SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1997
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
Securities registered pursuant to Section 12(b) of the Act:
CLASS A COMMON STOCK, PAR VALUE $.10 PER SHARE
Name of exchange on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock of the Registrant held by
non-affiliates of the Registrant on August 12, 1997 was $402,994,121.
As of August 12, 1997, 15,836,460 shares of Class A Common Stock, $.10 par
value, and 11,199,127 shares of Class B Common Stock, $.10 par value, of the
Registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
- -----------------------------------
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on October 21, 1997, are incorporated by reference into
Part III of this Report.
PART I
Item 1. BUSINESS.
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GENERAL
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Watts Industries, Inc., (the "Company") designs, manufactures and sells an
extensive line of valves for the plumbing and heating, water quality,
industrial, and oil and gas industries. Watts has focused on the valve industry
since its inception in 1874, when it was founded to design and produce steam
regulators for New England textile mills. Today, the Company is a leading
manufacturer and supplier of plumbing and heating and water quality valve
products, which account for approximately two-thirds of its sales. The Company's
growth strategy emphasizes internal development of new valve products and entry
into new markets for specialized valves and related products through
diversification of its existing business and strategic acquisitions in related
business areas, both domestically and abroad. The Company was incorporated in
Delaware in 1985.
The Company's product lines include safety relief valves, regulators,
thermostatic mixing valves, ball valves and flow control valves for water
service primarily in residential and commercial environments, and metal and
plastic water supply/drainage products including valves, tubular brass products,
faucets, drains, sink strainers, compression and flare fittings, and plastic
tubing and braided metal hose connectors for residential construction and home
repair and remodeling; backflow preventers for preventing contamination of
potable water caused by reverse flow within water supply lines and fire
protection equipment; steam regulators and control devices for industrial, HVAC
and naval/marine applications; ball valves, cryogenic valves, pneumatic and
electric actuators, relief valves, check valves and butterfly valves for
industrial applications; and floating and trunnion ball valves, oil field check
valves, and large ball valves for the oil and gas industry. Within a majority of
the product lines the Company manufactures and markets, the Company believes
that it has the broadest product line in terms of the distinct designs, sizes
and configurations of its valves. Products representing a majority of the
Company's sales have been approved under regulatory standards incorporated into
state and municipal plumbing and heating, building and fire protection codes,
and similar approvals from oil and gas industry standards agencies and from
various agencies in the European market have been obtained. The Company has
consistently advocated the development and enforcement of performance and safety
standards, and is currently planning new investments and implementing additional
procedures as part of its commitment to meet these standards. The Company
maintains quality control and testing procedures at each of its manufacturing
facilities in order to produce products in compliance with code requirements.
Additionally, a majority of the Company's manufacturing subsidiaries have either
acquired or are working to acquire ISO 9000, 9001 or 9002 certification from the
International Organization for Standardization (ISO).
On September 4, 1996 the Company divested itself of its Municipal Water
Group, which includes Henry Pratt Company ("Pratt"), James Jones Company
("Jones"), and Edward Barber & Co. Ltd. ("Barber"), pursuant to a Stock Purchase
Agreement dated June 19, 1996. On September 5, 1996, a wholly owned subsidiary
of the Company acquired Consolidated Precision Corporation ("CPC") located in
Riviera Beach, Florida. CPC manufactures control valves, manual and actuated
shutoff valves, cryogenic filters, valve manifolds, and bayonet fittings for the
cryogenic, ultra high purity, and industrial gas markets. The sales of CPC for
the twelve month period ended May 31, 1996 were approximately $2,500,000. On
January 3, 1997, a wholly owned subsidiary of the Company acquired Ames Company,
Inc. ("Ames") located in Woodland, California. Ames manufactures UL/FM backflow
prevention valves for use in fire protection equipment and automatic control
valves to control the pressure and flow of water and other fluids. Ames had
sales of approximately $27,000,000 for the twelve month period ended December
31, 1996. In June of 1997, the Company sold its vitreous china and faucet
business to a joint venture in which it has a 49% minority interest. In fiscal
1997, sales of these products amounted to approximately $15,000,000. Since the
Company will use the equity method to account for its investment in the joint
venture, these sales will not be included in its consolidated net sales in the
future.
The Company relies primarily on commissioned representative organizations,
most of whom maintain a consigned inventory of the Company's products, to market
its product lines. These organizations, which accounted for approximately 70% of
the Company's net sales in the fiscal year ended June 30, 1997, sell primarily
to plumbing and heating wholesalers, DIY Market accounts, and steam, industrial,
oil and gas distributors for resale to end users in the United States and
abroad. The Company sells metal and plastic water supply/drainage products
including valves, tubular brass products, faucets, drains, sink strainers,
compression and flare fittings, plastic tubing and braided metal hose connectors
for the residential construction and home repair and remodeling industries
through do-it-yourself plumbing retailers, national catalog distribution
companies, hardware stores, building material outlets and retail home center
chains ("DIY Markets") and through the Company's existing plumbing and heating
wholesalers. The industrial product line is sold to domestic process industries
through distributors and to aerospace and aircraft industries through special
distributors and manufacturers' representatives, and the oil and gas product
line is sold to domestic oil and gas industries through stocking supply stores
and internationally through commissioned
agents. The Company also sells products directly to certain large original
equipment manufacturers (OEM's) and private label accounts. The Company also
maintains direct and indirect sales channels for water valves, steam valves,
relief valves, shut-off valves, check valves, butterfly valves, ball valves and
flow meters to the power generation, maritime, heating, ventilation and
air-conditioning, irrigation, fire protection, and refrigeration industries and
utilities. The Company believes that sales to the residential construction and
to the oil and gas markets may be subject to cyclical variations to a greater
extent than its other targeted markets. However, because the Company sells into
different geographic areas, and to large and diverse customers, any potential
adverse effects from any cyclical variations tend to be mitigated. No assurance
can be given that the Company will be protected from a broad downturn in the
economy. There was no single customer which accounted for more than 10% of sales
in the fiscal year ended June 30, 1997.
The Company has a fully integrated and highly automated manufacturing
capability including foundry operations, machining operations, injection molding
and assembly. The Company's foundry operations include metal pouring systems and
automatic core making, mold making and pouring capabilities. The Company's
machining operations feature computer-controlled machine tools, high-speed
chucking machines and automatic screw machines for machining bronze, brass, iron
and steel components. See "Properties" below. The Company has invested heavily
in recent years to expand its manufacturing base and to ensure the availability
of the most efficient and productive equipment. Capital expenditures were
$29,742,000, $31,080,000, and $27,980,000 for fiscal 1997, 1996, and 1995,
respectively. Depreciation and amortization for such periods were $20,828,000,
$21,574,000, and $20,345,000, respectively.
Five significant raw materials used in the Company's production processes
are bronze ingot, brass rod, cast iron, carbon steel and stainless steel. While
the Company historically has not experienced significant difficulties in
obtaining these commodities in quantities sufficient for its operations, there
have been significant changes in their prices. The Company's gross profit
margins are adversely affected to the extent that the selling prices of its
products do not increase proportionately with increases in the costs of bronze
ingot, brass rod, cast iron, carbon steel and stainless steel. Any significant
unanticipated increase or decrease in the prices of these commodities could
materially affect the Company's results of operations. However, increased sales
volume, an active materials management program, and the diversity of materials
used in the Company's production processes have somewhat diminished the impact
from changes in the cost of these five raw materials. No assurances can be given
that this will protect the Company from future changes in the prices for such
raw materials.
The domestic and international markets for valves are intensely competitive
and include companies possessing greater financial, marketing and other
resources than the Company. Management considers product reputation, price,
effectiveness of distribution and breadth of product line to be the primary
competitive factors. The Company believes that new product development and
product engineering are also important to success in the valve industry and that
the Company's position in the industry is attributable in significant part to
its ability to develop new and innovative products quickly and to adapt and
enhance existing products. During fiscal 1997, the Company began development of
several new and innovative products to enhance market position and is currently
implementing newly identified manufacturing and design programs to reduce costs.
The Company employs over 100 engineers and technicians, which does not include
engineers working in the Chinese joint ventures, who engage primarily in these
activities. Although the Company owns certain patents and trademarks that it
considers to be of importance, it does not believe that its business and
competitiveness as a whole is dependent on any one or more patents or trademarks
or on patent or trademark protection generally.
The Company's financial information by geographic area is contained in Note
14 of Notes to Consolidated Financial Statements incorporated herein by
reference. From time to time, the Company's results of operations may be
adversely affected by fluctuations in foreign exchange rates. Backlog was
$104,559,000 at August 15, 1997 and $97,917,000 at August 16, 1996. The Company
does not believe that its backlog at any point in time is indicative of future
operating results. Available funds and funds provided from the Company's
operations are sufficient to meet anticipated capital requirements. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", below as it relates to the impact of foreign exchange rates and
capital requirements.
As of June 30, 1997, the Company's domestic and foreign operations employed
approximately 3,900 people, plus 750 employees in the Company's joint ventures
located in the People's Republic of China. There are approximately 139 employees
that are covered by collective bargaining agreements in the United States and
Canada. The Company believes that its employee relations are excellent.
EXECUTIVE OFFICERS
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Information with respect to the executive officers of the Company is set
forth below:
Name Position Age
---- -------- ---
TIMOTHY P. HORNE Chairman of the Board, Chief Executive Officer and Director 59
DAVID A. BLOSS, SR. President, Chief Operating Officer and Director 47
FREDERIC B. HORNE Corporate Vice President and Director 47
KENNETH J. MCAVOY Chief Financial Officer, Treasurer, Secretary and Director 57
ROBERT T. MCLAURIN Corporate Vice President of Asian Operations 66
MICHAEL O. FIFER Vice President of Corporate Development 40
WILLIAM C. MCCARTNEY Vice President of Finance 43
SUZANNE M. ZABITCHUCK Corporate Counsel and Assistant Secretary 42
Timothy P. Horne joined the Company in September 1959 and has been a
Director since 1962. Mr. Horne served as the Company's President from 1976 to
1978 and again from 1994 to April 1997. He has served as Chief Executive Officer
since 1978 and he became the Company's Chairman of the Board in April 1986.
David A. Bloss, Sr., was appointed President and Chief Operating Officer in
April, 1997. He joined the Company as Executive Vice President in July 1993 and
has been a Director since January 1994. Prior to joining the Company, Mr. Bloss
was for five years associated with the Norton Company, a manufacturer of
abrasives and cutting tools, serving most recently as President of the
Superabrasives Division.
Frederic B. Horne, brother of Timothy P. Horne, joined the Company in 1973
and has been Corporate Vice President of the Company since August 1987 and a
Director since 1980. Mr. Horne served as the Company's Vice President and
General Manager from 1978 to August 1987.
Kenneth J. McAvoy joined the Company in 1981 as Corporate Controller. He
served as the Company's Vice President of Finance from 1984 to 1994. He has been
the Chief Financial Officer and Treasurer since June 1986, and has been a
Director since January 1994. Mr. McAvoy served as Executive Vice President of
European Operations from January 1994 to June 1996. Mr. McAvoy has also served
as Secretary or Clerk since January 1985.
Robert T. McLaurin was appointed Corporate Vice President of Asian Operations
in August 1994. He served as the Senior Vice President of Manufacturing of Watts
Regulator Co. from 1983 to August 1994. He joined Watts Regulator Company as
Vice President of Manufacturing in 1978.
Michael O. Fifer joined the Company in May 1994 and was appointed the
Company's Vice President of Corporate Development. Prior to joining the Company,
Mr. Fifer was Associate Director of Corporate Development with Dynatech Corp., a
diversified high-tech manufacturer, from 1991 to April 1994.
William C. McCartney joined the Company in 1985 as Controller. He was
appointed the Company's Vice President of Finance in 1994, and he has been
Corporate Controller of the Company since April 1988.
Suzanne M. Zabitchuck has been Corporate Counsel of the Company since joining
the Company in December 1992. Ms. Zabitchuck was appointed Assistant Secretary
in August 1993. Ms. Zabitchuck was associated with The Stride Rite Corporation,
a shoe manufacturer, serving as its Associate General Counsel and Clerk
immediately prior to joining the Company.
PRODUCT LIABILITY AND ENVIRONMENTAL MATTERS
- -------------------------------------------
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.
Leslie Controls, Inc. and Spence Engineering Company, both 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 a
similar matter pending in the Superior Court of California, San Francisco
County. The Company has resort to certain insurance coverage with respect to
these matters. Coverage has been disputed by certain of the carriers and,
therefore, recovery is questionable, a factor which the Company has considered
in its evaluation of these matters. The Company has established reserves which
it currently believes are adequate in light of the probable and estimable
exposure of pending and threatened litigation of which it has knowledge. Based
on facts presently known to it, the Company does not believe that the outcome of
these proceedings will have a material adverse effect on its financial
condition, results of operations, or its liquidity.
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 on-going basis. The Company cannot predict the effect of future requirements
on its capital expenditures, earnings or competitive position due to any changes
in either 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. Four of these sites, the Sharkey
and Combe Landfills in New Jersey, the San Gabriel Valley/El Monte, California
water basin site, and the Cherokee Oil Resources Site in Charlotte, North
Carolina, are listed on the National Priorities List. With respect to the
Sharkey Landfill, the Company has been allocated .75% of the remediation costs,
an amount which is not material to the Company. No allocations have been made to
date with respect to the Combe Landfill or San Gabriel Valley sites. 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 PRP's named to date or
the EPA could seek to expand the list of potentially responsible parties. With
respect to the Cherokee Oil Resources Site, the Company has elected to
participate in a de minimis settlement. 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, the Company has resort to indemnification from third parties and based
on currently available information, the Company believes it will be entitled to
participate in a de minimis capacity.
With respect to the Combe Landfill, the Company is one of approximately 30
potentially responsible parties. The Company and all other PRP's received a
Supplemental Directive from the New Jersey Department of Environmental
Protection & Energy in 1994 seeking to recover approximately $9 million in the
aggregate for the operation, maintenance, and monitoring of the implemented
remedial action taken up to that time in connection with the Combe Landfill
North site. Certain of the PRP's, including the Company, are currently
negotiating with the state only to assume maintenance of this site in an effort
to reduce future costs. The Company and the remaining PRP's have also received a
formal demand from the U.S. Environmental Protection Agency to recover
approximately $17 million expended to date in the remediation of this site. The
EPA has filed suit against certain of the PRP's, and the Company has recently
been named a third-party defendant in this litigation.
Based on facts presently known to it, the Company does not believe that the
outcome of these proceedings will have a material adverse effect on its
financial condition, results of operations, or its liquidity. The Company has
established balance sheet accruals which it currently believes are adequate in
light of the probable and estimable exposure of pending and threatened
environmental litigation and proceedings of which it has knowledge. 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.
Item 2. PROPERTIES.
-----------
The Company's manufacturing operations include four casting foundries, two
of which are located in the United States, one in Europe and one at Tianjin
Tanggu Watts Valve Company Limited ("Tanggu Watts"), a joint venture located in
the People's Republic of China. Castings from these foundries and other
components are machined and assembled into finished valves at 22 manufacturing
facilities located in the United States, Canada, Europe and the People's
Republic of China. Many of these facilities contain sales offices or warehouses
from which the Company ships finished goods to customers and com-
missioned representative organizations. The Company's corporate headquarters are
located in North Andover, Massachusetts. The vast majority of the Company's
operating facilities and the related real estate are owned by the Company. The
buildings and land located in Nerviano, Italy and Tianjin, People's Republic of
China and the land located in Suzhou, People's Republic of China, are leased by
Pibiviesse S.p.A. ("PBVS"), Tanggu Watts and Suzhou Watts Valve Co., Ltd.
("Suzhou Watts") respectively, under lease agreements, the terms of which are 6
years, 30 years, and 30 years, respectively. Additionally, during fiscal 1997
the Company relocated the operations of Jameco Industries, Inc. ("Jameco") to
the Company's Watts Regulator plant in Spindale, North Carolina and began to
consolidate the operations of PBVS into one location at Nerviano, Italy. Certain
of the Company's facilities are subject to mortgages and collateral assignments
under loan agreements with long-term lenders. In general, the Company believes
that its properties, including machinery, tools and equipment, are in good
condition, well maintained and adequate and suitable for their intended uses.
The Company believes that the manufacturing facilities are currently operating
at a level that management considers normal capacity. This utilization is
subject to change as a result of increases or decreases in sales.
Item 3. LEGAL PROCEEDINGS.
------------------
Item 3(a). The Company is from time to time involved in various legal and
administrative procedures. See Part I, Item 1, "Product Liability and
Environmental Matters".
Item 3(b). None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
There were no matters submitted during the fourth quarter of the fiscal year
covered by this Report to a vote of security holders through solicitation of
proxies or otherwise.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
------------------------------------------------------------------
MATTERS.
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MARKET INFORMATION
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The following tabulation sets forth the high and low sales prices of the
Company's Class A Common Stock on the New York Stock Exchange during fiscal 1997
and fiscal 1996 and cash dividends per share:
High Low Dividend High Low Dividend
---- --- -------- ---- --- --------
1997 1996
---- ----
First Quarter $19 7/8 $15 1/2 $.07 $25 5/8 $22 3/8 $.0625
Second Quarter 24 1/4 19 .07 25 1/8 20 .0625
Third Quarter 26 3/8 23 .0775 23 5/8 16 5/8 .07
Fourth Quarter 26 1/2 21 1/4 .0775 20 5/8 17 7/8 .07
There is no established public trading market for the Class B Common Stock
of the Company, which is held exclusively by members of the Horne family and
management. The principal holders of such stock are subject to restrictions on
transfer with respect to their shares. Each share of Class B Common Stock (10
votes per share) of the Company is convertible into one share of Class A Common
Stock (1 vote per share). Aggregate common stock dividend payments for fiscal
1997, 1996, and 1995, were $7,992,000, $7,793,000 and $6,951,000, respectively.
While the Company presently intends to continue to pay cash dividends, payment
of future dividends necessarily depends upon the Board of Directors' assessment
of the Company's earnings, financial condition, capital requirements and other
factors. See Note 8 of Notes to Consolidated Financial Statements incorporated
herein by reference regarding restrictions on payment of dividends.
The number of record holders of the Company's Class A Common Stock as of
August 12, 1997 was 232. The Company believes that the number of beneficial
shareholders of the Company's Class A Common Stock was in excess of
approximately 4,500 as of August 12, 1997. The number of record holders of the
Company's Class B Common Stock as of August 12, 1997 was 11.
Item 6. SELECTED FINANCIAL DATA.
------------------------
The selected financial data set forth below should be read in conjunction
with the Company's consolidated financial statements, related Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein.
FIVE YEAR FINANCIAL SUMMARY
(Amounts in thousands, except per share information)
1997 1996(1) 1995 1994 1993(2)
---- ------- ---- ---- -------
Selected Data
Net sales from continuing operations $ 720,340 $ 640,876 $ 576,851 $ 444,484 $ 398,688
Income (loss) from continuing operations 48,460 (53,765) 42,463 39,400 24,923
Net income (loss) 51,747 (50,285) 45,738 41,010 27,274
Total assets 622,083 656,294 676,394 546,722 526,119
Total debt 128,359 163,150 144,240 98,244 103,434
Income (loss) per share from continuing operations 1.77 (1.82) 1.43 1.33 0.83
Net income (loss) per share 1.89 (1.70) 1.54 1.38 0.91
Dividends per common share 0.295 0.265 0.235 0.20 0.16
<FN>
(1) Fiscal 1996 includes an after-tax charge of $92,986,000 related to:
restructuring costs of $25,415,000; an impairment of long-lived assets of
$63,065,000; other charges of $13,753,000 principally for product liability
costs, additional bad debt reserves and environmental remediation costs; and
additional inventory valuation reserves of $9,508,000 (see Item 7 - "Management
Initiatives").
(2) Fiscal 1993 includes an after-tax charge of $7,471,000 related to cumulative
change in accounting method and other unusual charges.
</FN>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS.
--------------------------
MANAGEMENT INITIATIVES
- ----------------------
In fiscal 1996, the Company re-evaluated its strategy and decided to
restructure its business in an effort to improve the efficiency of the Company's
worldwide operations as described below:
DIVESTITURE
- -----------
As part of this strategy, the Company decided to divest itself of the
Municipal Water Group of Companies, which consisted of Henry Pratt Company,
James Jones Company, and Edward Barber & Company Ltd. This divestiture was
completed on September 4, 1996 resulting in an after-tax gain of $3,208,000. The
proceeds were used primarily to reduce long-term debt, fund the Company's share
repurchase program and fund acquisitions. This divestiture will enable the
Company to focus its acquisition and growth strategies on its core markets,
namely plumbing and heating and water quality, and industrial, and oil and gas.
The results of operations of the Municipal Water Group have been reported as
income from discontinued operations.
IMPAIRMENT OF LONG-LIVED ASSETS
- -------------------------------
During fiscal 1996 the Company recorded a $63,065,000 impairment of
long-lived asset loss. The impairment charge mainly pertains to the Company's
Italian subsidiaries and was the result of the potential non-deductibility of
goodwill amortization coupled with decreasing margins and operating profits. In
connection with the re-evaluation of its business strategy in Italy, management
concluded an impairment had occurred and recorded a loss by reducing the value
of affected long-lived assets, primarily goodwill, to fair value, as determined
using a discounted cash flow approach.
RESTRUCTURING ACTIVITIES
- ------------------------
The Company also decided to undertake certain restructuring initiatives
aimed at improving the efficiency of certain of its continuing operations. The
two most significant initiatives are the consolidation and downsizing of
Pibiviesse S.p.A. ("PBVS") and the relocation of Jameco Industries, Inc.
("Jameco").
The Company initiated a plan to consolidate and downsize the operations of
its PBVS subsidiary in Italy. The downsizing has occurred, and the consolidation
will be completed during fiscal 1998. PBVS has experienced an improvement in
sales volume and gross margin in fiscal 1997, even though the restructuring
efforts are still on-going. The Company also decided to relocate the
manufacturing operations of Jameco from Wyandanch, New York to a Watts Regulator
plant in Spindale, North Carolina. The expansion of the Spindale facility, which
will house the Jameco activity, is complete, and the manufacturing machinery and
equipment has been relocated. We expect this transfer to be fully completed in
early fiscal 1998.
The $25,415,000 of restructuring expense recorded in fiscal 1996 includes
$9,300,000 of severance; $8,400,000 of asset write-downs for assets to be
abandoned or sold; and $7,715,000 of exit costs. The $7,715,000 of exit costs
are comprised primarily of lease and other contract termination costs and plant
closure costs.
It is expected that the restructuring plan will be substantially complete by
the end of fiscal year 1998, although unanticipated events could affect the cost
and timing of the restructuring plan.
OTHER MATTERS
- -------------
In fiscal 1996, the Company recorded a $13,753,000 selling, general and
administrative expense charge, principally for product liability costs,
environmental remediation requirements and additional bad debt reserves. Also, a
$9,508,000 inventory write-down was recorded during fiscal 1996 to reduce
inventories to their estimated market value.
CONCLUSION
- ----------
The effect of the aforementioned fiscal year 1996 charges is summarized
below:
(In thousands)
--------------
Inventory write-down charged to cost of goods sold $ 9,508
Selling, general and administrative expense charge 13,753
Impairment of long-lived assets 63,065
Restructuring expense 25,415
---------
111,741
Income tax benefit (18,755)
---------
After-tax charge $ 92,986
========
RESULTS OF OPERATIONS
- ---------------------
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO
- -------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1996
- -------------------------------
Net sales from continuing operations increased $79,464,000 (12.4%) to
$720,340,000. An analysis of this increase in net sales is as follows:
1997 - 1996
(In thousands)
Domestic
-Internal Growth $43,256 6.8%
International
-Internal Growth $25,297 3.9%
-Exchange Rate Effect $(8,037) (1.3%)
-------- ------
Total International $17,260 2.6%
Acquisitions $18,948 3.0%
-------- ------
Total Increase $79,464 12.4%
======== ======
The increase in net sales from internal growth is primarily attributable to
increased unit shipments of oil and gas valves and plumbing and heating valves.
The increased unit shipments of oil and gas valves is supported by a strong
worldwide oil and gas market. The increased unit shipments of plumbing and
heating valves is primarily associated with increased demand from plumbing and
heating wholesalers and increased penetration into the home repair retail market
(DIY). The increased sales due to acquisitions is primarily attributable to the
acquisition of Ames Company, Inc. ("Ames") of Woodland, CA in January
1997. The Company intends to maintain its strategy of seeking acquisition
opportunities as well as expanding its existing market position to achieve sales
growth.
Gross profit from continuing operations increased $33,194,000 (15.6%).
Excluding the $9,508,000 of inventory write-downs recorded in cost of sales last
fiscal year, gross profit would have increased $23,686,000 (10.7%) to
$245,392,000 and decreased as a percentage of net sales from 34.6% to 34.1%. The
gross profit percentage was primarily, among other things, adversely affected by
decreased absorption of fixed expenses that occurred because the Company reduced
production levels to achieve inventory reductions. The decreased absorption was
partially offset by improved gross margins for oil and gas valves due to
increased sales volumes and factory efficiencies.
Selling, general and administrative expenses in the year ended June 30, 1996
include a $13,753,000 charge for product liability costs, environmental
remediation and additional bad debt reserves. Selling, general and
administrative expenses excluding this charge increased $9,786,000 (6.6%) to
$158,984,000 and decreased as a percentage of net sales from 23.3% to 22.1%. The
increase in spending is primarily attributable to increased commissions and
variable selling expenses associated with the increased sales and the inclusion
of the expenses of acquired companies.
The Company's effective tax rate was favorably effected in fiscal 1997 by
tax planning strategies and utilization of foreign net operating loss carry
forwards. During fiscal 1996, the Company's effective tax rate was unfavorably
effected by the substantially non-deductible nature of the long-lived asset
impairment loss.
Earnings from continuing operations increased by $102,225,000 when compared
to fiscal 1996, and by $9,239,000 (23.6%) when the $92,986,000 after-tax effect
of the items described above under "Management Initiatives" are excluded from
the comparison. The Company's return on average stockholders' investment,
excluding the gain on the sale of the Municipal Water Group, was 14.9% for
fiscal 1997 compared to 9.6% in fiscal 1996 (as adjusted to exclude the 1996
items described above).
The Company experienced an unfavorable impact due to the change in foreign
exchange rates since June 30, 1996. This change did not have a material adverse
impact on the results of operations or the financial condition of the Company.
RESULTS OF OPERATIONS
- ---------------------
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO
- -------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1995
- -------------------------------
Net sales from continuing operations increased $64,025,000 (11.1%) to
$640,876,000. An analysis of this increase in net sales is as follows:
1996 - 1995
(In thousands)
Domestic
-Internal Growth $11,759 2.0%
International
-Internal Growth $ 4,697 0.8%
-Exchange Rate Effect $ 3,145 0.6%
-------- ------
Total International $ 7,842 1.4%
Acquisitions $44,424 7.7%
-------- ------
Total Increase $64,025 11.1%
======= ======
This increase in internal growth was primarily attributable to increased
unit shipments of plumbing and heating and water quality valves in the United
States and Europe. The increase in sales from acquisitions was primarily
attributable to the acquisition of Anderson-Barrows Metals Corporation of
Palmdale, CA, PBVS of Nerviano, Italy, and Etablissements Trubert S.A. of
Chartres, France.
Gross profit from continuing operations increased $1,486,000 (0.7%) to
$212,198,000 but decreased as a percentage of sales from 36.5% to 33.1%. This
decreased percentage was primarily attributable to the inclusion of $9,508,000
in costs related primarily to inventory write-downs to market value. Gross
profit from continuing operations exclusive of these charges would have been
$221,706,000 or 34.6% of net sales. This decreased percentage was primarily
attributable to lower gross margins experienced within the Industrial and Oil
and Gas group as a result of competitive pricing and unfavorable manufactur-
ing variances. In addition, unfavorable manufacturing variances associated with
reduced production levels caused by lower sales volume experienced within the
steam group adversely impacted the Company's gross margin. The inclusion of
certain acquired companies which operate at a lower gross margin than the rest
of the Company also adversely impacted the gross margin. Gross profit was also
adversely affected by increased raw material costs of bronze ingot, carbon and
stainless steel, which, due to competitive pricing pressures, could not be
completely recovered through price increases.
Selling, general and administrative expenses from continuing operations
increased $29,350,000 (22%) to $162,951,000. This increase is primarily
attributable to the inclusion of a $13,753,000 additional charge for product
liability costs, environmental remediation and bad debt reserves discussed above
and the expenses of acquired companies.
Interest income from continuing operations decreased $1,228,000 (63.6%) to
$702,000 due to decreased levels of cash and short-term investments.
Interest expense from continuing operations increased $592,000 (6.3%) to
$9,960,000. This increase was primarily attributable to the increased levels of
debt incurred in association with the acquisitions.
The effective tax rate from continuing operations, exclusive of the
restructuring, impairment of long-lived assets and other matters, decreased to
37.1% in fiscal 1996 from 37.7% in fiscal 1995.
Net income (loss) from continuing operations decreased $96,228,000 (226.6%)
to $(53,765,000). Net income from continuing operations exclusive of the
impairment loss, restructuring charge and other matters referred to under
"Management Initiatives" above, would have decreased $3,242,000 (7.6%) to
$39,221,000.
The change in foreign exchange rates did not have a material impact on the
net results of operations or the financial condition of the Company.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During fiscal 1997, the Company generated $58,870,000 in cash flow from
operations, which was principally used to reduce borrowings under its line of
credit and to fund capital expenditures.
In fiscal 1997, the Company received $88,164,000 of proceeds as a result of
its sale of the Municipal Water Group. These proceeds were used to fund the
acquisitions that are described below, reduce the borrowings under its line of
credit and to fund additional share purchases under its existing stock
repurchase program.
Capital expenditures for fiscal 1997 were $29,742,000, primarily for
manufacturing machinery and equipment, as part of its commitment to continuously
improve its manufacturing capabilities. The Company's capital expenditure budget
for fiscal 1998 is $29,500,000.
The Company purchased 1,321,300 shares of Class A Common Stock for an
aggregate purchase price of $25,564,000.
During the twelve months ended June 30, 1997, the Company invested
$37,705,000 in two acquisitions. In September 1996, a wholly-owned subsidiary of
the Company purchased certain assets and assumed certain liabilities of CPC. CPC
is a manufacturer of high quality control valves, manual and actuated shut-off
valves, cryogenic filters, valve manifolds and bayonet fittings for the
cryogenic and ultra-high purity and industrial gas market. CPC had sales of
approximately $2,500,000 for the twelve months ended May 31, 1996. In January
1997, a wholly-owned subsidiary of the Company purchased Ames. Ames designs,
manufactures, and markets UL/FM certified backflow prevention valves for use in
the fire protection market. Ames had sales of approximately $27,000,000 for the
twelve months ended December 31, 1996.
The Company has available an unsecured $125,000,000 line of credit which
expires on August 31, 1999. The Company's intent is to utilize this credit
facility to support the Company's acquisition program, working capital
requirements of acquired companies, and for general corporate purposes. As of
June 30, 1997, there was $29,000,000 borrowed under this line of credit.
Working capital at June 30, 1997 was $224,702,000 compared to $286,205,000
at June 30, 1996. The ratio of current assets to current liabilities was 2.9 to
1 at June 30, 1997 compared to 3.2 to 1 at June 30, 1996. This decrease is
principally attributable to repayment of long-term debt and the Company's stock
repurchase program. Cash and short-term investments were $14,422,000 at June 30,
1997 compared to $0 at June 30, 1996. Debt as a percentage of total capital
employed was 27.8% at June 30, 1997 compared to 33.8% at June 30, 1996. At June
30, 1997 the Company was in compliance with all covenants related to its
existing debt.
The Company from time to time is involved with environmental proceedings and
incurs costs on an on-going basis related to environmental matters. The Company
currently anticipates that it will not incur significant expenditures in fiscal
1998
in connection with any of these environmentally contaminated sites. Please see
Part I, Item 1, "Product Liability and Environmental Matters".
The Company anticipates that available funds and funds provided from current
operations will be sufficient to meet current operating requirements and
anticipated capital expenditures for at least the next 24 months.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
--------------------------------------------
The index to financial statements is included in page 12 of this Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
The information called for by this Item 9 was previously reported in a
Current Report on Form 8-K filed with the Securities and Exchange Commission on
April 11, 1997. Also see Item 14(b).
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
---------------------------------------------------
DIRECTORS
- ---------
The information appearing under the caption "Information as to Directors and
Nominees for Director" in the Registrant's Proxy Statement relating to the
Annual Meeting of Stockholders to be held on October 21, 1997 is incorporated
herein by reference.
EXECUTIVE OFFICERS
- ------------------
Information with respect to the executive officers of the Company is set
forth in Item 1 of this Report under the caption "Executive Officers".
Item 11. EXECUTIVE COMPENSATION.
-----------------------
The information appearing under the caption "Compensation Arrangements" in
the Registrant's Proxy Statement relating to the Annual Meeting of Stockholders
to be held on October 21, 1997 is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
The information appearing under the caption "Principal and Management
Stockholders" in the Registrant's Proxy Statement relating to the Annual Meeting
of Stockholders to be held on October 21, 1997 is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
The information appearing under the caption "Compensation
Arrangements-Certain Transactions" in the Registrant's Proxy Statement relating
to the Annual Meeting of Stockholders to be held on October 21, 1997 is
incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
----------------------------------------------------------------
(a)(1) FINANCIAL STATEMENTS
- ---------------------------
The following financial statements are included in a separate section of
this Report commencing on the page numbers specified below:
Report of Independent Auditors 16
Consolidated Statements of Operations for each of the Three Years
in the Period Ended June 30, 1997 17
Consolidated Balance Sheets as of June 30, 1997 and 1996 18
Consolidated Statements of Stockholders' Equity for each of the Three Years
in the Period Ended June 30, 1997 19
Consolidated Statements of Cash Flows for each of the Three Years
in the Period Ended June 30, 1997 20
Notes to Consolidated Financial Statements 21
(a)(2) SCHEDULES
- ----------------
Schedule II - Valuation and Qualifying Accounts for each of the Three Years
in the Period Ended June 30, 1997 33
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(a)(3) EXHIBITS
- ---------------
Exhibits 10.1-10.6, 10.8, 10.22, and 10.29 constitute all of the management
contracts and compensation plans and arrangements of the Company required to be
filed as exhibits to this Annual Report. Upon written request of any stockholder
to the Chief Financial Officer at the Company's principal executive office, the
Company will provide any of the Exhibits listed below.
Exhibit No. Description and Location
3.1 Restated Certificate of Incorporation, as amended. (12)
3.2 Amended and Restated By-Laws. (1)
9.1 Horne Family Voting Trust Agreement-1991 dated as of October 31,
1991 (2), Amendments dated November 19, 1996*, February 24, 1997*,
June 5, 1997*, and August 26, 1997.*
9.2 The George B. Horne Voting Trust Agreement-1997 dated as of August
26, 1997. *
10.1 Employment Agreement effective as of September 1, 1996 between the
Registrant and Timothy P. Horne. (14)
10.2 Supplemental Compensation Agreement effective as of September 1,
1996 between the Registrant and Timothy P. Horne. (14)
10.3 Deferred Compensation Agreement between the Registrant and Timothy
P. Horne, as amended. (4)
10.4 1996 Stock Option Plan, dated October 15, 1996. (15)
10.5 1989 Nonqualified Stock Option Plan. (3)
10.6 Watts Industries, Inc. Retirement Plan for Salaried Employees dated
December 30, 1994, as amended and restated effective as of January
1, 1994, (12), Amendment No. 1 (14), Amendment No. 2 (14), Amendment
No. 3 (14), Amendment No. 4 dated September 4, 1996.*
10.7 Registration Rights Agreement dated July 25, 1986. (5)
10.8 Executive Incentive Bonus Plan, as amended. (12)
10.9 Indenture dated as of December 1, 1991 between the Registrant and
The First National Bank of Boston, as Trustee, including form of
8-3/8% Note Due 2003. (8)
10.10 Loan Agreement and Mortgage among The Industrial Development
Authority of the State of New Hampshire, Watts Regulator Co. and
Arlington Trust Company dated August 1, 1985. (4)
10.11 Amendment Agreement relating to Watts Regulator Co. (Canaan and
Franklin, New Hampshire, facilities) financing dated December 31,
1985. (4)
10.12 Sale Agreement between Village of Walden Industrial Development
Agency and Spence Engineering Company, Inc. dated June 1, 1994. (11)
10.13 Letter of Credit, Reimbursement and Guaranty Agreement dated June 1,
1994 by and among the Registrant, Spence Engineering Company, Inc.
and First Union National Bank of North Carolina. (11), Amendment No.
1 (14), Amendment No. 2 dated October 1, 1996.*
10.14 Trust Indenture from Village of Walden Industrial Development Agency
to The First National Bank of Boston, as Trustee, dated June 1,
1994. (11)
10.15 Loan Agreement between Hillsborough County Industrial Development
Authority and Leslie Controls, Inc. dated July 1, 1994. (11)
10.16 Letter of Credit, Reimbursement and Guaranty Agreement dated July 1,
1994 by and among the Registrant, Leslie Controls, Inc. and First
Union National Bank of North Carolina (11), Amendment No. 1 (14),
Amendment No. 2 dated October 1, 1996.*
10.17 Trust Indenture from Hillsborough County Industrial Development
Authority to The First National Bank of Boston, as Trustee, dated
July 1, 1994. (11)
10.18 Loan Agreement between The Rutherford County Industrial Facilities
and Pollution Control Financing Authority and Watts Regulator
Company dated September 1, 1994. (12)
10.19 Letter of Credit, Reimbursement and Guaranty Agreement dated
September 1, 1994 by and among the Registrant, Watts Regulator
Company and The First Union National Bank of North Carolina (12),
Amendment No. 1 (14), Amendment No. 2 dated October 1, 1996.*
10.20 Trust Indenture from The Rutherford County Industrial Facilities and
Pollution Control Financing Authority to The First National Bank of
Boston,as Trustee, dated September 1, 1994. (12)
10.21 Amended and Restated Stock Restriction Agreement dated October 30,
1991 (2), Amendment dated August 26, 1997.*
10.22 Watts Industries, Inc. 1991 Non-Employee Directors' Nonqualified
Stock Option Plan (7), Amendment No. 1. (14)
10.23 Letters of Credit relating to retrospective paid loss insurance
programs. (10)
10.24 Form of Stock Restriction Agreement for management stockholders. (5)
10.25 Revolving Credit Agreement dated December 23, 1987 between
Nederlandse Creditbank NV and Watts Regulator (Nederland) B.V. and
related Guaranty of Watts Industries, Inc. and Watts Regulator Co.
dated December 14, 1987. (6)
10.26 Loan Agreement dated September 1987 with, and related Mortgage to,
N.V. Sallandsche Bank. (6)
10.27 Agreement of the sale of shares of Intermes, S.p.A., RIAF Holding
A.G. and the participations in Multiscope Due S.R.L. dated November
6, 1992. (9)
10.28 Revolving Credit Agreement dated August 30, 1994 between and among
Watts Investment Company, certain financial institutions, the First
National Bank of Boston, as Agent, and the Registrant, as Guarantor
(11), Amendment No. 1 (14), Amendment No. 2. (14)
10.29 Watts Industries, Inc. Management Stock Purchase Plan dated October
17, 1995 (13), Amendment No. 1 dated August 5, 1997.*
10.30 Stock Purchase Agreement dated as of June 19, 1996 by and among
Mueller Co., Tyco Valves Limited, Watts Investment Company, Tyco
International Ltd. and Watts Industries, Inc. (16)
11. Statement Regarding Computation of Earnings per Common Share. *
21. Subsidiaries. *
23.1 Consent of KPMG Peat Marwick LLP. *
23.2 Consent of Ernst & Young LLP, Independent Auditors, predecessor
auditors.*
23.3 Consent of Deloitte & Touche, Independent Auditors, predecessor
auditors.*
27. Financial Data Schedule. *
INCORPORATED BY REFERENCE TO:
- -----------------------------
(1) Relevant exhibit to Registrant's Form 8-K dated May 15, 1992.
(2) Relevant exhibit to Registrant's Form 8-K dated November 14, 1991.
(3) Relevant exhibit to Registrant's Form 10-K for the year ended June 30,
1989.
(4) Relevant exhibit to Registrant's Form S-1 (No.33-6515) dated June 17, 1986.
(5) Relevant exhibit to Registrant's Form S-1 (No. 33-6515) as part of the
Second Amendment to such Form S-1 dated August 21, 1986.
(6) Relevant exhibit to Registrant's Form S-1 (No. 33-27101) dated February 16,
1989.
(7) Relevant exhibit to Registrant's Amendment No. 1 to Form 10-K for year
ended June 30, 1992.
(8) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1992.
(9) Relevant exhibit to Registrant's Amendment No. 2 dated February 22, 1993 to
Form 8-K dated November 6, 1992.
(10) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1993.
(11) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1994.
(12) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1995.
(13) Relevant exhibit to Registrant's Form S-8 (No. 33-64627) dated November 29,
1995.
(14) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1996.
(15) Relevant exhibit to Registrant's Form S-8 (No. 333-32685) dated
August 1, 1997.
(16) Relevant exhibit to Registrant's Form 8-K dated September 4, 1996.
* Filed as an exhibit to this Report with the Securities and Exchange
Commission
(b) REPORTS ON FORM 8-K.
- ------------------------
A report on Form 8-K was filed with the Securities and Exchange Commission
on April 11, 1997. The following items were reported in the Form 8-K:
(1) Item 4. Changes in Registrant's Certifying Accountant.
(2) Item 7 (c). Financial Statements, Pro Forma Financial Information and
Exhibits. Letters from Ernst & Young LLP and Deloitte & Touche were filed as
Exhibits (letter re change in certifying accountant).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ TIMOTHY P. HORNE
---------------------
TIMOTHY P. HORNE
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
DATED: SEPTEMBER 8, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ TIMOTHY P. HORNE Chairman of the Board and Chief Executive Officer September 8, 1997
- --------------------------
Timothy P. Horne (Principal Executive Officer) and Director
/S/ KENNETH J. MCAVOY Chief Financial Officer and Treasurer (Principal Financial September 8, 1997
- --------------------------
Kenneth J. McAvoy and Accounting Officer), Secretary, and Director
/S/ DAVID A. BLOSS, SR. President and Chief Operating Officer, and Director September 8, 1997
- --------------------------
David A. Bloss, Sr.
/S/ FREDERIC B. HORNE Corporate Vice President and Director September 8, 1997
- --------------------------
Frederic B. Horne
/S/ NOAH T. HERNDON Director September 8, 1997
- --------------------------
Noah T. Herndon
/S/ WENDY E. LANE Director September 8, 1997
- --------------------------
Wendy E. Lane
/S/ GORDON W. MORAN Director September 8, 1997
- --------------------------
Gordon W. Moran
/S/ DANIEL J. MURPHY, III Director September 8, 1997
- --------------------------
Daniel J. Murphy, III
Independent Auditors' Report
The Board of Directors
Watts Industries, Inc.:
We have audited the accompanying consolidated balance sheet of Watts Industries,
Inc. and subsidiaries as of June 30, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. In connection with our audit of the consolidated financial statements, we
also have audited the accompanying financial statement schedule of valuation and
qualifying accounts as of and for the year ended June 30, 1997. These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audit. The
accompanying consolidated financial statements and schedule of valuation and
qualifying accounts of Watts Industries, Inc. and subsidiaries as of June 30,
1996 and for each of the years in the two year period then ended were audited by
other auditors whose report thereon dated August 6, 1996 included an explanatory
paragraph as discussed in note 4 to the consolidated financial statements that
described the Company's adoption of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of."
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Watts
Industries, Inc. and subsidiaries as of June 30, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG Peat Marwick L.L.P.
August 1, 1997
Boston, Massachusetts
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Fiscal Year Ended June 30
1997 1996 1995
------------------------------------
Net sales $ 720,340 $ 640,876 $ 576,851
Cost of goods sold 474,948 428,678 366,139
--------- --------- ---------
GROSS PROFIT 245,392 212,198 210,712
Selling, general and administrative expenses 158,984 162,951 133,601
Impairment of long-lived assets 0 63,065 0
Restructuring charge 0 25,415 0
--------- --------- ---------
OPERATING INCOME (LOSS) 86,408 (39,233) 77,111
--------- --------- ---------
Other (income) expense:
Interest income (763) (702) (1,930)
Interest expense 10,493 9,960 9,368
Other 1,091 919 1,483
--------- --------- ---------
10,821 10,177 8,921
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 75,587 (49,410) 68,190
Provision for income taxes 27,127 4,355 25,727
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS 48,460 (53,765) 42,463
Income from discontinued operations, net of taxes 79 3,480 3,275
Gain on disposal of discontinued operations, net of taxes 3,208 0 0
--------- --------- ---------
NET INCOME (LOSS) $ 51,747 $ (50,285) $ 45,738
========= ========= =========
Income (loss) per common share:
Continuing operations $ 1.77 $ (1.82) $ 1.43
Discontinued operations .00 .12 .11
Gain on disposal of discontinued operations .12 .00 .00
--------- --------- ---------
NET INCOME (LOSS) $ 1.89 $ (1.70) $ 1.54
========= ========= =========
Dividends per common share $ .295 $ .265 $ .235
========= ========= =========
Weighted average number of common shares 27,433 29,527 29,755
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
June 30
1997 1996
----------------
ASSETS
CURRENTASSETS:
Cash and cash equivalents $ 13,904 $ 0
Short-term investments 518 0
Trade accounts receivable, less allowance for
doubtful accounts of $7,945 in 1997 and $8,822 in 1996 121,349 116,370
Inventories:
Raw materials 64,261 64,182
Work in process 26,030 30,994
Finished goods 80,926 86,922
--------- --------
171,217 182,098
Prepaid expenses and other assets 13,087 9,283
Deferred income taxes 22,480 29,998
Net assets held for sale 3,037 78,401
--------- --------
Total Current Assets 345,592 416,150
OTHER ASSETS:
Goodwill, net of accumulated amortization of $13,484
in 1997 and $10,450 in 1996 110,928 79,489
Other 12,869 12,705
PROPERTY, PLANT AND EQUIPMENT
Land 10,147 11,503
Buildings and improvements 66,191 63,821
Machinery and equipment 192,581 170,304
Construction in progress 12,312 14,700
--------- --------
281,231 260,328
Accumulated depreciation (128,537) (112,378)
--------- --------
152,694 147,950
--------- --------
TOTAL ASSETS $622,083 $656,294
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 48,896 $ 46,022
Accrued expenses and other liabilities 53,738 73,260
Accrued compensation and benefits 15,834 7,756
Current portion of long-term debt 2,422 2,907
--------- --------
Total Current Liabilities 120,890 129,945
LONG-TERM DEBT, NET OF CURRENT PORTION 125,937 160,243
DEFERRED INCOME TAXES 16,675 19,178
OTHER NONCURRENT LIABILITIES 13,796 16,291
MINORITY INTEREST 11,146 11,054
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value; 5,000,000 shares
authorized; no shares issued or outstanding 0 0
Class A Common Stock, $.10 par value; 80,000,000 shares
authorized; 1 vote per share; 15,797,460 shares in 1997
and 16,856,838 shares in 1996 issued and outstanding 1,580 1,686
Class B Common Stock, $.10 par value; 25,000,000 shares
authorized; 10 votes per share; 11,215,627 shares in
1997 and 11,365,627 shares in 1996 issued
and outstanding 1,121 1,136
Additional paid-in capital 44,643 67,930
Retained earnings 293,170 249,415
Currency translation adjustment (6,875) (584)
--------- --------
Total Stockholders' Equity 333,639 319,583
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $622,083 $656,294
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Class A Class B Additional Currency Total
Common Stock Common Stock Paid-In Retained Translation Stock-
------------------------------------------- holders*
Shares Amount Shares Amount Capital Earnings Adjustment Equity
-----------------------------------------------------------------------------------
Balance at June 30, 1994 18,009,822 $ 1,801 11,472,470 $1,147 $92,996 $268,706 $(3,048) $361,602
Net income 45,738 45,738
Shares of Class B Common Stock converted to
Class A Common Stock 68,000 7 (68,000) (7)
Shares of Class A Common Stock issued upon
the exercise of stock options 140,394 14 2,500 2,514
Common Stock cash dividends (6,951) (6,951)
Change in currency translation adjustment 2,734 2,734
-----------------------------------------------------------------------------------
Balance at June 30, 1995 18,218,216 1,822 11,404,470 1,140 95,496 307,493 (314) 405,637
Net loss (50,285) (50,285)
Shares of Class B Common Stock converted to
Class A Common Stock 38,843 4 (38,843) (4)
Shares of Class A Common Stock issued upon
the exercise of stock options 74,522 7 1,245 1,252
Shares of Class A Common Stock exchanged upon
the exercise of stock options and retired (15,843) (1) (390) (391)
Purchase and retirement of treasury stock (1,458,900) (146) (28,421) (28,567)
Common Stock cash dividends (7,793) (7,793)
Change in currency translation adjustment (270) (270)
-----------------------------------------------------------------------------------
Balance at June 30, 1996 16,856,838 1,686 11,365,627 1,136 67,930 249,415 (584) 319,583
NET INCOME 51,747 51,747
SHARES OF CLASS B COMMON STOCK CONVERTED
TO CLASS A COMMON STOCK 150,000 15 (150,000) (15)
SHARES OF CLASS A COMMON STOCK ISSUED
UPON THE EXERCISE OF STOCK OPTIONS 111,922 11 2,145 2,156
PURCHASE AND RETIREMENT OF TREASURY STOCK (1,321,300) (132) (25,432) (25,564)
COMMON STOCK CASH DIVIDENDS (7,992) (7,992)
CHANGE IN CURRENCY TRANSLATION ADJUSTMENT (6,291) (6,291)
-----------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 15,797,460 $ 1,580 11,215,627 $1,121 $44,643 $293,170 $(6,875) $333,639
===================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
Fiscal Year Ended June 30
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Income (loss) from continuing operations $ 48,460 $ (53,765) $ 42,463
Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by continuing operating activities:
Restructuring charge, net of payments (8,918) 21,635 0
Impairment of long-lived assets 0 63,065 0
Depreciation and amortization 20,828 21,574 20,345
Deferred income taxes 3,725 (14,556) 3,313
Loss (gain) on disposal of equipment 241 (1,405) (453)
Changes in operating assets and liabilities, net of effects from
business acquisitions:
Accounts receivable (5,773) (12,979) (16,353)
Inventories 7,734 (17,524) (11,453)
Prepaid expenses and other assets (2,049) 4,688 (4,696)
Accounts payable, accrued expenses and other liabilities (6,031) 35,028 4,161
----------- ----------- -----------
58,217 45,761 37,327
Net cash provided by discontinued operations 653 9,638 3,447
----------- ----------- -----------
Net cash provided by operating activities 58,870 55,399 40,774
----------- ----------- -----------
INVESTING ACTIVITIES
Additions to property, plant and equipment (29,742) (31,080) (27,980)
Proceeds from sale of property, plant and equipment 1,715 1,462 1,287
Discontinued operations:
Proceeds from disposal of discontinued operations 88,164 0 0
Additions to property, plant and equipment (142) (1,141) (3,013)
Increase in other assets (1,494) (1,347) (597)
Business acquisitions, net of cash acquired (37,705) (13,415) (73,242)
Repayment of debt of acquired businesses 0 (680) (18,729)
Net changes in short-term investments (652) 4,483 54,286
----------- ----------- -----------
Net cash provided by (used in) investing activities 20,144 (41,718) (67,988)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from long-term borrowings 106,346 91,867 65,430
Payments of long-term debt (140,662) (73,399) (34,656)
Proceeds from exercise of stock options 1,935 772 2,059
Dividends (7,992) (7,793) (6,951)
Purchase and retirement of common stock (25,564) (28,567) 0
----------- ----------- -----------
Net cash provided by (used in) financing activities (65,937) (17,120) 25,882
----------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents 827 96 (213)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,904 (3,343) (1,545)
Cash and cash equivalents at beginning of year 0 3,343 4,888
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,904 $ 0 $ 3,343
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
The Company designs, manufactures and sells an extensive line of valves for the
plumbing and heating, water quality, industrial, and oil and gas markets located
predominately in North America, Europe, and Asia.
(2) ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Watts Industries,
Inc. and its majority and wholly-owned subsidiaries (the Company). Upon
consolidation, all significant intercompany accounts and transactions are
eliminated.
REVENUE RECOGNITION
Revenue is recognized, net of a provision for estimated returns and allowances,
upon shipment.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of investments with maturities of three months or less
at the date of purchase. Short-term investments consist of participation in
mutual funds whose portfolios consist principally of United States Government
securities. Short-term investments are valued at cost, which approximates
market.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of trade receivables. Concentrations of credit
risk with respect to trade receivables are limited due to the large number of
customers included in the Company's customer base and their dispersion across
many different industries and geographic areas. At June 30, 1997, the Company
had no significant concentrations of credit risk.
INVENTORIES
Inventories are stated principally at the lower of cost (first-in, first-out
method) or market.
GOODWILL
Goodwill represents the excess of cost over the fair value of net assets of
businesses acquired. This balance is amortized over 40 years using the
straight-line method. The carrying value of goodwill is reviewed if facts and
circumstances suggest it may be impaired. If this review indicates that goodwill
will not be recoverable, as determined based on the undiscounted operating cash
flows of the entity acquired over the remaining amortization period, the
carrying value of the goodwill is reduced to its fair value, as determined using
a discounted cash flow approach.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is provided on
a straight-line basis over the estimated useful lives of the assets, which range
from 10 to 40 years for buildings and improvements and 3 to 15 years for
machinery and equipment.
LONG-LIVED ASSETS
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. In
such instances, the carrying value of long-lived assets is reduced to their
estimated fair value, as determined using a discounted cash flow approach.
INCOME TAXES
Deferred income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOREIGN CURRENCY TRANSLATION
Balance sheet accounts of foreign subsidiaries are translated into United States
dollars at fiscal year-end exchange rates. Operating accounts are translated at
weighted average exchange rates for each year. Net translation gains or losses
are adjusted directly to a separate component of stockholders' equity.
STOCK BASED COMPENSATION
As allowed under Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, the Company accounts for its
stock-based employee compensation plans in accordance with the provisions of APB
Opinion No. 25, Accounting for Stock Issued to Employees.
EARNINGS PER COMMON SHARE
Earnings per common share is calculated using the weighted average number of
Class A and B Common Shares outstanding during each period and common stock
equivalents, when dilutive.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company principally in the
management of foreign currency exposures on certain anticipated intercompany
transactions. Gains and losses on contracts designated as hedges of existing
assets and liabilities are recognized in income as foreign currency gains
(losses) as exchange rates change. Gains and losses on contracts designated as
hedges of identifiable foreign currency firm commitments are deferred and
included in the related foreign currency transaction.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
BASIS OF PRESENTATION
Certain amounts in fiscal years 1996 and 1995 have been reclassified to permit
comparison with the 1997 presentation.
NEW ACCOUNTING STANDARDS
SFAS No. 128, Earnings Per Share, will become effective during fiscal year 1998.
At that time, the Company will be required to exclude the effect of dilutive
common stock equivalents from its primary earnings per share calculation and
restate all prior periods on that basis. The effect of implementation of this
new standard is not expected to be material.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income and SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information. The Company is currently evaluating the
effects of these new standards.
(3) DISCONTINUED OPERATIONS, RESTRUCTURING AND OTHER MATTERS
DISCONTINUED OPERATIONS
On September 4, 1996, the Company divested itself of its Municipal Water Group
of businesses, which included Henry Pratt Company, James Jones Company and
Edward Barber & Company Ltd. by selling the stock of each entity and realizing a
$3.2 million after-tax gain. The results of operations of these companies have
been reported as discontinued operations, net of income taxes, in the
consolidated statements of operations. Unassigned corporate interest expense has
been allocated based on the ratio of the net assets of the discontinued
operations to the consolidated net assets and unassigned debt of the Company.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the results of operations of the Municipal Water
Group:
Fiscal Year Ended June 30,
------------------------------
1997 1996 1995
------------------------------
(in thousands)
Revenues $14,027 $86,179 $80,815
Costs and expenses 13,900 80,278 75,358
------- ------- -------
Income before income taxes 127 5,901 5,457
Income taxes 48 2,421 2,182
------- ------- -------
Income from discontinued operations $ 79 $ 3,480 $ 3,275
======= ======= =======
The net assets of the Municipal Water Group are classified as net assets held
for sale in the accompanying consolidated balance sheet at June 30, 1996 and
consisted of accounts receivable, $15,843,000; inventories, $19,301,000;
goodwill, $31,835,000; property, plant and equipment, $20,409,000; other assets,
$5,415,000; current liabilities, $10,900,000; and other liabilities, $3,502,000.
RESTRUCTURING
During fiscal year 1996, the Company decided to undertake certain restructuring
initiatives aimed at improving the efficiency of certain of its continuing
operations. The two most significant of those initiatives are the consolidation
and downsizing of Pibiviesse S.p.A. ("Pibiviesse") and the relocation of Jameco
Industries, Inc. ("Jameco"). In connection with this restructuring plan, the
Company recorded a $25,415,000 restructuring charge during fiscal year 1996. The
restructuring charge consisted of $9,300,000 for severance costs, $7,715,000 for
plant closure costs and $8,400,000 for asset write-downs.
Cash payments for accrued employee severance and other plant closure costs were
$3,780,000 during fiscal year 1996 and the Company's remaining accrued
restructuring liability was $12,819,000 at June 30, 1996. During fiscal year
1997, such cash payments amounted to $8,918,000 and the Company's remaining
accrued restructuring liability was $3,874,000 at June 30, 1997.
It is expected that the consolidation and downsizing of Pibiviesse will be
completed during fiscal year 1998. The Jameco relocation was substantially
complete at June 30, 1997 and its operations have been integrated into a Company
plant in Spindale, North Carolina.
Since commencement of the restructuring plan, there has been a related net
reduction of 205 employees. At June 30, 1997, it is expected that approximately
119 additional restructuring related employee terminations will occur.
OTHER MATTERS
During fiscal year 1996, the Company recorded a $13.8 million selling, general
and administrative expense charge, principally for product liability costs,
environmental remediation reserves and bad debt reserves. The Company also
recorded a $9.5 million cost of goods sold charge during fiscal year 1996 to
write down inventories to their estimated market value.
(4) LONG-LIVED ASSET IMPAIRMENT
During fiscal year 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and recorded a $63,065,000 charge for
long-lived asset impairment losses. Such losses occurred principally at its
Italian subsidiaries and were the result of declining margins and operating
profits at the subsidiaries, and the potential non-deductibility of goodwill for
income tax purposes. In connection with a re-evaluation of its business strategy
in Italy, management concluded an impairment had occurred and recorded a loss by
reducing the carrying value of affected long-lived assets, primarily goodwill,
to fair value, as determined using a discounted cash flow approach.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) BUSINESS ACQUISITIONS
During fiscal year 1997, the Company acquired Ames Company, Inc. of Woodland,
California and Consolidated Precision Corporation of Riviera Beach, Florida. In
fiscal year 1996, the Company acquired four businesses, the most significant
being the purchase of Etablissements Trubert S.A. located in Chartres, France.
Five businesses were acquired by the Company during fiscal year 1995, the most
significant being the purchases of Jameco Industries, Inc., Anderson-Barrows
Metals Corporation, and Pibiviesse S.p.A. of Italy. All of these acquired
companies are valve manufacturers and the aggregate purchase price of the
acquisitions was approximately $124.4 million. The goodwill which resulted from
these acquisitions is being amortized on a straight-line basis over a 40 year
period unless circumstances indicate an impairment loss has occurred (see note
4).
These acquisitions have all been accounted for under the purchase method and the
results of operations of the acquired businesses have been included in the
consolidated financial statements from the date of acquisition. Had these
acquisitions occurred at the beginning of fiscal year 1997 or 1996, the effect
on operating results would not have been material.
(6) INCOME TAXES
The significant components of the Company's deferred income tax liabilities and
assets are as follows:
June 30,
-------------------
1997 1996
-------------------
(in thousands)
Deferred income tax liabilities:
Excess tax over book depreciation $ 8,855 $10,959
Inventory 5,962 5,336
Other 1,858 2,883
------- --------
Total deferred income tax liabilities 16,675 19,178
------- --------
Deferred income tax assets:
Accrued expenses 18,727 20,345
Net operating loss carryforward 6,054 4,449
Other 1,906 6,543
------- --------
Total deferred income tax assets 26,687 31,337
Valuation allowance for deferred income tax assets (4,207) (1,339)
------- --------
Net deferred income tax assets 22,480 29,998
------- --------
Net deferred income tax asset $ 5,805 $10,820
======= =======
The components of the provision for income taxes were as follows:
Fiscal Year Ended June 30,
------------------------------
1997 1996 1995
------------------------------
(in thousands)
Continuing operations $27,127 $4,355 $25,727
Discontinued operations 3,412 2,421 2,182
------- ------ -------
$30,539 $6,776 $27,909
======= ====== =======
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes from continuing operations is based on the
following pre-tax income (loss):
Fiscal Year Ended June 30,
------------------------------
1997 1996 1995
------------------------------
(in thousands)
Domestic $60,530 $19,816 $59,760
Foreign 15,057 (69,226) 8,430
-------- -------- --------
$75,587 $(49,410) $68,190
======= ========= ========
The provision for income taxes from continuing operations consists of the
following:
Fiscal Year Ended June 30,
------------------------------
1997 1996 1995
------------------------------
(in thousands)
Current tax expense (benefit):
Federal $20,417 $15,739 $18,299
Foreign (369) 1,176 685
State 1,714 1,996 3,430
-------- ------- --------
21,762 18,911 22,414
-------- ------- --------
Deferred tax expense (benefit):
Federal 1,377 (8,458) 764
Foreign 3,747 (3,964) 2,411
State 241 (2,134) 138
-------- ------- --------
5,365 (14,556) 3,313
-------- ------- --------
$27,127 $4,355 $25,727
======= ========= ========
Actual income taxes reported from continuing operations are different than would
have been computed by applying the federal statutory tax rate to income (loss)
from continuing operations before income taxes. The reasons for this difference
are as follows:
Fiscal Year Ended June 30,
------------------------------
1997 1996 1995
------------------------------
(in thousands)
Computed expected federal income tax expense
(benefit) $26,455 $(17,294) $23,867
State income taxes, net of federal tax benefit 1,271 (90) 2,319
Goodwill writedown and amortization 898 17,443 807
Foreign tax rate and regulation differential (1,893) 3,830 (791)
Other, net 396 466 (475)
-------- ------- --------
$27,127 $4,355 $25,727
======= ========= ========
At June 30, 1997, the Company has foreign net operating loss carryforwards of
$11.5 million for income tax purposes that expire in fiscal years 1998 through
2005. In addition, foreign net operating losses of $4.6 million can be carried
forward indefinitely. Undistributed earnings of the Company's foreign
subsidiaries amounted to approximately $28 million, $37 million and $43 million
at June 30, 1997, 1996 and 1995, respectively. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been recorded thereon. Upon distribution of those
earnings, in the form of dividends or otherwise, the Company will be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of the
amount of U.S.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
income tax liability that would be incurred is not practicable because of the
complexities associated with its hypothetical calculation; however, unrecognized
foreign tax credits would be available to reduce some portion of any U.S. income
tax liability. Withholding taxes of approximately $2.1 million would be payable
upon remittance of all previously unremitted earnings at June 30, 1997.
The Company made income tax payments of $30.2 million, $27.8 million and $25.2
million in fiscal years 1997, 1996 and 1995, respectively.
(7) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
June 30,
---------------------
1997 1996
---------------------
(in thousands)
Restructuring costs $ 3,874 $12,819
Commissions and sales incentives payable 8,606 10,276
Accrued insurance costs 10,626 10,652
Other 30,632 39,513
-------- --------
$53,738 $73,260
======== ========
(8) FINANCING ARRANGEMENTS
Long-term debt consists of the following:
June 30,
---------------------
1997 1996
---------------------
(in thousands)
8-3/8% Notes, due December, 2003 $ 75,000 $ 75,000
$125 million revolving line of credit, accruing
interest at a variable rate of LIBOR plus 25 basis
points or the bank's prime rate (6.55% at June 30, 1997)
and expiring in August, 1999 29,000 61,300
Industrial Revenue Bonds, maturing periodically from
2003 through 2020, accruing interest at a variable rate
based on weekly tax-exempt interest rates (4.25%
at June 30, 1997) 17,265 17,265
Other 7,094 9,585
-------- --------
128,359 163,150
Less current portion 2,422 2,907
--------- ---------
$125,937 $160,243
========= =========
At June 30, 1997, $96,000,000 was available for borrowing under the Company's
$125 million revolving line of credit.
Principal payments during each of the next five fiscal years are due as follows:
1998-$2,422,000; 1999-$2,067,000; 2000-$30,132,000; 2001-$438,000; and
2002-$358,000. Interest paid for all periods presented in the accompanying
consolidated financial statements approximates interest expense.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Certain of the Company's loan agreements contain covenants that require, among
other items, the maintenance of certain financial ratios and net worth, and
limit the Company's ability to enter into secured borrowing arrangements. Under
its most restrictive loan covenant, which requires the Company to maintain a net
worth of not less than the sum of $295 million and 50% of cumulative
consolidated net income for periods subsequent to June 30, 1996, the Company had
$12.8 million available at June 30, 1997 for the payment of dividends.
(9) COMMON STOCK
The Company's Board of Directors authorized the purchase of up to 1,500,000 and
2,000,000 shares of the Company's common stock in open market and private
purchases during fiscal years 1997 and 1996, respectively. At June 30, 1997,
2,780,200 shares of the Company's common stock had been purchased and retired
since commencement of this purchase plan.
The Class A Common Stock and Class B Common Stock have equal dividend and
liquidation rights. Each share of the Company's Class A Common Stock is entitled
to one vote on all matters submitted to stockholders and each share of Class B
Common Stock is entitled to ten votes on all such matters. Shares of Class B
Common Stock are convertible into shares of Class A Common Stock, on a
one-to-one basis, at the option of the holder. The Company has reserved a total
of 6,231,108 shares of Class A Common Stock for issuance under its stock-based
compensation plans and 11,215,627 shares for conversion of Class B Common Stock
to Class A Common Stock.
(10) STOCK-BASED COMPENSATION
The Company has several stock option plans under which key employees and outside
directors have been granted incentive (ISOs) and nonqualified (NSOs) options to
purchase the Company's Class A Common Stock. Generally, options become
exercisable over a five-year period at the rate of 20% per year and expire ten
years after the date of grant. ISOs and NSOs granted under the plans have
exercise prices of not less than 100% and 50% of the fair market value of the
common stock on the date of grant, respectively. At June 30, 1997, 4,882,914
shares of Class A Common Stock were authorized for future grants of options
under the Company's stock option plans.
The following is a summary of stock option activity and related information:
Fiscal Year Ended June 30,
---------------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------------------
WEIGHTED Weighted Weighted
AVERAGE average average
(Options in thousands) EXERCISE exercise exercise
OPTIONS PRICE Options price Options price
---------------------------------------------------------------------------------
Outstanding at beginning of year 1,137 $ 21.04 1,019 $ 20.06 1,056 $ 18.32
Granted 378 16.38 314 23.36 289 23.81
Canceled (55) 21.79 (121) 22.16 (186) 20.09
Exercised (112) 17.28 (75) 15.61 (140) 14.66
------- ----------- -------- ----------- ------- -----------
Outstanding at end of year 1,348 $ 20.01 1,137 $ 21.04 1,019 $ 20.06
======= =========== ======== =========== ======= ===========
Exercisable at end of year 552 $ 20.39 460 $ 19.34 371 $ 18.37
======= =========== ======== =========== ======= ===========
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes information about options outstanding at June 30,
1997:
Options Outstanding Options Exercisable
----------------------------------- ------------------------------
Weighted
average Weighted Weighted
(Options in thousands) remaining average average
Number contractual exercise Number exercise
Range of Exercise Prices outstanding life (years) price exercisable price
-------------------------------------------------------------------
$10.69 - $11.38 13 3.4 $10.84 13 $10.84
$14.25 - $16.38 420 8.5 16.20 52 15.02
$16.60 - $19.80 228 5.3 17.44 165 17.36
$22.13 - $26.13 687 6.9 23.37 322 23.20
------ ----- ------- ----- -------
$10.69 - $26.13 1,348 5.6 20.01 552 20.39
====== ===== ======= ===== =======
The Company has a Management Stock Purchase Plan which allows for the granting
of Restricted Stock Units (RSUs) to key employees to purchase up to 1,000,000
shares of Class A Common Stock at 75% of the fair market value on the date of
grant. RSUs generally vest annually over a three-year period from the date of
grant. At June 30, 1997, 46,419 RSUs were outstanding.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS No. 123 for awards granted after June 30, 1995 as if
the Company had accounted for its stock-based awards to employees under the fair
value method of SFAS 123. The weighted average grant date fair value of options
granted during fiscal years 1997, 1996 and 1995 was $3.72, $5.69 and $6.03,
respectively. The fair value of the Company's stock-based awards to employees
was estimated using a Black-Scholes option pricing model and the following
assumptions:
Options
--------------------
1997 1996
--------------------
Expected life (years) 5.0 5.0
Expected stock price volatility 15.0% 15.0%
Expected dividend yield 1.8% 1.1%
Risk-free interest rate 6.56% 6.17%
The Company's pro forma information follows:
Fiscal Year
Ended June 30,
--------------------
1997 1996
--------------------
(in thousands, except
per share information)
Net income (loss) - as reported $51,747 $(50,285)
Net income (loss) - pro forma 51,132 (50,613)
Primary net income (loss) per share - as reported 1.89 (1.70)
Primary net income (loss) per share - pro forma 1.86 (1.71)
Because SFAS 123 is applicable only to awards granted subsequent to June 30,
1995, its pro forma effect will not be fully reflected until fiscal year 2000.
(11) EMPLOYEE BENEFIT PLANS
The Company sponsors defined benefit pension plans covering substantially all of
its domestic nonunion employees. Benefits are based primarily on years of
service and employees' compensation. The funding policy of the Company for these
plans is to contribute annually the maximum amount that can be deducted for
federal income tax purposes. At June 30, 1997, the fair value of assets held in
trust for the Company's defined benefit plans approximated the related projected
benefit obligation.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of net pension expense follow:
Fiscal Year Ended June 30,
-------------------------------
1997 1996 1995
-------------------------------
(in thousands)
Defined benefit plans:
Service cost - benefits earned $1,516 $1,620 $1,736
Interest cost on projected benefit obligation 2,189 2,200 1,915
Actual return on plan assets (1,976) (3,689) (802)
Net amortization and deferral (346) 1,447 (1,369)
--------- --------- ---------
Total pension expense $1,383 $1,578 $1,480
========= ========= =========
The funded status of the Company's principal defined benefit plans and the
amounts recognized in the consolidated balance sheets at June 30, follows:
1997 1996 1995
-------------------------------
(in thousands)
Vested benefit $(22,804) $(22,429) $(20,013)
Nonvested benefit (1,299) (1,774) (1,307)
--------- --------- ---------
Accumulated benefit obligation (24,103) (24,203) (21,320)
Benefit obligation related to future
compensation levels (5,002) (5,699) (3,245)
--------- --------- ---------
Projected benefit obligation (29,105) (29,902) (24,565)
Fair value of plan assets, invested primarily
in equities and debt securities 28,014 29,348 24,635
--------- --------- ---------
Plan assets greater (less) than projected
benefit obligation (1,091) (554) 70
Unrecognized transition (asset) obligation (2,225) (2,543) (2,862)
Unrecognized prior service cost 1,055 546 602
Unrecognized net (gain) loss (676) 9 430
Minimum liability adjustment (217) (420) (469)
--------- --------- ---------
Net accrued pension cost included in
consolidated balance sheets $(3,154) $(2,962) $(2,229)
========= ========= =========
The primary assumptions used in determining related obligations of the plans
were: discount rate 8%; increases in compensation levels 5%; and long-term rates
of return on assets 8%; in fiscal years 1997, 1996 and 1995.
The Company sponsors a 401(k) Savings Plan for substantially all domestic
nonunion employees. Under the Plan, the Company matches a specified percentage
of employee contributions, subject to certain limitations. Company expense
incurred in connection with this plan was $330,000, $350,000 and $260,000 in
fiscal years 1997, 1996 and 1995, respectively.
(12) CONTINGENCIES AND ENVIRONMENTAL REMEDIATION
CONTINGENCIES
Lawsuits and other proceedings or claims, arising from the ordinary course of
operations, are pending or threatened against the Company and its subsidiaries.
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. On the basis of information presently available,
management is of the opinion that any additional liability resulting from these
matters will not have a material adverse effect on the consolidated financial
position, results of operations or liquidity of the Company.
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
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
(13) FINANCIAL INSTRUMENTS
Fair Value of Long-Term Debt
The fair value of the Company's 8-3/8% notes, due December 2003, is based on
quoted market prices. The fair value of the Company's variable rate debt
approximates its carrying value. The carrying amount and the estimated fair
market value of the Company's long-term debt, including the current portion, are
as follows:
June 30,
---------------------
1997 1996
---------------------
(in thousands)
Carrying amount $128,359 $163,150
Estimated fair value 133,774 166,994
USE OF DERIVATIVES
The Company uses foreign currency forward exchange contracts to reduce the
impact of currency fluctuations on certain anticipated intercompany purchase
transactions that are expected to occur within the fiscal year. Related gains
and losses are recognized when the contracts expire, which is generally in the
same period as the underlying foreign currency denominated transaction. These
contracts do not subject the Company to significant market risk from exchange
movement because they offset gains and losses on the balances and transactions
being hedged. At June 30, 1997 and 1996, there were no open foreign currency
forward exchange contracts.
(14) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Financial information by geographic area is summarized as follows. Transfer
prices to foreign subsidiaries are intended to produce profit margins
commensurate with sales and marketing efforts:
FISCAL YEAR ENDED JUNE 30, 1997
--------------------------------------------------------------------------
DOMESTIC CANADA EUROPE ASIA ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------
(IN THOUSANDS)
NET SALES $ 535,954 $ 27,681 $ 139,636 $ 17,069 $ 0 $ 720,340
TRANSFER BETWEEN AREAS 12,209 5,549 421 4,004 (22,183) 0
---------- ---------- ---------- ---------- ---------- ----------
$ 548,163 $ 33,230 $ 140,057 $ 21,073 $ (22,183) $ 720,340
========== ========== ========== ========== ========== ==========
OPERATING INCOME OF GEOGRAPHIC AREAS $ 81,283 $ 1,401 $ 16,074 $ 653 $ (574) $ 98,837
========== ========== ========== ========== ========== ==========
GENERAL CORPORATE EXPENSES 12,429
----------
OPERATING INCOME $ 86,408
==========
ASSETS $ 450,302 $ 23,742 $ 118,171 $ 31,499 $ (1,631) $ 622,083
========== ========== ========== ========== ========== ==========
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Year Ended June 30, 1996
--------------------------------------------------------------------------------
Domestic Canada Europe Asia Eliminations Consolidated
--------------------------------------------------------------------------------
(in thousands)
Net sales $ 476,279 $ 28,086 $ 118,673 $ 17,838 $ 0 $ 640,876
Transfer between areas 10,220 5,180 3,549 0 (18,949) 0
--------- --------- --------- --------- --------- ---------
$ 486,499 $ 33,266 $ 122,222 $ 17,838 $ (18,949) $ 640,876
========= ========= ========= ========= ========= =========
Operating income (loss) of
geographic areas $ 43,576 $ (7,709) $ (59,242) $ 907 $ (2,558) $ (25,026)
========= ========= ========= ========= =========
General corporate expenses 14,207
---------
Operating loss $ (39,233)
=========
Assets of continuing operations $ 400,469 $ 25,357 $ 123,270 $ 30,118 $ (1,321) $ 577,893
Net assets of discontinued operations 65,202 0 13,199 0 0 78,401
--------- --------- --------- --------- --------- ---------
$ 465,671 $ 25,357 $ 136,469 $ 30,118 $ (1,321) $ 656,294
========= ========= ========= ========= ========= =========
Fiscal Year Ended June 30, 1995
--------------------------------------------------------------------------------
Domestic Canada Europe Asia Eliminations Consolidated
--------------------------------------------------------------------------------
(in thousands)
Net sales $ 441,808 $ 30,016 $ 93,518 $ 11,509 $ 0 $ 576,851
Transfer between areas 12,592 5,231 0 0 (17,823) 0
--------- --------- --------- --------- ---------- ---------
$ 454,400 $ 35,247 $ 93,518 $ 11,509 $ (17,823) $ 576,851
========= ========= ========= ========= ========== =========
Operating income of geographic areas $ 75,415 $ 1,913 $ 8,978 $ 1,429 $ (65) $ 87,670
========= ========= ========= ========= ==========
General corporate expenses 10,559
---------
Operating income $ 77,111
=========
Assets of continuing operations $ 393,012 $ 29,567 $ 154,069 $ 17,550 $ (1,191) $ 593,007
Net assets of discontinued operations 71,743 0 11,644 0 0 83,387
--------- --------- --------- --------- ---------- ---------
$ 464,755 $ 29,567 $ 165,713 $ 17,550 $ (1,191) $ 676,394
========= ========= ========= ========= ========== =========
Included in domestic sales are export sales of $54.1 million in fiscal year
1997, $43.5 million in fiscal year 1996 and $39.7 million in fiscal year 1995.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(15) QUARTERLY FINANCIAL INFORMATION (Unaudited)
First Second Third Fourth
Quarter(a) Quarter Quarter Quarter
----------------------------------------------------
(in thousands, except per share information)
Fiscal year ended June 30, 1997:
Net sales $176,008 $174,220 $184,191 $185,921
Gross profit 60,356 60,152 63,730 61,154
Income from continuing operations 12,346 11,750 12,889 11,475
Net income 15,633 11,750 12,889 11,475
Income per common share:
Continuing operations .45 .43 .47 .42
Discontinued operations .12 .00 .00 .00
Net income .57 .43 .47 .42
Dividends per common share .07 .07 .0775 .0775
<FN>
(a) Includes $3.2 million after-tax gain from sale of discontinued operations.
</FN>
First Second Third Fourth
Quarter Quarter Quarter(a) Quarter(b)
------------------------------------------------------
(in thousands, except per share information)
Fiscal year ended June 30, 1996:
Net sales $154,129 $156,593 $159,823 $170,331
Gross profit 56,921 55,913 44,941 54,423
Income (loss) from continuing operations 11,664 10,051 (80,303) 4,823
Net income (loss) 12,134 10,777 (79,273) 6,077
Income (loss) per common share:
Continuing operations .39 .33 (2.70) .17
Discontinued operations .02 .03 .03 .04
Net income (loss) .41 .36 (2.67) .21
Dividends per common share .0625 .0625 .07 .07
<FN>
(a) Includes $63.1 long-lived asset impairment loss; $19.9 million restructuring
charge; $13.8 million charge, principally for product liability costs,
additional bad debt reserves and environmental remediation costs; and $9.5
million charge for additional inventory valuation reserves. The aggregate
after-tax effect of these charges on net income was $89.6 million.
(b) Includes $5.5 million restructuring charge ($3.4 million after-tax).
</FN>
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
(AMOUNTS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------
ADDITIONS
- ------------------------------------------------------------------------------------------------------------------
Balance at Charged to Costs Charged to Other Deductions Balance at
Description Beginning of Period and Expenses Accounts - Describe Describe (1) End of Period
- ------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1997
Deducted from asset account:
Allowance for doubtful
accounts $8,822 $2,489 $30 (2) $3,396 $7,945
Year ended June 30, 1996
Deducted from asset account:
Allowance for doubtful
accounts $5,417 $4,408 $320 (2) $1,323 $8,822
Year ended June 30, 1995
Deducted from asset account:
Allowance for doubtful
accounts $4,105 $1,351 $1,173 (2) $1,212 $5,417
<FN>
(1) Uncollectible accounts written off, net of recoveries.
(2) Balance acquired in connection with acquisition of Ames in 1997, Trubert
and Artec in 1996, Jameco and Anderson-Barrows in 1995.
</FN>
EXHIBIT INDEX
Exhibits 10.1-10.6, 10.8, 10.22, and 10.29 constitute all of the
management contracts and compensation plans and arrangements of the Company
required to be filed as exhibits to this Annual Report. Upon written request of
any stockholder to the Chief Financial Officer at the Company's principal
executive office, the Company will provide any of the Exhibits listed below.
Exhibit No. Description and Location
3.1 Restated Certificate of Incorporation, as amended. (12)
3.2 Amended and Restated By-Laws. (1)
9.1 Horne Family Voting Trust Agreement-1991 dated as of October 31,
1991 (2), Amendments dated November 19, 1996*, February 24, 1997*,
June 5, 1997*, and August 26, 1997.*
9.2 The George B. Horne Voting Trust Agreement-1997 dated as of August
26, 1997. *
10.1 Employment Agreement effective as of September 1, 1996 between
the Registrant and Timothy P. Horne. (14)
10.2 Supplemental Compensation Agreement effective as of September 1,
1996 between the Registrant and Timothy P. Horne. (14)
10.3 Deferred Compensation Agreement between the Registrant and Timothy
P. Horne, as amended. (4)
10.4 1996 Stock Option Plan, dated October 15, 1996. (15)
10.5 1989 Nonqualified Stock Option Plan. (3)
10.6 Watts Industries, Inc. Retirement Plan for Salaried Employees dated
December 30, 1994, as amended and restated effective as of January
1, 1994, (12), Amendment No. 1 (14), Amendment No. 2 (14), Amendment
No. 3 (14), Amendment No. 4 dated September 4, 1996.*
10.7 Registration Rights Agreement dated July 25, 1986. (5)
10.8 Executive Incentive Bonus Plan, as amended. (12)
10.9 Indenture dated as of December 1, 1991 between the Registrant and
The First National Bank of Boston, as Trustee, including form of
8-3/8% Note Due 2003. (8)
10.10 Loan Agreement and Mortgage among The Industrial Development
Authority of the State of New Hampshire, Watts Regulator Co. and
Arlington Trust Company dated August 1, 1985. (4)
10.11 Amendment Agreement relating to Watts Regulator Co. (Canaan and
Franklin, New Hampshire, facilities) financing dated December 31,
1985. (4)
10.12 Sale Agreement between Village of Walden Industrial Development
Agency and Spence Engineering Company, Inc. dated June 1, 1994. (11)
10.13 Letter of Credit, Reimbursement and Guaranty Agreement dated June 1,
1994 by and among the Registrant, Spence Engineering Company, Inc.
and First Union National Bank of North Carolina. (11), Amendment No.
1 (14), Amendment No. 2 dated October 1, 1996.*
10.14 Trust Indenture from Village of Walden Industrial Development Agency
to The First National Bank of Boston, as Trustee, dated June 1,
1994. (11)
10.15 Loan Agreement between Hillsborough County Industrial Development
Authority and Leslie Controls, Inc. dated July 1, 1994. (11)
10.16 Letter of Credit, Reimbursement and Guaranty Agreement dated July 1,
1994 by and among the Registrant, Leslie Controls, Inc. and First
Union National Bank of North Carolina (11), Amendment No. 1 (14),
Amendment No. 2 dated October 1, 1996.*
10.17 Trust Indenture from Hillsborough County Industrial Development
Authority to The First National Bank of Boston, as Trustee, dated
July 1, 1994. (11)
10.18 Loan Agreement between The Rutherford County Industrial Facilities
and Pollution Control Financing Authority and Watts Regulator
Company dated September 1, 1994.(12)
10.19 Letter of Credit, Reimbursement and Guaranty Agreement dated
September 1, 1994 by and among the Registrant, Watts Regulator
Company and The First Union National Bank of North Carolina (12),
Amendment No. 1 (14), Amendment No. 2 dated October 1, 1996.*
10.20 Trust Indenture from The Rutherford County Industrial Facilities and
Pollution Control Financing Authority to The First National Bank of
Boston,as Trustee, dated September 1, 1994. (12)
10.21 Amended and Restated Stock Restriction Agreement dated October 30,
1991 (2), Amendment dated August 26, 1997.*
10.22 Watts Industries, Inc. 1991 Non-Employee Directors' Nonqualified
Stock Option Plan (7), Amendment No. 1. (14)
10.23 Letters of Credit relating to retrospective paid loss insurance
programs. (10)
10.24 Form of Stock Restriction Agreement for management stockholders. (5)
10.25 Revolving Credit Agreement dated December 23, 1987 between
Nederlandse Creditbank NV and Watts Regulator (Nederland) B.V. and
related Guaranty of Watts Industries, Inc. and Watts Regulator
Co. dated December 14, 1987. (6)
10.26 Loan Agreement dated September 1987 with, and related Mortgage to,
N.V. Sallandsche Bank. (6)
10.27 Agreement of the sale of shares of Intermes, S.p.A., RIAF Holding
A.G. and the participations in Multiscope Due S.R.L. dated November
6, 1992. (9)
10.28 Revolving Credit Agreement dated August 30, 1994 between and among
Watts Investment Company, certain financial institutions, the First
National Bank of Boston, as Agent, and the Registrant, as Guarantor
(11), Amendment No. 1 (14), Amendment No. 2. (14)
10.29 Watts Industries, Inc. Management Stock Purchase Plan dated October
17, 1995 (13), Amendment No. 1 dated August 5, 1997.*
10.30 Stock Purchase Agreement dated as of June 19, 1996 by and among
Mueller Co., Tyco Valves Limited, Watts Investment Company, Tyco
International Ltd. and Watts Industries, Inc. (16)
11 Statement Regarding Computation of Earnings per Common Share. *
21 Subsidiaries. *
23.1 Consent of KPMG Peat Marwick LLP. *
23.2 Consent of Ernst & Young LLP, Independent Auditors, predecessor
auditors.*
23.3 Consent of Deloitte & Touche, Independent Auditors, predecessor
auditors.*
27 Financial Data Schedule. *
Incorporated By Reference To:
- -----------------------------
(1) Relevant exhibit to Registrant's Form 8-K dated May 15, 1992.
(2) Relevant exhibit to Registrant's Form 8-K dated November 14, 1991.
(3) Relevant exhibit to Registrant's Form 10-K for the year ended June 30,
1989.
(4) Relevant exhibit to Registrant's Form S-1 (No. 33-6515) dated June 17,
1986.
(5) Relevant exhibit to Registrant's Form S-1 (No. 33-6515) as part of the
Second Amendment to such Form S-1 dated August 21, 1986.
(6) Relevant exhibit to Registrant's Form S-1 (No. 33-27101) dated February
16, 1989.
(7) Relevant exhibit to Registrant's Amendment No. 1 to Form 10-K for year
ended June 30, 1992.
(8) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1992.
(9) Relevant exhibit to Registrant's Amendment No. 2 dated February 22, 1993
to Form 8-K dated November 6, 1992.
(10) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1993.
(11) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1994.
(12) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1995.
(13) Relevant exhibit to Registrant's Form S-8 (No.33-64627) dated November 29,
1995.
(14) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1996.
(15) Relevant exhibit to Registrant's Form S-8 (No.333-32685) dated August 1,
1997.
(16) Relevant exhibit to Registrant's Form 8-K dated September 4, 1996.
* Filed as an exhibit to this Report with the Securities and Exchange Commission