593) (4,393)
Business acquisitions, net of cash acquired 0 (406)
Increase in other assets (503) (1,661)
Net changes in short-term investments
Discontinued operations:
Additions to property, plant and equipment (3,262) (907)
Proceeds from sale of property, plant and equip 45 1,019
Business acquisitions, net of cash acquired 0 (66,862)
--------- ---------
Net cash used in investing activities (9,313) (73,210)
--------- ---------
FINANCING ACTIVITIES
Proceeds from long-term borrowings 20,089 12,851
Payments of long-term debt (23,070) (4,685)
Proceeds from exercise of stock options 233 20
Dividends (2,319) (2,363)
Purchase of treasury stock 0 0
Discontinued operations:
Proceeds from long-term borrowings 21,958 54,766
Payments of long-term debt (17,421) (2,424)
--------- ---------
Net cash provided by financing activities (530) 58,165
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents (150) 2,249
--------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS (7,736) 2,526
Cash and cash equivalents at beginning of period 12,774 10,767
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,038 $ 13,293
========= =========
See accompanying notes to consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. In the opinion of management, the accompanying unaudited,
consolidated financial statements contain all necessary
adjustments, consisting only of adjustments of a normal recurring
nature, to present fairly Watts Industries, Inc.'s Consolidated
Balance Sheet as of September 30, 1999, its Consolidated Statements
of Income for the three months ended September 30, 1999 and 1998,
and its Consolidated Statements of Cash Flows for the three months
ended September 30, 1999 and 1998.
The balance sheet at June 30, 1999 has been derived from the
audited financial statements at that date. Certain amounts have
been reclassified to conform with the fiscal period ended December
31, 1999 presentation. The accounting policies followed by the
Company are described in the June 30, 1999 financial statements
which are contained in the Company's 1999 Annual Report on Form 10-
K. It is suggested that these financial statements be read in
conjunction with the financial statements and notes included in the
1999 Annual Report on Form 10-K.
2. On December 15, 1998 the Company announced its plans to
separate its industrial, oil and gas businesses from its plumbing
and heating and water quality businesses. To accomplish this
separation, the Company continued its existing plumbing and heating
and water quality business and transferred the industrial, oil and
gas business to a new company, CIRCOR International, Inc. On
October 18, 1999, the Company spun-off CIRCOR to the Watts'
stockholders in the form of a pro-rata stock dividend. The Company
received a Private Letter Ruling ("PLR") from the Internal Revenue
Service confirming the tax-free treatment of the spin-off.
Accordingly, the Company is treating its industrial, oil and
gas business as a discontinued operation.
The following table summarizes the results of operations of the
industrial, oil and gas group:
Three Months Ended September 30
1999 1998
Net Sales $ 76,957 $ 80,656
Costs and Expenses 76,428 72,921
Income Before Income Taxes 529 7,735
Income Taxes 1,274 3,240
Income(Loss) from Discontinued
Operations,
Net of Taxes $ (745) $ 4,495
Net assets of the industrial, oil, and gas group reported in the
accompanying consolidated balance sheets consist of the following:
Balance Sheet September 30 June 30
1999 1999
Total Current Assets $ 190,391 $ 185,028
Total Current Liabilities (60,346) (62,057)
Net Current Assets $ 130,045 $ 122,971
Total Non-Current Assets $ 178,335 $ 178,153
Total Non-Current Liabilities (143,173) (141,962)
Net Non-Current Assets $ 35,162 $ 36,191
The Company presently expects to incur approximately
$8,600,000 of direct costs on an after-tax basis from the spin-off
transaction and has accrued such a liability at September 30, 1999
As required by APB Opinion No. 30, the Company has fully offset
these costs with operating income from its industrial, oil and gas
businesses. Excluding the costs of this transaction, net earnings
from discontinued operations would have been $1,688,000 for the
three months ended September 30, 1999.
3. The following tables set forth the reconciliation of the
calculation of earnings per share.
For the Three Months Ended September 30, 1999
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS
Income from Continuing
Operations $ 9,042,000 26,447,936 $ 0.34
Loss from Discontinued
Operations (745,000) (0.03)
Net Income $ 8,297,000 $ 0.31
Effect of Dilutive Securities
Common Stock Equivalents - 186,624
Diluted EPS $ 8,297,000 26,634,560 $ 0.31
Options to purchase 771,600 shares of common stock at prices
ranging from $22.13 to $25.38 were outstanding during the three-
month period ended September 30, 1999. These options were not
included in the related computations of diluted EPS since the
exercise price of the options was greater than the average market
price of the common shares during the period.
For the Three Months Ended September 30, 1998
Income Share Per Share
(Numerator) (Denominator) Amount
Basic EPS
Income from Continuing Operations $ 7,893,000 27,018,108 $ .29
Income from Discontinued Operations 4,495,000 .17
Net Income $12,388,000 $ .46
Effect of Dilutive Securities
Common Stock Equivalents - 159,172
Diluted EPS $12,388,000 27,177,280 $ .46
Options to purchase 838,700 shares of common stock at prices
ranging from $22.13 to $25.38 were outstanding during the three-
month period ended September 30, 1998. These options were not
included in the related computations of diluted EPS since the
exercise price of the options was greater than the average market
price of the common shares during the period.
4. Segment Information - the following table presents certain
operating segment information:
North Corporate
(Thousand of dollars) America Europe Asia Adjustments Consolidated
Three months ended
September 30, 1999:
Net Sales $98,755 $27,812 $3,763 $ - $130,330
Operating income 11,391 3,932 597 (307) 15,613
Three months ended
September 30, 1998:
Net Sales $89,649 $19,506 $4,114 $ - $113,269
Operating income 10,285 2,620 516 (98) 13,323
The above operating segments are presented on a basics consistent
with the presentation included in the Company's June 30, 1999
financial statements. There have been no material changes in the
identifiable assets of the individual segments since June 30,
1999.
5. The Company uses foreign currency forward exchange contracts
to reduce the impact of currency fluctuations on certain
anticipated purchase transactions that are expected to occur within
the fiscal year and other known currency exposures. At September
30, 1999 subsidiaries in the Company's Discontinued Operations had
forward contracts to buy foreign currencies with a face value of $
9 million. These contracts mature on various dates between October
1999 and March 2000 and have a fair market value of $ 8.4 million
at September 30, 1999. The counter parties to these contracts are
major financial institutions. The risk of loss to the Company in
the event of non-performance by a counter party is not significant.
The Company uses commodity futures contracts to fix the price
on a certain portion of certain raw materials used in the
manufacturing process. These contracts highly correlate to the
actual purchases of the commodity and the contract values are
reflected in the cost of the commodity as it is actually purchased.
At September 30, 1999, the Company had outstanding commodity
futures contracts with a notional value of $3.5 million and a fair
value of $4.0 million.
6. Effective July 1, 1998, the Company was required to adopt
Statement of Financial Accounting Standards ("SFAS") No. 130,
Reporting Comprehensive Income. This statement establishes
standards for reporting and presentation of comprehensive income
and its components in financial statements. Accumulated other
comprehensive income in the consolidated balance sheets as of
September 30, 1999 and June 30, 1999 consists of cumulative
translation adjustments. The Company's total comprehensive income
was as follows:
Three Months Ended September 30,
1999 1998
Income from Continuing Operations $9,042 $7,893
Income from Discontinued Operations (745) 4,495
Foreign Currency Translation
Adjustments 2,435 5,062
Total Comprehensive Income $10,732 $17,450
7. Contingencies and Environmental Remediation
Contingencies
In April 1998, the Company became aware of a complaint that
was filed under seal in the State of California alleging violations
of the California False Claims Act. The complaint alleges that a
former subsidiary of the Company sold products utilized in
municipal water systems which failed to meet contractually
specified standards and falsely certified that such standards had
been met. The complaint further alleges that the municipal
entities have suffered tens of millions of dollars in damages as a
result of defective products and seeks treble damages,
reimbursement of legal costs and penalties. The Company intends to
vigorously contest this matter but cannot presently determine
whether any loss will result from it.
Other lawsuits and proceedings or claims, arising from the
ordinary course of operations, are also pending or threatened
against the Company and its subsidiaries. With respect to these
other litigation matters, the Company has established reserves
which it presently believes are adequate in light of probable and
estimable exposure to pending and threatened litigation of which it
has knowledge. However, resolution of any such matters during a
specific period could have a material effect on quarterly or annual
operating results for that period. Also see Part II, Item 1.
Environmental Remediation
The Company has been named a potentially responsible party
with respect to identified contaminated sites. The level of
contamination varies significantly from site to site as do the
related levels of remediation efforts. Environmental liabilities
are recorded based on the most probable cost, if known, or on the
estimated minimum cost of remediation. The Company's accrued
estimated environmental liabilities are based on assumptions which
are subject to a number of factors and uncertainties.
Circumstances which can affect the reliability and precision of
these estimates include identification of additional sites,
environmental regulations, level of cleanup required, technologies
available, number and financial condition of other contributors to
remediation and the time period over which remediation may occur.
The Company recognizes changes in estimates as new remediation
requirements are defined or as new information becomes available.
The Company estimates that its accrued environmental remediation
liabilities will likely be paid over the next five to ten years.
Also see Part II, Item 1.
Item 2. WATTS INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
On December 15, 1998 the Company announced its plan to
spin-off its industrial, oil and gas business as a separately
traded public company, CIRCOR International, Inc. Under the terms
of the spin-off, which was completed on October 18, 1999, the
holders of Watts common stock received one share of CIRCOR common
stock for every two shares of Watts stock held, The Company's
results of operations have been restated to reflect CIRCOR as
discontinued operations for all periods presented.
Results of Operations
Three Months Ended September 30, 1999 Compared to
Three Months Ended September 30, 1998
Net sales for continuing operations increased $17,061,000
(15.1%) to $130,330,000. The increase in net sales is attributable
to the following:
(Revenue $'s 1999-1998)
Internal Growth $9,985,000 8.8%
Acquisitions $8,311,000 7.3%
Foreign Exchange ($1,235,000) (1.0%)
Total Change $17,061,000 15.1%
This increase in net sales from internal growth is primarily
attributable to increased unit shipments of North American plumbing
and heating market. The growth in net sales from acquired
companies is due to the inclusion of Cazzaniga S.p.A. of
Biassono, Italy, which was acquired March 9, 1999. Excluding
Cazzaniga, shipments of European plumbing and heating market were
6.3% higher than last year.
Gross profit increased $5,808,000 (14.1%), but decreased as a
percentage of net sales from 36.3 percent to 36.0 percent. This
percentage reduction is primarily attributable to production
inefficiencies in certain US manufacturing locations and the
inclusion of acquired companies currently operating at lower gross
margins compared to the rest of the Company.
Selling, general and administrative expenses increased
$3,518,000 (12.7%) to $31,281,000. This increase is primarily
attributable to inclusion of the selling, general and
administrative expenses of Cazzaniga, and increased variable
selling expenses primarily commissions and freight costs.
Interest expense increased $578,000 in the quarter ended
September 30, 1999, primarily due to increased acquisition
financing.
The Company's effective tax rate for continuing operations
increased from 32.6% to 33.3%. The increase is primarily
attributable to acquired companies operating in higher tax rate
jurisdictions than the rest of the Company.
Net income from continuing operations increased $1,149,000
(14.6%) to $9,042,000.
Income from discontinued operations, net of taxes, decreased
$5,240,000. The Company has recognized $2,433,000 in the current
quarter of the estimated $8,600,000 net after-tax costs to execute
the spin-off transaction. These costs include taxes, certain
relocation costs, and professional fees. Excluding the cost of
this transaction, net earnings would have declined $2,807,000 and
diluted earnings per share would have decreased from 17 cents to 6
cents. Total sales from discontinued operations decreased
$3,699,000 (4.8%) to $76,957,000. Domestic oil and gas valves
experienced a decline of 12 percent in net sales. Please see Note
2 of the Notes to the Consolidated Financial Statements for a
discussion of the Company's spin-off of its industrial, oil and
gas business.
The changes in foreign exchange rates had an immaterial affect
on net income for the quarter-to-date ended September 30, 1999.
Liquidity and Capital Resources
During the three-month period ended September 30, 1999, the
Company generated $9,816,000 in cash flow, from continuing
operations, which was principally used to fund the purchase of
$5,593,000 in capital equipment , pay cash dividends to common
shareholders and pay down long term debt. Capital expenditures were
primarily for manufacturing machinery and equipment as part of the
Company's commitment to continuously improve its manufacturing
capabilities. The Company's capital expenditure budget for the six
months ended December 31, 1999 is $10,000,000.
During the year ended June 30, 1999, the Company entered into
a syndicated credit facility with a group of European banks in the
amount of 40 millions Euros. This credit facility has several
tranches which provide credit to the Company for a period up to
five (5) years. The purpose of this credit facility is to fund
acquisitions in Europe, support the working capital requirements of
acquired companies, and for general corporate purposes. As of
September 30, 1999, 23,500,000 Euro's ($25,011,000) were borrowed
under this line of credit.
As of September 30, 1999 Watts had an unsecured $125 million
line of credit facility to support the Company's acquisition
program, working capital requirements of acquired companies, and
for general corporate purposes. At September 30, 1999 the Company
had $107 million outstanding on the line of credit and was in
compliance with all banking covenants related to this facility. On
the effective date of the spin-off, the Company amended its line of
credit, reducing its available borrowing limit to $100 million.
The borrowing on the amended LOC outstanding after the October 18,
1999 spin-off was $21,000,000.
Working capital from continuing operations at September 30,
1999 was $143,084,000 compared to $144,941,000 at June 30, 1999.
The ratio of current assets to current liabilities was 2.3 to 1 at
September 30, 1999 and 2.5 to 1 at June 30, 1999. Cash and cash
equivalents were $5,038,000 at September 30, 1999 compared to
$12,774,000 at June 30, 1999. Debt as a percentage of total
capital employed was 34.6% at September 30, 1999 compared to 38.9%
at June 30, 1999.
The Company anticipates that available funds and those funds
provided from current operations will be sufficient to meet current
operating requirements and anticipated capital expenditures for at
least the next 24 months.
The Company from time to time is involved with product
liability, environmental proceedings and other litigation
proceedings and incurs costs on an ongoing basis related to these
matters. The Company has not incurred material expenditures in
fiscal 1999 in connection with any of these matters. See Part II,
Item 1, Legal Proceedings.
Year 2000 Compliance
The Company has developed a comprehensive program to address
its potential exposure to the Year 2000 issue. The Company manages
the program by having each subsidiary and operating unit identify
their own Year 2000 issues and develop appropriate corrective
action steps, while instituting a series of management processes
that coordinate and manage the program across the Company. The
Company's Corporate Vice President of Administration has been
assigned responsibility for the overall coordination and monitoring
of the program, including establishment of policies, tracking
progress, and leveraging solutions across Company.
A significant portion of the Company's Year 2000 issues
relative to its information technology systems are being addressed
as part of the Company-wide initiative which began in fiscal 1997
to upgrade and replace its information systems. At September 30,
1999, approximately 95% of the Company's critical information
technology systems and more than 95% of its other information
technology systems have been replaced or upgraded and are Year 2000
compliant. The Company expects to complete the replacement or
upgrade of the remaining systems before the end of 1999.
Inventories, assessments and remediation activities for non-
information technology systems, including manufacturing equipment,
were completed during the Fiscal Year Ended June 30, 1999.
The Company has identified critical vendors, suppliers of
information processing services, customers, financial institutions
and other third parties and surveyed their Year 2000 remediation
efforts. Additionally, the Company has contacted all vendors and
third party suppliers in this regard. A preponderant majority of
vendors responded. Vendors not responding and those determined not
to be Year 2000 compliant have been replaced. This vendor survey
and review process is complete. The cost of the program was
immaterial. The Company did not utilize any independent
verification processes to confirm that these vendor responses were
reliable. However, the Company Purchasing Department personnel
communicate regularly with critical vendors. This communication
includes Year 2000 compliance confirmation.
In addition, the Company's operations depend on infrastructure
in a number of foreign countries in which it operates, and,
therefore, a failure of any of those infrastructures could
adversely affect its operations. The Company's most significant
foreign markets are: Canada, China, Germany, Italy and the United
Kingdom. In these countries, the Company is not aware of any
significant weaknesses in their infrastructure.
The Company has developed contingency plans for those few
vendors it considers critical . These are essentially vendors that
supply base raw materials and certain component parts. The
contingency plans include increasing levels of on-site and
consigned inventory. Additionally, raw materials are readily
available and most can be supplied by a number of alternate
vendors. These contingency plans are complete.
The Company continues to develop detailed contingency plans to
deal with unexpected issues which may occur. These plans include
the identification of appropriate resources and response teams.
Individual business managers at each of the Company's subsidiaries
and operating units are responsible to ensure their business
functions continue to operate normally. While the specifics vary
by operation, the general contingency planning strategies include:
increasing the on-hand supply of raw materials and finished goods;
identifying alternate suppliers of raw materials; ensuring key
personnel (both business and technical) are physically on-site;
backing up critical systems just before year-end; and identifying
alternative methods of doing business with customers as necessary.
Despite the Company's comprehensive program the Company cannot
be completely sure that issues will not develop or events occur
that could have material adverse affects on the Company's results
of operation or financial condition. Nevertheless, Watts does not
expect a material failure. The Company's Year 2000 program is
designed to minimize the likelihood of any failure occurring. The
most reasonably likely worst case scenario is that a short-term
disruption will occur with a small number of customers or suppliers
requiring an appropriate response.
Spending for the program is budgeted, expensed as incurred,
and not expected to be material.
Conversion To The Euro
On January 1, 1999, 11 of the 15 member countries of the
European Union adopted the Euro as their common legal currency and
established fixed conversion rates between their existing sovereign
currencies and the Euro. The Euro trades on currency exchanges and
is available for non-cash transactions. The introduction of the
Euro will affect the Company as the Company has manufacturing and
distribution facilities in several of the member countries and
trades extensively across Europe. The long-term competitive
implications of the conversion are currently being assessed by the
Company, however, the Company will experience an immediate
reduction in the risks associated with foreign exchange. At this
time, the Company is not anticipating that any significant costs
will be incurred due to the introduction and conversion to the
Euro.
The Company uses foreign currency forward exchange contracts
to reduce the impact of currency fluctuations on certain
intercompany purchase transactions that will occur within the
fiscal year and other known foreign currency exposures. The
notional amount of such contracts and the related realized and
unrealized gains and losses as of September 30, 1999 are not
material.
Other
Certain statements contained herein are forward looking. Many
factors could cause actual results to differ from these statements,
including loss of market share through competition; introduction of
competing products by other companies; pressure on prices from
competitors, suppliers, and/or customers; regulatory obstacles;
lack of acceptance of new products; changes in the plumbing and
heating and oil and gas markets; changes in global demand for the
Company's products; changes in distribution of the Company's
products; interest rates; foreign exchange fluctuations; cyclically
of industries in which the Company markets certain of its products
and general economic factors in markets where the Company's
products are sold, manufactured or marketed; and other factors
discussed in the Company's reports filed with the Securities and
Exchange Commission.
In June 1998, the Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging
Activities." The Company will adopt SFAS 133 no later than January
1, 2001. Its impact on the consolidated financial statements is
still being evaluated, but it is not expected to be material.
Part II. Other Information
Item 1. Legal Proceedings
The Company, like other worldwide manufacturing companies, is
subject to a variety of potential liabilities connected with its
business operations, including potential liabilities and expenses
associated with possible product defects or failures and compliance
with environmental laws. The Company maintains product liability
and other insurance coverage which it believes to be generally in
accordance with industry practices. Nonetheless, such insurance
coverage may not be adequate to protect the Company fully against
substantial damage claims which may arise from product defects and
failures.
James Jones Litigation
On June 25, 1997, Nora Armenta sued James Jones Company and
its present and past owners, Mueller Co., Tyco International (U.S.)
Inc. and Watts Industries, Inc. in the California Superior Court
for Los Angeles County with a complaint that sought tens of
millions of dollars in damages. By this complaint and an amended
complaint filed on November 4, 1998, ("First Amended Complaint")
Armenta, a former employee of James Jones, sued on behalf of 34
municipalities as a qui tam plaintiff under the California False
Claims Act. Late in 1998, the Los Angeles Department of Water and
Power ("DWP") intervened. Of the remaining 33 named
municipalities, four (Burbank, Pomona, Santa Monica and South Gate)
chose to intervene shortly before the Court-imposed deadline of
July 15, 1999. The case will now go forward with the
municipalities that have intervened.
The First Amended Complaint alleges that the Company's former
subsidiary (James Jones Company) sold products which did not meet
contractually specified standards used by the named municipalities
for their water systems and falsely certified such standards had
been met. Armenta claims that these municipalities were damaged by
their purchase of these products, and seeks treble damages, legal
costs, attorneys' fees and civil penalties under the False Claims
Act.
The DWP's intervention filed on December 9, 1998 adopted the
First Amended Complaint and added claims for breach of contract,
fraud and deceit, negligent misrepresentation, and unjust
enrichment. The DWP seeks past and future reimbursement costs,
punitive damages, contract difference in value damages, treble
damages, civil penalties under the False Claims Act and costs of
the suit.
One of the lawsuit's allegations is the suggestion that
because some of the purchased James Jones products are out of
specification and contain more lead than the 85 bronze specified, a
risk to public health might exist. This contention is predicated
on the average difference of about 2% lead content in '81 bronze
(6% to 8% lead) and '85 bronze (4% to 6% lead) alloys and the
assumption that this would mean increased consumable lead in public
drinking water. The evidence and discovery available to date
indicate that this is not the case.
In addition, bronze that does not contain more than 8% lead,
like 81 bronze, is approved for home plumbing fixtures by the City
of Los Angeles, and the Federal Environmental Protection Agency
defines metal for pipe fittings with no more than 8% lead as "lead
free" under Section 1417 of the Federal Safe Drinking Water Act.
The Company intends to contest this matter vigorously, and
discovery is currently under way. Presently, the Company cannot
determine whether any loss will result from this litigation. See
Note 7 of the Notes to the Consolidated Financial Statements.
Product Liability
Leslie Controls, Inc. and Spence Engineering Company, both
former subsidiaries of the Company, are involved as third-party
defendants in various civil product liability actions pending in
the U.S. District Court, Northern District of Ohio. The underlying
claims have been filed by present or former employees of various
shipping companies for personal injuries allegedly received as a
result of exposure to asbestos. The shipping companies contend
that they installed in their vessels certain valves manufactured by
Leslie Controls and/or Spence Engineering which contained asbestos.
Leslie Controls is also a defendant in one similar matter pending
in Superior Court of California, San Francisco County. Leslie
Controls and Spence Engineering are subsidiaries of CIRCOR
International, Inc., which was spun-off from the Company on October
18, 1999 (the "Distribution"). The liability associated with these
claims remains with Leslie Controls and Spence Engineering, and the
Company has resort to indemnification from CIRCOR for these
asbestos claims.
Environmental
Certain of the Company's operations generate solid and
hazardous wastes, which are disposed of elsewhere by arrangement
with the owners or operators of disposal sites or with transporters
of such waste. The Company's foundry and other operations are
subject to various federal, state and local laws and regulations
relating to environmental quality. Compliance with these laws and
regulations requires the Company to incur expenses and monitor its
operations on an ongoing basis. The Company cannot predict the
effect of future requirements on its capital expenditures, earnings
or competitive position due to any changes in federal, state or
local environmental laws, regulations or ordinances.
The Company is currently a party to or otherwise involved with
various administrative or legal proceedings under federal, state or
local environmental laws or regulations involving a number of
sites, in some cases as a participant in a group of potentially
responsible parties ("PRPs"). One of these sites, the San Gabriel
Valley/El Monte, California water basin site, is listed on the
National Priorities List. No allocation of remediation costs has
been made with respect to the San Gabriel Valley site. The EPA has
formally notified several entities that they have been identified
as being potentially responsible parties with respect to the San
Gabriel Valley site. As the Company was not included in this
group, its potential involvement in this matter is uncertain at
this point given that either the PRPs named to date or the EPA
could seek to expand the list of potentially responsible parties.
With respect to the Sharkey Landfill, the Company was
allocated .8144% of the remediation costs, an amount which was not
material to the Company. No allocations were made to the date of
the Distribution with respect to the Combe Landfill. In addition
to the foregoing, the Solvent Recovery Service of New England site
and the Old Southington landfill site, both in Connecticut, are on
the National Priorities List, but, with respect thereto, there is
resort to indemnification from third parties, and, based on
information available to the Company prior to the Distribution, the
Company believed it would be entitled to participate in a de
minimis capacity.
With respect to the Combe Landfill, the Company paid
approximately $414,000 as its share of a $6.3 million settlement in
a CERCLA cost recovery action filed by the U.S. Environmental
Protection Agency. The New Jersey Department of Environmental
Protection has filed a related claim with respect to the same site
for approximately $5.5 million in the New Jersey Superior Court for
Morris County. The state action has more defendants than the
settled federal action, and part of the state claim is for future
costs which may be subject to negotiation. Any liabilities with
respect to the Sharkey Landfill, the Combe Landfill, the Solvent
Recovery Service of New England site and the Old Southington
Landfill site, remain with certain subsidiaries of CIRCOR, and the
Company has resort to indemnification from CIRCOR for any liability
associated with these sites.
During the quarter ending March 31, 1998, the Company received
an administrative order from the New Hampshire Department of
Environmental Services (the "NH DES") with respect to certain
regulatory issues concerning its Franklin, New Hampshire operation.
The Company has entered into an amended administrative order with
the NH DES and has withdrawn its appeal of this matter. The state
agency has recently proposed monetary sanctions which are subject
to negotiation and to which the Company intends to respond.
Based on facts presently known to it, the Company does not
believe that the outcome of environmental proceedings will have a
material adverse effect on its financial condition or results of
operations. Given the nature and scope of the Company's
manufacturing operations, there can be no assurance that the
Company will not become subject to other environmental proceedings
and liabilities in the future which may be material to the Company.
See Note 7 of the Notes to the Consolidated Financial Statements.
Other Litigation
Other lawsuits and proceedings or claims, arising from the
ordinary course of operations, are also pending or threatened
against the Company and its subsidiaries. Based on the facts
currently known to it, the Company does not believe that the
ultimate outcome of these other litigation matters will have a
material adverse effect on its financial condition or results of
operation. See Note 7 of the Notes to the Consolidated Financial
Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits are furnished elsewhere in this report.
(b) There were no reports filed on Form 8-K during the quarter
ended September 30, 1999.
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.
WATTS INDUSTRIES, INC.
Date: November 10, 1999 By:/s/ Timothy P. Horne
Timothy P. Horne
Chairman and Chief
Executive Officer
Date: November 10, 1999 By: /s/ Kenneth J. McAvoy
Kenneth J. McAvoy
Chief Financial Officer
and Treasurer
EXHIBIT INDEX
Listed and indexed below are all Exhibits filed as part of this report.
Exhibit No. Description
2.1 Distribution Agreement between Watts Industries, In. and CIRCOR
International, Inc. (7)
3.1 Restated Certificate of Incorporation, as amended. (1)
3.2 Amended and Restated By-Laws, as amended May 11, 1999 (2).
10.1 Letter of Credit, Reimbursement and Guaranty Agreement dated
September 1, 1994 by and among the Registrant, Watts Regulator
Company and First Union National Bank (1), Amend- ment No. 1
(3), Amendment No. 2 (4), and Amendment No. 3 dated October 18, 1999.*
10.2 Amended and Restated Revolving Credit Agreement dated March 27,
1998 between and among Watts Investment Company, certain
financial institutions, BankBoston N.A., as
Administrative Agent, and the Registrant, as Guarantor (5), and
First Amendment to Amended and Restated Revolving Credit
Agreement dated October 18, 1999.*
11 Computation of Earnings per Share (6)
27 Financial Data Schedule - September 30, 1999*
27.1 Restated Financial Data Schedule - September 30, 1998*
(1) Incorporated by reference to the relevant exhibit to the
Registrant's Form 10-K for the year ended June 30, 1995.
(2) Incorporated by reference to the relevant exhibit to the
Registrant's Form 10-Q for the quarter ended March 31, 1999.
(3) Incorporated by reference to the relevant exhibit to the
Registrant's form 10-K for the year ended June 30, 1996.
(4) Incorporated by reference to the relevant exhibit to the
Registrant's Form 10-K for the year ended June 30, 1997.
(5) Incorporated by reference to the relevant exhibit to the
Registrant's Form 10-Q for the quarter ended March 31,
1998.
(6) Incorporated by reference to the Notes to Consolidated
Financial Statements, Note 3, of this Report.
(7) Exhibit 2.1 to CIRCOR International, Inc. Amendment No. 2 to
its registration statement on Form 10 filed on October 6, 1999.
(File No. 000-26961)
*Filed herewith.
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