WATTS INDUSTRIES, Inc.
(FRONT COVER GRAPHICS: Pictures of valves)
ANNUAL REPORT
- - -------------
1994
(LOGO)
(INSIDE FRONT COVER)
(Descriptions of valves on front cover)
Contromatics
Actuated
Butterfly Valve
KF Industries
Top Entry Valve
Circle Seal Controls
Motor Operated Valve
Leslie Controls
Aeroflow(TM)
Control Valve
Henry Pratt Company
Butterfly Valve
Watts Regulator Company
Water Pressure
Reducing Valve
KF Industries
Three-Way Trunnion
Ball Valve
Spence Engineering
Company
Steam Pressure
Reducing
Valve
Watts ACV
Automatic Control Valve
Watts Regulator Company
Actuated
Ball Valve
Watts Regulator Company
Backflow Preventer
ANNUAL REPORT
- - -------------
1994
Watts Industries, Inc. Annual Report 1994
Page
Long Term Growth ..................................2
To Our Shareholders ...............................3
Operational Strategy ..............................4
Industrial and Oil & Gas ..........................5
Plumbing & Heating and
Water Quality ...................................6-7
Municipal Water ...................................8
Steam .............................................9
Consolidated Financial Statements ................10
Report of Independent Auditors ...................10
Management's Discussion .......................22-25
Quarterly Information ............................25
Fifteen Year Financial Summary ................26-27
Acquisitions .....................................28
Directors and Officers ............Inside back cover
A LEADER IN VALVE TECHNOLOGY
WATTS(R)
INDUSTRIES, INC.
SINCE 1874
Watts Industries: Committed to the achievement of
sustained long-term growth. (Fifteen year history)
[Graph of Net Sales showing a Compounded Annual Growth Rate of 17%]
[Graph of Net Income showing a Compounded Annual Growth Rate of 19%]
[Graph of Stockholders' Equity showing a Compounded Annual Growth Rate of 20%]
2
To Our Shareholders
Watts achieved yet another record year for both sales and earnings. This
performance marked the 18th consecutive year of increased sales and 17th of 18
years of record net income.
Net sales for Fiscal 1994 increased 11% to $519 million and net income
increased 50% to $41 million. Excluding the unusual charges and the cumulative
effect of the tax accounting change in Fiscal 1993, net income increased 18% and
the fully diluted earnings per share were $1.38 versus $1.16 last year.
Acquisition activity included two Canadian-based manufacturers of traps and
drains for commercial, industrial, and institutional construction. Ancon and
Enpoco were acquired during the first half of Fiscal 1994. With combined annual
sales of approximately $12 million, these companies have a significant share of
the Canadian market and will add strong product lines to our domestic plumbing
product range during Fiscal 1995.
Many weeks were devoted to business trips to Asia to explore the region's
unfolding growth markets, including China. The first tangible result of these
efforts was the commencement on September 1st of a joint venture with the
Tianjin Tanggu Valve Plant of the People's Republic of China, in which Watts has
a 60% controlling investment. Tanggu, an established ISO 9001 certified
manufacturer, sells its butterfly, globe, and check valves to 29 provinces and
autonomous regions in China and exports to the United States, Europe, Australia,
and Southeast Asia. We expect there will be further joint ventures in China
during Fiscal 1995. In addition to water and industrial, our focus will be on
the valve markets for oil and gas, power generation, and central steam heating.
Sales were flat in Europe owing to the recession which continued throughout
Fiscal 1994. Some of the impact of the recession was offset by the rebuilding of
former East Germany, and the developing markets of Poland, Czech Republic,
Hungary, Slovakia, and other emerging Eastern European markets. Our
consolidation of the acquired companies and product lines resulted in an
operating profit of 14%. Any increase in sales volume during Fiscal 1995 should
have a meaningful impact upon operating earnings because of the leverage now
established.
Europe continues to be an area of opportunity for growth by acquisition.
Watts will also continue to explore the world markets for joint ventures and
acquisitions. Our near-term Corporate objective is to increase international
business as a percent of total sales. International sales, including Canada,
increased as a percent of sales from 23% in Fiscal 1993 to 29% during 1994.
Domestically, our growth was led by the Watts Regulator Company and its
water-oriented Plumbing and Heating, Water Quality (backflow preventers), and
OEM Divisions. The sales for these divisions increased by 10% from $150 million
in Fiscal 1993 to $165 million in Fiscal 1994. A return to some normalization
within their traditional markets, including a strong rebound in residential
construction, helped these divisions in their record performance.
Strong sales growth was also experienced within the oil and gas segment led
by KF Industries. KF's sales increased by 14% from $57 million in Fiscal 1993 to
$65 million in Fiscal 1994. This increase was derived primarily from a strong
international market, especially in gas transmission pipeline projects.
On July 28, 1994, Watts announced the acquisition of Jameco Industries, a
domestic manufacturer of valves and plumbing hardware sold through wholesale
plumbing and heating distribution and to the DIY (do-it-yourself) market.
Jameco, with sales of $56 million for the twelve months ending June 30, 1994,
represents one of our largest acquisitions to date. Its complementary fit with
the Watts Regulator Plumbing and Heating Division should enhance both companies
in presenting one of the largest arrays of plumbing products available to the
U.S. market.
We remain committed to our goal of double-digit growth with the ambitious
objective of reaching $1 billion in sales by the end of the decade. Including
the latest acquisitions, we expect our sales will exceed $600 million in Fiscal
1995. With more financial resources allocated to new product development, the
prospect of improving markets for more of our business segments, and our ongoing
acquisition search, we are optimistic about future growth prospects.
[Signature of Timothy P. Horne]
Timothy P. Horne
Chairman of the Board, President,
and Chief Executive Officer
[Photograph of Timothy P. Horne]
3
Operational
Strategy
During the past ten years, Watts has embarked on an aggressive growth plan
resulting in acquisitions of 28 valve companies that represented more than 60%
of our sales during Fiscal 1994. In doing so, we have diversified the company
into new valve markets and added important product lines. Our sales have grown
at a compounded growth rate of 17% during this period as each year set new sales
records for the company.
Our ability to successfully grow at this pace can be attributed to a number
of factors, but primarily to our commitment and focus on what we know best - the
valve industry. Having achieved a milestone of over $500 million in sales, our
next objective is to double our size within the next five years. During Fiscal
1994, we dedicated ourselves to setting the stage for this growth through a
series of measures:
[Photograph of David A. Bloss, Sr., Executive Vice President]
1. Organized businesses according to markets served: Within the United
States, we have organized our independently-operated businesses into four
strategic groups focused on major valve markets: Plumbing & Heating and Water
Quality, Municipal Water, Industrial and Oil & Gas, and Steam. This alignment
will allow us to offer extensive product lines and capitalize on economies of
scale to achieve greater market share and profitability.
2. Expanded our international scope to Asia: To achieve global market
participation, we are positioning ourselves for the tremendous growth that is
expected in the Asian markets. Our initial focus is the People's Republic of
China where significant capital expenditures are anticipated to develop its
domestic infrastructure. Our objective is to leverage our valve technology and
manufacturing expertise by joint ventures with manufacturers in China who serve
the region's valve markets for municipal water, oil and gas, and steam
applications.
3. New product development: During Fiscal 1994, we directed substantial
capital and human resources to new product development. A key initiative was the
formation of teams within our businesses to identify, engineer and commercialize
new products to strengthen our position in our target markets.
4. Improved employee development and communication: "Developing tomorrow's
leaders today" is a pervasive theme in our efforts to create an organizational
environment that supports our growth objectives. During the past year, we have
organized employee work-group sessions to inspire creativity and develop key
leadership skills. These ongoing sessions are also designed to promote
information sharing between business units to identify opportunities to improve
sales and operating performance. We have already seen tangible results.
[Photograph of Kenneth J. McAvoy, Chief Financial Officer and Executive Vice
President of European Operations]
We believe that these strategic moves will assist us in our efforts to
achieve our $1 billion sales objective by the end of this decade. The following
pages describe how we are addressing each of our major market segments and
identify the significant activities of the past year.
- - --------------------------------------------------------------------------------
Tianjin
Tanggu
Valve [Photo of Business License [Photos]
Company of the Joint Venture]
Joint Tianjin Tanggu Watts Valve Company, Ltd.
Venture
4
Industrial and
Oil & Gas
Watts' oil and gas companies supply valves to the major independent petroleum
and natural gas production companies worldwide, while the Watts Regulator
Industrial Division supplies valves to the domestic markets for petrochemical,
process control, severe service, and fugitive emission control. The Industrial
and Oil & Gas Group supplies a comprehensive line of valves to its market,
including ball valves, check valves, butterfly valves and needle valves.
Building on their strength of having one of the broadest product lines, the
oil and gas companies and the Industrial Division have consolidated most of
their domestic field sales representation. This allows the Group to offer a more
complete valve package to its customers. The integrated marketing effort is more
efficient and less costly than the prior system, and eliminates the potential
for confusion and overlap at the distributor and end-user levels.
Domestic demand for industrial valves was comparable to last year. However,
earnings for the Industrial Division grew as cost reduction efforts, product
consolidations and a greater emphasis on engineered products improved margins.
Domestic chemical and petrochemical companies are shifting their capital
investment projects to offshore locations, primarily to be closer to raw
material extraction sites. Therefore, we are targeting sales and marketing
efforts to become a more significant participant in valve purchases for
international projects during Fiscal 1995. Operating the Industrial Division and
oil and gas companies as one group with coordinated distribution for the two
market segments provides an efficient and expedient method of delivering Watts'
valves to the changing world markets.
Domestic demand for oil and gas products increased moderately during the
fiscal year, while international results, reflecting the ever more global
economy, showed robust growth. KF Industries actively marketed overseas and
supported these efforts with a strong new product development program and rapid
deliveries. Overall, the oil and gas business enjoyed strong growth in sales and
earnings.
During the year, the Group leveraged its resources by opening a new valve
automation and repair center in Houston, Texas, to provide distributors and end
users with factory-authorized automation and repair of quarter-turn valve
products. Automation and repair will strengthen Watts' competitive position in
the domestic and international marketplace. Furthermore, the Group has
established regional offices in Singapore and London and is focusing its
attention on developing joint ventures in China, Indonesia and Venezuela during
the coming year.
[Photograph of Alfred S. Schommer, Group Vice President Industrial and Oil &
Gas]
Allied with our Industrial Division is Circle Seal Controls, Inc., which
supplies valves to the aerospace, industrial and cryogenic markets.
- - --------------------------------------------------------------------------------
[Photo] [Photo of a valve]
KF Industries, Inc.
Oklahoma City, OK
[Pie Graph Showing Percentages of
Oil & Gas (13%) and Industrial (12.4%)
in the Industrial, Oil & Gas Market]
[Photo]
Watts Regulator Industrial Division
Milford, NH
5
Plumbing & Heating
and Water Quality
Watts serves the Plumbing and Heating and Water Quality markets with a
comprehensive line of valve products. These include temperature and pressure
relief valves for water heaters, water pressure reducing valves to regulate
water pressures within the home and high-rise buildings, and backflow preventers
to protect potable water systems from the potential hazard of water backflowing
from contaminated sources downstream. The application of these products is
generally enforced by strict national and regional plumbing codes and, in the
case of backflow preventers, is supported by federal legislation such as the
Safe Drinking Water Act of 1974.
Watts manufactures many other speciality and commodity products for these
markets including temperature control valves, ball valves, pipeline strainers,
hydronic heating specialities, electric motorized valves, thermal expansion
tanks, and other plumbing and heating products to provide customers with the
broadest range of valves and assemblies. Watts' customer base includes over
6,000 plumbing and heating wholesalers who resell to mechanical contractors and
installing plumbers. Watts' wholesalers have the advantage of buying a full
product range from a single source.
[Photo of Kevin R. Sweeney, Executive Vice President, Water Products Division
and Paul A. Lacourciere, Executive Vice President, Watts Regulator Company]
Domestic demand for plumbing and heating and water quality valves increased
significantly during the year owing primarily to the resurgence of residential
housing construction. Sales of water quality valves, namely backflow preventers,
also increased for the first time in three years as their principal market,
commercial construction, finally tempered its decline, and there was more
stringent enforcement of the plumbing codes governing the installation of these
products.
We also expanded sales to original equipment manufacturers (OEMs). Standard
catalog products were augmented with valves custom designed to the exacting
specifications of individual OEM requirements, thereby stimulating a sales
increase for this division of nearly 20%.
The replacement demand for Watts' products has consistently offset some of
the impact of interest-rate-sensitive construction cycles. Watts estimates that
approximately 40% of sales derived from these markets are replacement driven.
With market leadership for its principal valves and an installed base in excess
of 100 million valves, Watts' prospects for increasing replacement business are
excellent.
[Photo of Ernest E. Elliott, Vice President, Watts Products Division]
The flagship company serving these markets is the Watts Regulator Company,
founded in 1874. Its seven domestic manufacturing plants produce over 65,000
valves per day, providing all of the benefits of high volume manufacturing
including significant purchasing power.
- - --------------------------------------------------------------------------------
[Photos of valves]
[Pie Graph Showing Percentages of Plumbing & Heating (34%) and Water Quality
(12.5%) in the Plumbing & Heating and Water Quality Markets]
[Photo] [Photo]
Franklin, NH facility Spindale, NC facility
[Photo] [Photo]
Canaan, NH facility Chesnee, SC facility
6
The European counterpart of Watts Regulator is Intermes, S.p.A.,
headquartered in Italy. Intermes has an extensive range of valve products to
satisfy the demands of diverse wholesaler requirements in the major European
markets, including Germany, France, Italy, Holland, the Benelux countries,
Spain, Portugal, and, more recently, Eastern European countries as well. Most of
the Intermes product range mirrors the valve products produced by Watts
Regulator, except the Intermes products are custom designed for the European
market requirements since product styling and performance characteristics
generally differ from those of the United States.
[Photo of Jean-Marc Sassier, Managing Director, Watts Industries Europe]
Watts SFR in France and Watts Ocean in Holland augment the Intermes line with
relief valves, pressure regulators, and backflow preventers. The products from
all companies are combined into a single product offering to several thousand
plumbing and heating wholesalers throughout the major European markets.
The enforcement of European plumbing codes for pressure relief valves, water
pressure regulators, and backflow preventers offers many of the same advantages
in Europe for Intermes as in the domestic market for Watts Regulator.
The German sales arm of Intermes, MTR GmbH, headquartered in Stuttgart,
offers excellent future market opportunities in Eastern Europe. Initial sales
during the past year have been realized in Poland, Hungary, Czech Republic,
Slovakia, and other emerging markets. While Germany has been beleaguered with a
serious recession throughout Fiscal 1994, construction and remodeling in former
East Germany have provided some support to Watts' sales base. Overall sales for
Fiscal 1994 for Watts Europe were flat, but there are some prospects for
gradually improving market conditions in Western Europe and continued growth in
Eastern Europe.
[Photo of Victor L. Pitt, President, Watts Industries (Canada) Inc.]
Watts Canada also enjoyed a year of increasing sales as the Canadian economy
partially recovered from its long-term recession. Watts has a large market share
in Canada which is supported by three manufacturing operations. During the year,
Watts acquired the leading Canadian manufacturer of floor and roof drains,
intercepters, backwater valves, and yard hydrants when it purchased LeHage
Industries in July, 1993. The Ancon Division of LeHage presents an entirely new
range of products to complement Watts' plumbing line of valves sold through
wholesale distribution in Canada and the United States. As a further complement
to the Ancon line of products, Watts Canada acquired Enpoco in November, 1993.
The introduction of these product lines into the U.S. is one of Watts'
priorities for growth during the new fiscal year.
[Photo] [Photo] [Photo]
Watts Ocean B.V. Watts SFR SA Woodbridge, Ontario facility
Eerbeek, Netherlands Fressenneville, France
[Photo] [Photo] [Photo]
Intermes, SpA MTR GmbH Burlington, Ontario facility
Caldaro, Italy Gemmrigheim, Germany
[Pie Graph showing Fiscal 1994 Sales: International 29% and Domestic 71%]
7
Municipal Water
Watts' Municipal Water Group manufactures valves that are widely used to
control the flow, pressure and level of water in systems for potable water
supply, wastewater treatment, industrial process water and cooling water for
power generation. The performance and quality of these valves enhance the
reliability and efficiency of the systems in which they are installed.
Demand in the municipal water market comes from a combination of new
construction, expansion, renovation and repair. The obsolescence of systems
installed after the second World War, a shifting and expanding population, and
federal regulations regarding clean water drive a continuing need for the
Group's products. Federal and state funding limitations sometimes delay the
implementation of some of these projects which are highly competitive.
[Photo of Edward G. Holtgraver, Group Vice President, Municipal Water]
Henry Pratt Company is a leading producer of butterfly and ball valves for
municipal water supply. In power generation, Henry Pratt is one of a limited
number of companies certified to supply valves to nuclear plants. With its large
installed base, Henry Pratt is positioned to benefit from the growing business
for maintenance and repair as domestic nuclear power plants age.
James Jones Company markets bronze fire hydrants, ball valves, curb stops and
related bronze products for public and private potable water distribution
systems. It has experienced growth from improved customer service, quality and
delivery lead times, and a renewed emphasis on its core products and regional
markets. Profits have improved due to increased volumes and aggressive cost
management. James Jones is currently active in 11 states, with plans for
controlled expansion within the United States and certain export markets as
regionally focused products are developed. With the acquisition of EBCO, Watts
provides a similar line of products for the United Kingdom.
The Watts Automatic Control Valve (ACV) is a pilot-operated,
diaphragm-actuated, automatic hydraulic control valve used for water, fuels and
other low to medium viscosity liquids. Henry Pratt will market Watts ACV
products with its project specification and bid packages during Fiscal 1995. By
providing a more comprehensive, integrated product package, the Municipal Water
Group will meet more of its customers' needs and make it more attractive for
independent distributors to promote the line. At the same time, the companies
will maintain the independence necessary to provide the customer responsiveness
that has been key to their competitive success.
[Photo of Robert T. McLaurin, Corporate Vice President, Asian Operations]
Serving the municipal water valve market in the People's Republic of China,
Tianjin Tanggu Watts Valve Company, Ltd. is Watts' first effort to leverage
domestic valve technology and manufacturing expertise in this international
market.
[Photo] [Photo]
Watts Automatic Control Valve, Inc. Henry Pratt Company
Houston, TX Aurora and Dixon, IL
[Pie Graph Showing Percentage of Municipal
Water (16.1%) in the Municipal Water Market]
[Photo of valve]
[Photo] [Photo]
Edward Barber & Company, Ltd. James Jones Company
Tottenham, U.K. El Monte, CA
8
Steam
The Steam Group companies provide products that control the efficient and
safe use of steam - recognized as an economical method of transferring energy
from one place to another.
Watts' four companies in this segment address a wide variety of markets, from
HVAC, where steam is used in heating and cooling applications, to power
generation, industrial process, and propulsion systems on U.S. Navy ships.
Spence Engineering is a leader in the control of HVAC steam and is also active
in industrial plants. Leslie Controls is both the premier supplier of control
valves to the U.S. Navy and a supplier of products that are used in a variety of
industrial and commercial steam applications. Nicholson Steam Trap is a leader
in thermostatic trap technology, and the R. G. Laurence Company manufactures
products primarily for the gas turbine industry.
[Photo of Charles S. Wolley, Group Vice President, Steam]
Overall, the long-term market outlook for steam generation is flat, but some
new products and ongoing maintenance and repair opportunities should continue to
support moderate growth. Steam unleashes a destructive force on system
components, creating a demand for replacement parts that is predictable and
steady. Proper handling of steam is also critical for safety. Therefore, the
Steam Group's approach of selling through technical representatives
concentrating on safety, reliability, and proper system design creates added
value for its customer base.
Growth in 1994 was led by a rebound in sales to the U.S. Navy and the results
of a strong new product development program. Leslie introduced the Aeroflow(TM)
control valve which, coupled with its digital positioning system and optical
feedback, delivers precision previously unattainable within the power industry.
Spence Engineering strengthened its position in HVAC with a significant
expansion of its ASME safety relief valve product line, and R.G. Laurence
experienced strong growth in the gas turbine industry by redesigning its
Soli-Con(TM) line of solenoid control valves to meet changing OEM requirements.
Cost management remains a focus. The recently completed relocation of
Nicholson's manufacturing operations from Wilkes-Barre, Pennsylvania, to the
Spence facility in Walden, New York, will reduce operating costs and improve
manufacturing capabilities. Also, significant manufacturing cost improvements
were realized through product engineering efforts.
[Photo of Frederic B. Horne, Corporate Vice President]
International
Sourcing
The global economy presents opportunities to procure materials
internationally. Watts is sourcing worldwide for competitive supplies of lower
cost steel, iron and bronze castings, and other commodity materials, while
maintaining sound partnerships with the most progressive and competitive U.S.
suppliers. Through a careful blending process, our lower cost base will benefit
and complement our capital investment program and position Watts for consistent,
profitable growth.
- - --------------------------------------------------------------------------------
[Photo]
Leslie Controls, Inc.
R.G. Laurence Company, Inc.
Tampa, FL
[Photo]
Spence Engineering Company, Inc.,
Nicholson Steam Trap, Inc.
Walden, NY
[Pie Graph Showing Percentage of Steam (12%) in the Steam Market]
[Photo of valve]
9
Statements of Consolidated Earnings
(Amounts in thousands, except per share information)
Fiscal Year Ended June 30
1994 1993 1992
---------------------------------------
Net sales ............................................................................. $ 518,541 $ 465,796 $ 423,808
Cost of goods sold .................................................................... 322,336 292,103 262,804
--------- --------- ---------
GROSS PROFIT .................................................................. 196,205 173,693 161,004
Selling, general and administrative expenses .......................................... 121,597 111,550 96,458
Unusual charges ....................................................................... 7,000
--------- --------- ---------
OPERATING EARNINGS ............................................................ 74,608 55,143 64,546
Other (income) expense:
Interest income .................................................................... (2,986) (4,397) (4,103)
Interest expense ................................................................... 8,779 9,152 7,879
Other--net .......................................................................... 1,480 1,248 831
--------- --------- ---------
7,273 6,003 4,607
--------- --------- ---------
EARNINGS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING ..................................... 67,335 49,140 59,939
Provision for income taxes ............................................................ 26,325 18,734 23,314
--------- --------- ---------
EARNINGS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING .......................................................... 41,010 30,406 36,625
Cumulative effect on prior years (to June 30, 1992)
of change in accounting for income taxes ........................................... 3,132
--------- --------- ---------
NET EARNINGS .................................................................. $ 41,010 $ 27,274 $ 36,625
========= ========= =========
Primary earnings per Common Share:
Earnings before cumulative effect of change in accounting .......................... $ 1.38 $ 1.01 $ 1.29
Cumulative effect on prior years of change in accounting ........................... (.10)
--------- --------- ---------
NET EARNINGS .................................................................. $ 1.38 $ .91 $ 1.29
========= ========= =========
Fully diluted earnings per Common Share:
Earnings before cumulative effect of change in accounting .......................... $ 1.38 $ 1.01 $ 1.27
Cumulative effect on prior years
of change in accounting ............................................................ (.10)
--------- --------- ---------
NET EARNINGS .................................................................. $ 1.38 $ .91 $ 1.27
========= ========= =========
Dividends paid per Common Share ....................................................... $ .20 $ .16 $ .13
========= ========= =========
Weighted average number of Common Shares:
Primary ............................................................................ 29,674 30,090 28,326
========= ========= =========
Fully diluted ...................................................................... 29,717 30,098 30,080
========= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
Report of Independent Auditors
Board of Directors
Watts Industries, Inc.
We have audited the accompanying consolidated balance sheets of Watts
Industries, Inc. and subsidiaries as of June 30, 1994 and 1993, and the related
statements of consolidated earnings, consolidated stockholders' equity, and
consolidated cash flows for each of the three years in the period ended June 30,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1994 and 1993 financial
statements of Watts Industries Europe B.V., a wholly-owned subsidiary, which
statements reflect total assets of $107,729,000 and $100,219,000 as of June 30,
1994 and 1993, respectively, and total revenues of $79,709,000 and $57,645,000,
for the years then ended. Those 1994 and 1993 statements were audited by other
auditors, Deloitte & Touche, whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Watts Industries Europe
B.V., is based solely on the report of the other auditors.
We conducted our audits 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 audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Watts Industries, Inc. and subsidiaries
at June 30, 1994 and 1993, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended June 30, 1994,
in conformity with generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements, in 1993, the
Company changed its method of accounting for income taxes.
Boston, Massachusetts [Signature of Ernst & Young]
August 5, 1994
10
Consolidated Balance Sheets
(Amounts in thousands, except share information)
ASSETS June 30
1994 1993
--------- ---------
CURRENT ASSETS
Cash and cash equivalents ............................................................ $ 6,231 $ 16,937
Short-term investments ............................................................... 58,769 66,198
Trade accounts receivable, less allowance of $4,488 in 1994
and $3,565 in 1993 for doubtful accounts ......................................... 79,342 68,099
Inventories:
Finished goods ................................................................... 60,104 48,910
Work in process .................................................................. 39,671 33,939
Raw materials .................................................................... 53,305 49,064
--------- ---------
153,080 131,913
Prepaid expenses and other current assets ............................................ 8,484 9,494
Deferred income taxes ................................................................ 14,973 8,551
--------- ---------
Total Current Assets ............................................................. 320,879 301,192
OTHER ASSETS
Goodwill, net of accumulated amortization
of $7,232 in 1994 and $4,743 in 1993 ............................................. 89,500 87,017
Other ................................................................................ 12,222 13,205
--------- ---------
101,722 100,222
PROPERTY, PLANT AND EQUIPMENT
Land ................................................................................. 11,263 11,247
Buildings and improvements ........................................................... 62,279 59,951
Machinery and equipment .............................................................. 149,652 142,384
Construction in progress ............................................................. 7,181 4,665
--------- ---------
230,375 218,247
Less allowance for depreciation ...................................................... 94,126 83,986
--------- ---------
136,249 134,261
--------- ---------
$ 558,850 $ 535,675
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ..................................................................... $ 24,672 $ 21,180
Accrued expenses and other liabilities ............................................... 36,840 40,441
Accrued compensation ................................................................. 8,355 10,059
Income taxes payable ................................................................. 3,340 4,494
Current portion of long-term debt .................................................... 1,141 2,366
--------- ---------
Total Current Liabilities ........................................................ 74,348 78,540
LONG-TERM DEBT, net of current portion ................................................... 97,479 101,468
DEFERRED INCOME TAXES .................................................................... 16,357 13,435
OTHER LIABILITIES ........................................................................ 9,115 7,112
STOCKHOLDERS' EQUITY
Preferred Stock, $.10 par value; 5,000,000 shares authorized,
no shares issued or outstanding
Class A Common Stock, $.10 par value; authorized 40,000,000 shares;
issued 18,009,822 shares in 1994 and 9,226,770 in 1993 ........................... 1,801 923
Class B Common Stock, $.10 par value; authorized 13,000,000 shares;
issued 11,472,470 in 1994 and 5,744,635 in 1993 .................................. 1,147 574
Additional paid-in capital ........................................................... 92,996 101,491
Retained earnings .................................................................... 268,706 235,052
Foreign currency translation adjustment .............................................. (3,099) (2,920)
--------- ---------
361,551 335,120
--------- ---------
$ 558,850 $ 535,675
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
11
Statements of Consolidated Stockholders' Equity
(Amounts in thousands, except share information)
Foreign
Class A Class B Additional Currency Total
Common Stock Common Stock Paid-In Retained Translation Stockholders'
Shares Amount Shares Amount Capital Earnings Adjustment Equity
--------- ------ --------- ------ -------- -------- ----------- -------------
Balance at July 1, 1991 7,826,522 $ 783 5,778,575 $ 578 $ 55,308 $178,759 $ 287 $235,715
Net earnings 36,625 36,625
Shares of Class A Common Stock
issued upon conversion of debt 1,245,944 125 42,951 43,076
Shares of Class B Common Stock
converted to Class A Common Stock 32,940 3 (32,940) (3)
Shares of Class A Common Stock
exchanged upon the exercise
of stock options and retired (5,129) (1) (266) (267)
Shares of Class A Common Stock
issued upon the exercise of
stock options 70,553 7 2,041 2,048
Common Stock cash dividends (3,865) (3,865)
Change in foreign currency
translation adjustment 1,561 1,561
---------- ------ ---------- ------ -------- -------- ------- --------
Balance at June 30, 1992 9,170,830 917 5,745,635 575 100,034 211,519 1,848 314,893
Net earnings 27,274 27,274
Shares of Class B Common Stock
converted to Class A Common Stock 1,000 1 (1,000) (1)
Shares of Class A Common Stock
exchanged upon the exercise of
stock options and retired (4,500) (1) (218) (219)
Shares of Class A Common Stock
issued upon the exercise of
stock options 59,440 6 1,675 1,681
Common Stock cash dividends (3,741) (3,741)
Change in foreign currency
translation adjustment (4,768) (4,768)
---------- ------ ---------- ------ -------- -------- ------- --------
Balance at June 30, 1993 9,226,770 923 5,744,635 574 101,491 235,052 (2,920) 335,120
Net earnings 41,010 41,010
Shares of Class B Common Stock
converted to Class A Common Stock 16,500 1 (16,500) (1)
Shares of Class A Common Stock
exchanged upon the exercise
of stock options and retired (25,498) (3) (1,172) (1,175)
Shares of Class A Common Stock
issued upon the exercise of
stock options 154,761 16 4,707 4,723
Purchase and retirement of
treasury stock (342,700) (34) (12,030) (12,064)
Common Stock cash dividends (5,884) (5,884)
Effect of two-for-one stock split 8,979,989 898 5,744,335 574 (1,472)
Change in foreign currency
translation adjustment (179) (179)
---------- ------ ---------- ------ -------- -------- ------- --------
Balance at June 30, 1994 18,009,822 $1,801 11,472,470 $1,147 $ 92,996 $268,706 ($3,099) $361,551
========== ====== ========== ====== ======== ======== ======= ========
The accompanying notes are an integral part of these
consolidated financial statements.
12
Statements of Consolidated Cash Flows
(Amounts in thousands)
Fiscal Year Ended June 30
1994 1993 1992
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings .................................................................... $41,010 $27,274 $36,625
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization.............................................. 22,393 20,560 17,630
Deferred income taxes...................................................... (151) (1,273) (4,274)
Loss on disposal of equipment.............................................. 15 168 67
Cumulative effect of change in accounting for income taxes................. 3,132
Changes in operating assets and liabilities, net of effects from
business acquisitions:
Accounts receivable................................................. (9,849) 8,755 (5,687)
Inventories......................................................... (18,592) (3,540) (4,228)
Prepaid expenses and other current assets........................... 1,425 1,334 1,218
Accounts payable, accrued expenses and other liabilities............ 158 (9,447) (2,494)
------- ------- -------
Net cash provided by operating activities..................................... 36,409 46,963 38,857
INVESTING ACTIVITIES
Additions to property, plant and equipment........................................ (19,928) (25,798) (18,054)
Proceeds from sale of equipment................................................... 395 635 505
Increase in goodwill and other assets............................................. (1,196) (1,378) (1,081)
Business acquisitions, net of cash acquired:
Henry Pratt................................................................... (57,154)
Intermes .................................................................... (6,094) (22,184)
Other acquisitions............................................................ (4,783) (13,494) (2,393)
Repayment of debt of acquired businesses.......................................... (1,935) (6,872)
Net changes in short-term investments............................................. 7,429 32,690 (27,644)
------- ------- -------
Net cash used in investing activities......................................... (26,112) (36,401) (105,821)
FINANCING ACTIVITIES
Purchase and retirement of treasury stock......................................... (12,064)
Payments of long-term debt........................................................ (6,032) (963) (879)
Proceeds from the sale of Notes................................................... 75,000
Proceeds from long-term borrowings................................................ 716 3,048
Proceeds from exercise of stock options........................................... 2,418 1,265 1,286
Cash dividends.................................................................... (5,884) (4,785) (3,637)
------- ------- -------
Net cash provided by (used in) financing activities........................... (20,846) (1,435) 71,770
Effect of exchange rates on cash and cash equivalents............................. (157) (2,179) 378
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. (10,706) 6,948 5,184
Cash and cash equivalents at beginning of year.................................... 16,937 9,989 4,805
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................................... $ 6,231 $16,937 $ 9,989
======== ======= ========
The accompanying notes are an integral part of these
consolidated financial statements.
13
Notes to Consolidated Financial Statements
1. ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of Watts Industries, Inc. and its majority-owned subsidiaries (the
Company). Upon consolidation, all significant intercompany accounts and
transactions are eliminated.
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 average exchange rates for each year. Net
translation gains or losses are adjusted directly to a separate component of
stockholders' equity.
Cash Equivalents and Short-Term Investments: Cash equivalents consist of
investments having maturities of three months or less at the date of purchase.
Short-term investments consist of corporate and municipal bonds, and mutual
funds whose portfolios consist principally of United States Government
securities. Short-term investments are valued at cost, which approximates
market.
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This Statement will be effective
beginning in fiscal year 1995, and expands the use of fair value accounting and
reporting for certain investments in debt and equity securities, but retains the
use of the amortized cost method for those investments in debt securities for
which the holder has the positive intent and ability to hold to maturity. The
Company believes that adoption of this Standard will not have a significant
effect on its results of operations or financial condition.
Concentrations of Credit Risk: Financial instruments which potentially
subject the Company to concentration of credit risk consist principally of cash
equivalents, short-term investments and trade receivables. The Company places
its cash equivalents and short-term investments with high credit, quality
financial institutions and, by policy, limits the amount of credit exposure to
any one financial institution. 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. As of June 30, 1994, the Company had no
significant concentrations of credit risk.
Inventories: Inventories are stated at cost (principally first-in, first-out
method) not in excess of net realizable value. Inventories amounting to
$14,050,000 at June 30, 1994 and $14,019,000 at June 30, 1993 are valued using
the last-in, first-out method (LIFO), which approximates current replacement
cost.
Property, Plant and Equipment: Property, plant and equipment are recorded at
acquired cost. Depreciation is provided on the straight-line basis over the
estimated useful lives of the assets.
Income Taxes: Deferred income taxes are recognized for temporary differences
between financial statement and income tax bases of assets and liabilities for
which income tax benefits and obligations will be realized in future years.
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. To the extent the Company makes payments under contingent
earn-out arrangements related to businesses previously acquired, those amounts
are recorded as additional goodwill.
The carrying value of goodwill is reviewed if the facts and circumstances
suggest that it may be impaired. If this review indicates that goodwill will not
be recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, the Company's carrying value of
the goodwill would be reduced to its fair value.
Earnings Per Common Share: Earnings per common share is based upon the
weighted average number of Class A and B Common Shares outstanding during each
period and the dilutive effect of Class A Common Stock options. Shares of Class
A Common Stock issuable upon conversion of outstanding Convertible Subordinated
Debentures were included in the calculation of fully diluted earnings per share,
up to the date of conversion on March 15, 1992. Had the conversion of these
Debentures taken place at the beginning of 1992, primary earnings per share in
1992 would have been $1.27.
Basis of Presentation: Certain amounts in 1993 and 1992 have been
reclassified to permit comparison with the 1994 presentation.
2. BUSINESS ACQUISITIONS
On November 6, 1992, the Company acquired 100% of the outstanding common
stock of Intermes, a plumbing and heating valve manufacturer, for $28.3 million.
14
2. BUSINESS ACQUISITIONS(cont'd.)
On September 30, 1991, the Company acquired 100% of the outstanding common
stock of Henry Pratt Company for cash of $57.2 million. In addition, upon
Pratt's achievement of targeted operating income levels, the Company will be
required to make annual contingent payments through 1997 of $1.3 million plus
25% of amounts in excess of targeted operating income levels.
In addition, the Company acquired other valve manufacturers for cash of $4.8
million, $13.5 million and $2.4 million in fiscal 1994, 1993 and 1992,
respectively.
These acquisitions were accounted for under the purchase method. The results
of operations of the acquired businesses are included in the consolidated
financial statements from the dates of acquisition.
The following unaudited pro forma consolidated results of operations for the
years ended June 30, 1993 and 1992 are presented as if the acquisitions made in
1993 and 1992 had been made at the beginning of the year in which the
acquisitions occurred, and at the beginning of the year immediately preceding
the year of the acquisitions. The effects of acquisitions made in 1994 are not
material and, accordingly, have been excluded from the pro forma presentation.
1993 1992
------------ ------------
Net sales .................................... $483,081,000 $485,061,000
Net earnings ................................. 26,807,000 37,184,000
Primary net earnings per Common Share ........ .89 1.32
The pro forma results of operations give effect to interest costs of funds
used to finance the acquisitions and include adjustments for depreciation and
amortization resulting from the allocation of the costs of the acquisitions. The
unaudited pro forma information is not necessarily indicative of either the
results of operations that would have occurred had the purchase been made during
the periods presented, or the future results of the combined operations.
3. UNUSUAL CHARGES
In December 1992, the Company recorded unusual charges of $7 million. These
unusual charges were related to environmental matters and costs associated with
the downsizing and restructuring of certain previously acquired companies. The
charges include approximately $2 million relating to the resolution of
environmental litigation arising under CERCLA (Comprehensive Environmental
Response, Compensation and Liability Act) involving a manufacturing facility
sold in 1978, and clean-up costs principally relating to certain of the
Company's foundry operations; a $3 million accrual for estimated future
environmental clean-up costs; and $2 million relating to downsizing of certain
previously acquired operations which have been negatively impacted by reduced
military spending and to the consolidation and relocation of the operations of a
previously acquired business.
4. INCOME TAXES
The Company adopted SFAS Statement No. 109 ("Accounting for Income Taxes") as
of the beginning of fiscal year 1993. The cumulative effect on prior years of
this change in accounting principle decreased fiscal 1993 net earnings by $3.1
million or $.10 per share, and is reported separately in the statement of
consolidated earnings for the year ended June 30, 1993. The effect of adopting
Statement 109, including its application to prior business combinations, did not
have a material impact on 1993 pre-tax earnings.
At June 30, 1994, the Company has foreign net operating loss carryforwards of
$6.2 million for income tax purposes that expire in years 1995 through 2004. In
addition, foreign net operating losses of $3.4 million can be carried forward
indefinitely. These carryforwards resulted primarily from the Company's 1993
business acquisitions.
The significant components of the Company's deferred tax liabilities and
assets are as follows:
June 30
1994 1993
Deferred tax liabilities: ------------ -------------
Depreciation ................................ $ 12,402,000 $ 12,172,000
Other ....................................... 3,955,000 1,263,000
------------ ------------
Total deferred tax liabilities ............ 16,357,000 13,435,000
Deferred tax assets:
Accrued expenses ............................ 8,202,000 6,367,000
Other ....................................... 7,613,000 3,998,000
------------ ------------
Total deferred tax assets ................. 15,815,000 10,365,000
Valuation allowance for deferred tax assets . (842,000) (1,814,000)
------------ ------------
Net deferred tax assets ................... 14,973,000 8,551,000
------------ ------------
Net deferred tax liabilities .............. $ 1,384,000 $ 4,884,000
============ ============
15
Notes to Consolidated Financial Statements (cont'd.)
4. INCOME TAXES (cont'd.)
The provision for income taxes is based on the following pre-tax earnings:
1994 1993 1992
----------- ----------- -----------
Domestic .............. $57,375,000 $42,260,000 $52,238,000
Foreign ............... 9,960,000 6,880,000 7,701,000
----------- ----------- -----------
$67,335,000 $49,140,000 $59,939,000
=========== =========== ===========
The provision for income taxes as reflected in the statements of
consolidated earnings consists of the following:
Deferred
Liability Method Method
---------------------------- -------------
1994 1993 1992
------------- ----------- -------------
Currently payable:
Federal ...................... $ 20,035,000 $ 14,583,000 $ 20,987,000
Foreign ...................... 2,606,000 2,850,000 2,995,000
State ........................ 3,835,000 2,574,000 3,606,000
------------ ------------ ------------
26,476,000 20,007,000 27,588,000
Deferred, principally federal .. (151,000) (1,273,000) (4,274,000)
------------ ------------ ------------
$ 26,325,000 $ 18,734,000 $ 23,314,000
============ ============ ============
Total income taxes reported are different than would have been computed by
applying the federal statutory tax rate to earnings before income taxes. The
reasons for this difference are as follows:
Deferred
Liability Method Method
---------------------------- -----------
1994 1993 1992
------------ ------------ -----------
Computed expected federal
income tax expense ........... $23,567,000 $16,708,000 $20,379,000
State income taxes, net
of federal tax benefit ....... 2,350,000 1,548,000 2,243,000
Other .......................... 408,000 478,000 692,000
----------- ----------- -----------
$26,325,000 $18,734,000 $23,314,000
=========== =========== ===========
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $36 million, $29 million and $25 million at June 30, 1994, 1993
and 1992 respectively. Those earnings are considered to be indefinitely
reinvested and, accordingly, no provision for U.S. federal and state income
taxes has been provided thereon. Upon distribution of those earnings in the form
of dividends or otherwise, the Company would 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. 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 $2.8 million would be payable upon remittance of all
previously unremitted earnings at June 30, 1994.
The Company made income tax payments of $31.4 million, $20.5 million and
$27.6 million in 1994, 1993 and 1992, respectively.
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
June 30
1994 1993
----------- -----------
Commissions and sales incentives payable ....... $ 6,860,000 $ 5,915,000
Accrued insurance costs ........................ 6,330,000 4,481,000
Accrued medical and pension benefits ........... 3,072,000 2,820,000
Accrued payments in connection with
business acquisitions ........................ 2,982,000 10,612,000
Other .......................................... 17,596,000 16,613,000
----------- -----------
$36,840,000 $40,441,000
=========== ===========
16
6. FINANCING ARRANGEMENTS
Long-term debt consists of the following: June 30
1994 1993
------------ ------------
8-3/8% Notes, Due 2003 ............................. $ 75,000,000 $ 75,000,000
Industrial Revenue Bonds, maturing periodically from
2006 through 2019. Interest accrues at a variable
rate based on weekly tax-exempt interest rates
(2.75% at June 30, 1994) ......................... 17,268,000 17,653,000
Other .............................................. 6,352,000 11,181,000
------------ ------------
98,620,000 103,834,000
Less current portion ............................... 1,141,000 2,366,000
------------ ------------
$ 97,479,000 $101,468,000
============ ============
On November 26, 1991, the Company issued $75,000,000 principal amount of
8-3/8% Notes Due 2003. Interest is payable semiannually on December 1 and June 1
each year. The notes are not subject to optional redemption prior to maturity
and there are no sinking fund payments required. The notes are considered
general unsecured obligations of the Company. The notes include covenants,
which, among other things, restrict borrowings secured by certain assets and
certain sale and leaseback transactions by the Company or any "restricted
subsidiary" (as defined), subject to certain exceptions, including secured
borrowings not exceeding 10% of the Company's consolidated stockholders' equity,
unless the notes are secured ratably with such borrowings.
Principal payments during each of the next five fiscal years are due as
follows: 1995-$1,141,000; 1996-$883,000; 1997-$682,000; 1998-$552,000; and
1999-$5,457,000. Interest paid during fiscal 1994 and 1993 approximates interest
expense.
7. COMMON STOCK
On January 18, 1994, the Board of Directors declared a two-for-one stock
split, effective March 15, 1994, in the form of a dividend of one additional
share of the Company's Common Stock (Class A and B) for each share owned by
stockholders of record at the close of business on March 1, 1994. Par value
remained at $.10 per share. Earnings per share, cash dividends per share,
weighted average common shares outstanding and the stock option plan share
information have been restated for all periods presented to reflect the stock
split.
During 1994, the Company repurchased 342,700 shares of Class A Common Stock
prior to the stock split for $12.1 million.
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 14,663,116 shares of Class A Common
Stock for issuance under its Incentive Stock Option Plan, its Nonqualified Stock
Option Plan and conversion of shares of Class B Common Stock into Class A Common
Stock.
8. QUALIFIED AND NONQUALIFIED STOCK OPTION PLANS
The Company has a qualified incentive stock option plan whereunder options
to purchase up to 1,980,000 shares of Class A Common Stock may be granted to key
employees. Options are granted at an exercise price equal to 100% of the fair
market value per share on the date of grant. At June 30, 1994, the Company has
reserved 1,495,800 shares of Class A Common Stock for issuance under the plan.
The Company also has a nonqualified stock option plan whereunder options to
purchase up to 2,000,000 shares of Class A Common Stock may be granted to key
employees. Options are granted at an exercise price determined by the Board of
Directors, but not less than 50% of the fair market value per share on the date
of grant. At June 30, 1994, the Company has reserved 1,694,846 shares of Class A
Common Stock for issuance under the plan.
17
Notes to Consolidated Financial Statements (cont'd.)
8. QUALIFIED AND NONQUALIFIED STOCK OPTION PLANS (cont'd.)
A summary of activity in the plans is as follows:
Number of Shares
Qualified Nonqualified Exercise Price
--------- ------------ --------------
Outstanding options at
July 1, 1991 467,510 312,586 $ 8.09 to $17.50
Granted 206,000 136,000 16.88 to 24.75
Exercised (71,384) (69,722) 8.09 to 17.50
Cancelled (14,000) 10.50 to 17.50
------- -------
Outstanding options at
June 30, 1992 588,126 378,864 8.09 to 24.75
Granted 210,000 136,000 16.60 to 24.34
Exercised (86,880) (32,000) 8.09 to 22.50
Cancelled (34,000) 14.25 to 22.50
------- -------
Outstanding options at
June 30, 1993 677,246 482,864 8.75 to 24.75
Granted 237,500 146,000 15.73 to 22.50
Exercised (108,446) (167,432) 8.75 to 22.50
Cancelled (54,000) (158,000) 8.75 to 22.50
------- -------
Outstanding options at
June 30, 1994 752,300 303,432 $ 8.75 to $24.75
======= =======
Outstanding options generally vest at the rate of 20% per year. At June
30, 1994, 192,880 qualified options were exercisable and 45,432 nonqualified
options were exercisable.
9. RETIREMENT BENEFITS
The Company has defined benefit pension plans covering substantially all of
its domestic nonunion employees. Plans covering salaried employees provide
pension benefits that are based on years of service and the employee's
compensation during the last five years of employment. Plans covering hourly
employees generally provide benefits of stated amounts for each year of service.
The Company's funding policy is to contribute annually the maximum amount that
can be deducted for federal income tax purposes. Contributions are intended to
provide not only for benefits attributable to service to date, but also for
those expected to be earned in the future.
The following table sets forth the components of pension expense, the funded
status and amounts recognized in the consolidated balance sheets for the
Company's domestic defined benefit pension plans. Defined benefit plans for the
Company's foreign subsidiaries are not material. The Company computes its
pension obligations and expense using March 31 as its measurement date.
March 31
1994 1993
------------ ------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $18,361,000 at March 31, 1994 and $15,951,000 at March 31, 1993 ............... $ 19,046,000 $ 16,647,000
============ ============
Projected benefit obligation for services rendered to date ....................... $ 24,288,000 $ 20,714,000
Plan assets at fair value, primarily fixed income securities ..................... 24,432,000 22,443,000
------------ ------------
Plan Assets in Excess of Projected Benefit Obligation ............................... 144,000 1,729,000
Unrecognized net (gain) loss from past experience different from
that assumed and effect of changes in assumptions ................................ 410,000 (467,000)
Unrecognized prior service cost ..................................................... 1,089,000 1,178,000
Unrecognized net transition asset ................................................... (3,181,000) (3,499,000)
------------ ------------
Accrued Pension Liability ........................................................... ($ 1,538,000) ($ 1,059,000)
============ ============
18
9. RETIREMENT BENEFITS (cont'd)
Net pension cost included the following components:
Year Ended March 31
1994 1993 1992
----------- ----------- -----------
Service cost--benefits earned during the year ................................... $ 1,753,000 $ 1,678,000 $ 1,486,000
Interest cost on projected benefit obligation ................................... 1,775,000 1,556,000 1,359,000
Actual return on plan assets .................................................... (1,608,000) (1,787,000) (1,930,000)
Net amortization and deferral ................................................... (418,000) (105,000) 255,000
----------- ----------- -----------
$ 1,502,000 $ 1,342,000 $ 1,170,000
=========== =========== ===========
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were approximately 8% and 6%, respectively, at
March 31, 1994 and 1993. The expected long-term rate of return on plan assets in
1994, 1993 and 1992 was approximately 8%.
In November 1992, the FASB issued SFAS No. 112 "Employers' Accounting for
Postemployment Benefits." The Statement will be effective for fiscal year 1995
and requires in certain cases that estimated costs of postemployment benefits be
recognized over the service lives of employees. The Company believes that
adoption of the Standard will not have a material effect on its results of
operations or financial condition.
10. COMMITMENTS AND CONTINGENCIES
The Company is engaged in various claims and litigation arising from its
operations. In the opinion of management, uninsured losses, if any, resulting
from these matters will not have a material adverse impact on the consolidated
financial position or future results of operations of the Company.
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 and remediation efforts that are underway are in various
stages. In certain cases, remediation has not begun. The Company has evaluated
its potential exposure based on all currently available information and has
recorded an estimate of its liability for environmental matters.
With respect to one contaminated site included on the Environmental
Protection Agency's National Priorities List, the Company expects to be named a
potentially responsible party. The process of determining the causes and extent
of contamination, the cost of remediation and the method to allocate that cost
among those ultimately determined to be responsible is in a very early stage.
Accordingly, the ultimate outcome of this matter cannot be determined at this
time.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following method and assumptions were used by the Company to estimate the
fair value of its financial statements:
Cash and Cash Equivalents and Short-Term Investments
The carrying amounts reported in the balance sheet approximate fair value.
Long-Term Debt
The fair value of the Company's 8-3/8% Notes, Due 2003 is based on quoted
market prices. The fair value of other long-term debt is estimated using
discounted cash flow analyses, based on the Company's incremental borrowing
rates for similar types of borrowing arrangements.
The carrying amount and the estimated fair market value of the Company's long
term debt are as follows:
June 30
1994 1993
------------ ------------
Carrying amount ...................... $ 98,620,000 $103,834,000
Estimated fair value ................. 99,745,000 113,115,000
19
Notes to Consolidated Financial Statements (cont'd.)
12. FINANCIAL INFORMATION BY GEOGRAPHIC AREA
The Company designs, manufactures and sells an extensive line of valves for
plumbing and heating, municipal water, water quality, industrial, steam, and oil
and gas markets. Sales, operating profit and identifiable assets by major
geographic area are summarized as follows. Transfer prices to foreign
subsidiaries are intended to produce profit margins commensurate with sales and
marketing efforts.
(Amounts in thousands)
-----------------------------------------------------------------------------
Domestic Canada Europe Eliminations Consolidated
-------- -------- -------- ------------ ------------
1994
- - -----------------------------------------------
Sales ........................................ $410,100 $ 28,732 $ 79,709 $518,541
Transfer between areas ....................... 14,991 2,820 $ 17,811
-------- -------- -------- -------- --------
$425,091 $ 31,552 $ 79,709 $ 17,811 $518,541
======== ======== ======== ======== ========
Operating Earnings of
Geographic Areas ............................ $ 68,120 $ 2,304 $ 10,276 $ 94 $ 80,606
======== ======== ======== ========
General corporate expenses ................... 5,998
--------
Operating Earnings ............................ $ 74,608
========
Identifiable Assets .......................... $428,293 $ 23,469 $108,072 $ 984 $558,850
======== ======== ======== ======== ========
1993
- - -----------------------------------------------
Sales ........................................ $388,804 $ 19,347 $ 57,645 $465,796
Transfer between areas ....................... 13,166 2,196 $ 15,362
-------- -------- -------- -------- --------
$401,970 $ 21,543 $ 57,645 $ 15,362 $465,796
======== ======== ======== ======== ========
Operating Earnings of
Geographic Areas ............................ $ 52,105 $ 2,306 $ 6,294 $ 264 $ 60,441
======== ======== ======== ========
General corporate expenses ................... 5,298
--------
Operating Earnings ............................ $ 55,143
========
Identifiable Assets .......................... $415,759 $ 20,343 $100,463 $ 890 $535,675
======== ======== ======== ======== ========
1992
- - -----------------------------------------------
Sales ........................................ $376,782 $ 19,836 $ 27,190 $423,808
Transfer between areas ....................... 13,623 1,694 $ 15,317
-------- -------- -------- -------- --------
$390,405 $ 21,530 $ 27,190 $ 15,317 $423,808
======== ======== ======== ======== ========
Operating Earnings of
Geographic Areas ............................ $ 60,621 $ 3,420 $ 4,538 $ 94 $ 68,485
======== ======== ======== ========
General corporate expenses ................... 3,939
--------
Operating Earnings ........................... $ 64,546
========
Identifiable Assets .......................... $433,737 $ 19,624 $ 22,885 $ 626 $475,620
======== ======== ======== ======== ========
Included in domestic sales are export sales of $45.4 million in 1994, $31.6
million in 1993 and $28.1 million in 1992.
13. SUBSEQUENT EVENTS
During July, the Company purchased a domestic manufacturer of metal and
plastic water supply products with annual revenues of approximately $56 million
for $35.2 million in cash. The Company also entered into a joint venture for
$8.5 million with a valve manufacturer located in the People's Republic of China
in exchange for a 60% interest in the Chinese joint venture.
During August, the Company entered into a five year agreement with a banking
syndicate which permits the Company to borrow up to $125 million under an
unsecured line of credit facility. Borrowings under the agreement accrue
interest at LIBOR, plus 25 basis points.
20
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(Amounts in thousands, except share information)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
1994
----
Net sales....................................................... $130,581 $127,734 $133,532 $126,694
Gross profit.................................................... 49,272 49,342 50,691 46,900
Net earnings.................................................... 10,537 10,548 11,040 8,885
Primary and fully diluted net earnings per Common Share......... .35 .36 .37 .30
Dividends paid per share........................................ .045 .045 .055 .055
1993
----
Net sales........................................................ $109,616 $113,909 $119,764 $122,507
Gross profit..................................................... 41,186 43,899 44,755 43,853
Earnings before cumulative effect
of change in accounting........................................ 9,932 4,996 8,567 6,911
Net earnings..................................................... 6,800 4,996 8,567 6,911
Primary and fully diluted earnings per Common Share:
Earnings before cumulative effect
of change in accounting........................................ .33 .17 .28 .23
Net earnings..................................................... .23 .17 .28 .23
Dividends paid per share......................................... .035 .035 .045 .045
1992
----
Net sales........................................................ $94,098 $108,078 $110,238 $111,394
Gross profit..................................................... 35,909 41,446 42,819 40,830
Net earnings..................................................... 9,101 8,932 10,117 8,475
Earnings per Common Share:
Primary........................................................ .33 .32 .36 .28
Fully diluted.................................................. .32 .32 .35 .28
Dividends paid per share......................................... .030 .030 .035 .035
Primary and fully diluted earnings per share and dividends paid per share
have been restated for all periods presented above to reflect the stock split
effected in March 1994.
21
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Fiscal Year Ended June 30, 1994 Compared to
Fiscal Year Ended June 30, 1993
Net sales increased $52,745,000 (11.3%) to $518,541,000. This increase was
attributable to the inclusion of the net sales of acquired companies and
increased unit shipments of certain product lines. The net sales of Intermes,
S.p.A. ("Intermes") acquired in November 1992, Edward Barber Company ("EBCO")
acquired in May 1993, Ancon Products, Inc. ("Ancon") acquired in July 1993, and
Enpoco Canada, Ltd. ("Enpoco") acquired in November 1993, all foreign based
companies, represented approximately 56% of the increase. The Company had
increased unit shipments of plumbing and heating valves, water quality valves,
and oil and gas valves. These increases were partially offset by decreased unit
shipments of municipal water valves and aerospace/military valves. International
sales increased from 23% to 29% of total sales, principally as a result of the
acquisitions discussed above. Export sales increased almost $14,000,000 (44%) to
$45,400,000, primarily due to increased shipments of oil and gas valves. The
Company intends to maintain its strategy of seeking acquisition opportunities as
well as developing its international sales to achieve sales growth.
Gross profit increased $22,512,000 (13.0%) to $196,205,000 and increased as a
percentage of net sales from 37.3% to 37.8%. This increased percentage was
primarily attributable to improved manufacturing performance and increased
volume, particularly in the plumbing and heating and water quality segments, as
well as decreased costs of bronze ingot. During fiscal 1995, the Company
anticipates the cost of ingot to rise which may unfavorably impact its margin
depending on its ability to increase selling prices.
Selling, general and administrative expenses increased $3,047,000 (2.6%) to
$121,597,000. The Company recorded $7,000,000 of unusual charges in the year
ended June 30, 1993 for environmental matters and costs associated with the
downsizing and restructuring of certain acquired companies. Excluding the effect
of this charge, selling, general and administrative expenses would have
increased $10,047,000 (9.0%) in the period ended June 30, 1994. This increase is
primarily attributable to the inclusion of the expenses of acquired companies
and increased commissions associated with the higher sales volume. These
increases were partially offset by decreased spending at several subsidiaries as
a result of downsizing programs implemented during the last fiscal year.
The Company from time to time is involved with environmental proceedings and
incurs costs on an ongoing basis related to environmental matters. The Company
has been or expects to be named a potentially responsible party with respect to
currently identified contaminated sites, which are in various stages of the
remediation process. The Company has evaluated its potential exposure based on
all currently available information and has recorded its estimate of its
liability for environmental matters. The ultimate outcome of these environmental
matters cannot be determined. The Company currently anticipates that it will not
incur significant expenditures in fiscal 1995 in connection with any of these
environmentally contaminated sites. Please see Note 10 to the accompanying
consolidated financial statements.
Interest income decreased $1,411,000 (32.1%) to $2,986,000 due to decreased
levels of cash and short-term investments.
Net earnings increased $13,736,000 (50.4%) to $41,010,000. If the Company had
not incurred the $7,000,000 of unusual charges and the cumulative effect of the
change in accounting method in fiscal 1993, net earnings would have increased
18.5%. The Company's return on investment for the fiscal year ended June 30,
1994 was 11.8%. The Company's return on investment for the fiscal year ended
June 30, 1993 before the change in accounting method and the $7,000,000 of
unusual charges was 10.4%. This compares to 13.7% for fiscal year 1992, 15.8%
for fiscal year 1991, and 17.6% for fiscal year 1990. The primary reasons for
these declining percentages is the increase in stockholders' equity associated
with the conversion of the Company's $44,000,000 Convertible Debentures on or
prior to March 15, 1992 and the sale on February 28, 1991 of 920,000 shares of
Class A Common Stock in a public offering at a price to the public of $40.50 per
share. Stockholders' equity increased $78,732,000 as a result of these
transactions. These transactions have also resulted in a relatively high level
of cash and short-term investments which also had the effect of decreasing the
22
return on investment ratio due to the lower return earned on these assets as
compared to the return earned on operating assets.
The change in foreign exchange rates since June 30, 1993 did not have a
material impact on the results of operations or the financial condition of the
Company.
The weighted average number of common shares, after giving effect to the
two-for-one stock split described in Note 7 to the accompanying consolidated
financial statements, outstanding on June 30, 1994 decreased to 29,674,464 from
30,089,898 for primary earnings per share. This decrease is the result of the
repurchase by the Company, prior to the stock split, of 342,700 shares of Class
A Common Stock. Primary and fully diluted earnings per share were $1.38 for the
period ended June 30, 1994 compared to $1.16 before unusual charges and the
cumulative effect of the change in accounting method for the period June 30,
1993.
Results of Operations
Fiscal Year Ended June 30, 1993 Compared to
Fiscal Year Ended June 30, 1992
Net sales increased $41,988,000 (9.9%) to $465,796,000. This increase was
attributable exclusively to the inclusion of the net sales of acquired
companies, including the net sales of Intermes, S.p.A. ("Intermes") acquired in
November 1992, Henry Pratt Company ("Pratt") acquired in September 1991,
Waletzko Armaturen GmbH ("Waletzko") acquired in July 1992, Edward Barber
Company (EBCO) acquired in May 1993, and Rockford Valve Company ("Rockford")
acquired in August 1992. Without the net sales of these acquired companies, net
sales for fiscal year 1993 would have been equal to the net sales for fiscal
year 1992. The Company had increased unit shipments of plumbing and heating
valves, water flow control valves, and oil and gas valves. However, these
increases were offset by decreased unit shipments of steam control valves to the
Navy, and aerospace/military valves. The Company believes the reduction in
Navy/military sales to be a long-term condition. The Company also believes that
as long as the general economic environment remains at its current level, it
will be difficult to achieve meaningful internal sales growth. The Company
intends to maintain its strategy of seeking acquisition opportunities as well as
developing its international sales to achieve growth.
Gross profit increased $12,689,000 (7.9%) to $173,693,000 but decreased as a
percentage of net sales from 38.0% to 37.3%. This decreased percentage was
primarily attributable to decreased unit pricing in certain product lines due to
competitive pricing pressure, decreased absorption of fixed manufacturing
expenses resulting from lower production levels associated with decreased sales
of steam control valves to the Navy, and a less favorable product mix.
Selling, general and administrative expenses increased $22,092,000 (22.9%)
to $118,550,000. This increase includes $7,000,000 of unusual charges; without
these unusual charges the increase would have been $15,092,000 (15.6%). These
unusual charges are related to environmental matters and costs associated with
the downsizing and restructuring of certain acquired companies. The charges
include approximately $2,000,000 relating to the resolution of environmental
litigation arising under CERCLA (Comprehensive Environmental Response,
Compensation, and Liability Act) involving a manufacturing facility sold in
1978, and clean-up costs relating principally to certain of the Company's
foundry operations; a $3,000,000 accrual for estimated future environmental
clean-up costs; and $2,000,000 relating to downsizing of certain previously
acquired operations which have been negatively impacted by reduced military
spending and to the consolidation and relocation of the operations of a
previously acquired company. The balance of the increased expenses is due to the
inclusion of expenses of Intermes and the other acquired companies discussed
above, and increased international selling expenses. The Company from time to
time is involved with environmental proceedings and incurs costs on an on-going
basis related to environmental matters.
Interest expense increased $1,273,000 (16.2%) to $9,152,000 due to the
issuance on November 26, 1991 of $75,000,000 aggregate principal amount of the
Company's 8-3/8% Notes Due 2003 and the inclusion of the interest expense of
23
Management's Discussion (cont'd.)
Intermes. These increases were partially offset by the conversion of $44,000,000
aggregate principal amount of the Company's 7-3/4% Convertible Subordinated
Debentures Due 2014 into Class A Common Stock on or prior to March 15, 1992.
Other expense increased $417,000 (50.2%) to $1,248,000 primarily due to the
inclusion of the company's share of the net loss of a partially owned subsidiary
of Intermes.
Earnings before income taxes decreased $10,799,000 (18.0%) to $49,140,000.
Net earnings before the change in accounting method decreased $6,219,000 (17.0%)
to $30,406,000. If the Company had not incurred the $7,000,000 of unusual
charges, net earnings before the change in accounting method would have
decreased $1,880,000 (5.1%).
Effective retroactively to July 1, 1992, the Company changed its method of
accounting for income taxes from the deferred method to the liability method
required by FASB Statement No. 109, "Accounting for Income Taxes". The change is
required for the Company's fiscal year beginning July 1, 1993 (fiscal 1994),
however, the Company has elected early adoption of the new rules. As permitted
under the new rules, prior years' financial statements were not restated. The
cumulative effect of adopting Statement No. 109 as of July 1, 1992 is to
decrease net earnings $3,132,000 or $.10 per share for the current fiscal year.
The on-going effect of the net income tax rules is expected to decrease pre-tax
income by approximately $100,000 per year because of increased depreciation
expense as a result of Statement No. 109's requirement to report assets acquired
in prior business combinations at their pre-tax amounts. The net deferred tax
liabilities at June 30, 1993 will not be materially affected by the recently
enacted federal corporate income tax rate increase.
The change in foreign exchange rates since June 30, 1992 did not have a
material impact on the results of operations or the financial condition of the
Company.
The weighted average number of common shares outstanding on June 30, 1993
increased to 30,089,898 from 28,325,552 for the period ended June 30, 1992 due
to the conversion of the Company's 7-3/4% Convertible Subordinated Debentures
Due 2014 described above. Primary earnings per share decreased to $.91 for the
fiscal year ended June 30, 1993 from $1.29 for the fiscal year ended June 30,
1992. Fully diluted earnings per share decreased to $.91 from $1.27 for the same
periods.
The following table illustrates the reasons for the changes in fully diluted
earnings per share:
Fiscal Year Ended
June 30,
-------------------
1993 1992
------ ------
Earnings per share as reported....................... $.91 $1.27
Change in accounting method.......................... .10
Impact of unusual charges............................ .15
----- -----
$1.16 $1.27
===== =====
Liquidity and Capital Resources
During the fiscal year ended June 30, 1994, the Company repurchased 342,700
shares on a pre-split basis of its Class A Common Stock through open market
repurchases for an aggregate purchase price of $12,064,000. The Company's
repurchase program is now complete. In July, 1993, a subsidiary of the Company
purchased Ancon Products, Inc. located in Scarborough, Ontario, Canada. Ancon
manufactures a wide range of floor and roof drains, intercepters, backwater
valves, yard hydrants, and stainless and carbon steel specialty products used
primarily in commercial and industrial construction applications. In November,
1993, a subsidiary of the Company also purchased Enpoco Canada, Ltd., a
manufacturer of drains located in Ontario, Canada. The aggregate purchase price
for these acquisitions was U.S. $4,783,000. The Company also repaid $1,935,000
of debt acquired with one of the companies. The Company made contingent purchase
price payments of $6,094,000 as part of the Intermes acquisition. The Company
24
also spent $19,928,000 on capital expenditures, primarily manufacturing
machinery and equipment. The Company is budgeting $27,000,000 of capital
expenditures in the fiscal year ending June 30, 1995, as part of its commitment
to continuously improve its manufacturing capabilities.
Working capital at June 30, 1994 was $246,531,000 compared to $222,652,000 at
June 30, 1993. Cash and short-term investments were $65,000,000 at June 30, 1994
compared to $83,135,000 at June 30, 1993. The ratio of current assets to current
liabilities was 4.3 to 1 at June 30, 1994 compared to 3.8 to 1 at June 30, 1993.
Debt as a percentage of total capital employed was 21.4% at June 30, 1994
compared to 23.7% at June 30, 1993.
Subsequent to fiscal year end, on July 28, 1994, the Company purchased Jameco
Industries, Inc. ("Jameco") of Wyandanch, New York, for a cash purchase price of
$35,200,000. Jameco is a manufacturer of metal and plastic water supply
products, including valves, tubular products and sink strainers that are sold
primarily to residential construction and home repair and remodeling markets in
the United States and overseas. Jameco had net sales of approximately
$56,000,000 for the twelve months ended June 30, 1994.
In August, 1994, the Company entered into a joint venture with a valve
company in Tianjin, People's Republic of China. The Company will invest a total
of $8,500,000 for a 60% interest in the joint venture during fiscal year 1995.
In August, 1994, the Company acquired the Cryolab valve product line from
SAES Pure Gas, Inc. for a total purchase price of approximately $890,000.
Cryolab will be integrated into the existing cryogenic valve business at the
Company's wholly-owned subsidiary, Circle Seal Controls of Corona, California.
In order to support the Company's acquisition program, working capital
requirements which would arise due to acquisitions, and for general corporate
purposes, the Company received a five-year commitment for an unsecured line of
credit for $125,000,000.
The Company anticipates that available funds and those funds provided from
current operations will be sufficient to meet current operating requirements and
anticipated capital expenditures for at least the next 24 months.
Quarterly Information
Dividends
Fiscal Quarters Market Price Per Share
1994 1993 1994 1993
-------------------- -------------------- ---- ----
High Low High Low
First 22-1/16 17-1/8 24-1/2 22 $.045 $.035
Second 25-1/4 21-1/4 25-1/8 22 .045 .035
Third 28-5/8 23-1/2 24-1/4 19-1/2 .055 .045
Fourth 27 22-1/4 20-5/8 17-11/16 .055 .045
----- -----
Year $.20 $.16
===== =====
25
Fifteen Year Financial Summary
(Amounts in thousands, except per share information)
Operating Data 1994 1993 1992 1991 1990
Net sales $518,541 $465,796 $423,808 $350,780 $291,861
- - ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 196,205 173,693 161,004 134,790 115,167
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 37.8 37.3 38.0 38.4 39.5
- - ------------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 121,597 118,550 96,458 80,584 68,552
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 23.4 25.5 22.8 23.0 23.5
- - ------------------------------------------------------------------------------------------------------------------------------------
Operating income 74,608 55,143 64,546 54,206 46,615
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 14.4 11.8 15.2 15.5 16.0
- - ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 67,335 49,140 59,939 51,332 44,223
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 13.0 10.55 14.1 14.6 15.2
- - ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 26,325 18,734 23,314 19,651 16,521
- - ------------------------------------------------------------------------------------------------------------------------------------
% of earnings before income taxes 39.1 38.1 38.9 38.2 37.4
- - ------------------------------------------------------------------------------------------------------------------------------------
Net earnings 41,010 27,274 36,625 31,681 27,702
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 7.9 5.9 8.6 9.0 9.5
- - ------------------------------------------------------------------------------------------------------------------------------------
Net earnings before unusual charges & accounting change -- 34,745 -- -- --
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net earnings before unusual charges & accounting change -- 7.5 -- -- --
- - ------------------------------------------------------------------------------------------------------------------------------------
Investment Data
Total assets $558,850 $535,675 $475,620 $353,223 $286,761
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash and short-term investments 65,000 83,135 108,877 76,049 42,031
- - ------------------------------------------------------------------------------------------------------------------------------------
Current assets 320,879 301,192 301,291 229,583 181,089
- - ------------------------------------------------------------------------------------------------------------------------------------
Current ratio 4.3 to 1 3.8 to 1 5.5 to 1 5.1 to 1 4.3 to 1
- - ------------------------------------------------------------------------------------------------------------------------------------
Working capital 246,531 222,652 246,355 184,796 138,640
- - ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures 19,928 25,798 18,054 14,101 17,788
- - ------------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense 22,393 20,560 17,630 13,581 11,561
- - ------------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 136,249 134,261 105,373 90,309 80,290
- - ------------------------------------------------------------------------------------------------------------------------------------
Capital employed:
- - -------------------
Total debt 98,620 103,834 96,564 66,209 71,100
- - ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 361,551 335,120 314,893 235,715 170,775
- - ------------------------------------------------------------------------------------------------------------------------------------
Capital employed 460,171 438,954 411,457 301,924 241,875
- - ------------------------------------------------------------------------------------------------------------------------------------
Debt as a % of capital employed 21.4 23.7 23.5 21.9 29.4
- - ------------------------------------------------------------------------------------------------------------------------------------
Return on Investment Data
Return on average stockholders' investment less
ending cash and short-term investments - % 14.2 10.5 17.5 20.1 20.8
- - ------------------------------------------------------------------------------------------------------------------------------------
Return on average stockholders' investment - % 11.8 8.4 13.7 15.8 17.6
- - ------------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Net earnings - Fully diluted/Before unusual charges &
accounting change $1.38 $.91/1.16 $1.27 $1.18 $1.06
- - ------------------------------------------------------------------------------------------------------------------------------------
Common cash dividends paid .20 .16 .13 .11 .09
- - ------------------------------------------------------------------------------------------------------------------------------------
Ending stockholders' equity 12.18 11.14 11.12 9.03 6.72
- - ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - Fully diluted 29,717 30,098 30,080 28,707 27,955
- - ------------------------------------------------------------------------------------------------------------------------------------
Please refer to acquisition history on page 28.
26
Operating Data 1989 1988 1987 1986 1985
Net sales $223,871 $181,353 $145,561 $137,004 $124,372
- - ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 86,612 72,628 59,641 54,650 48,384
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 38.7 40.0 41.0 39.9 38.9
- - ------------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 48,483 40,502 31,608 30,606 26,948
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 21.7 22.3 21.7 22.3 21.7
- - ------------------------------------------------------------------------------------------------------------------------------------
Operating income 38,129 32,126 28,033 24,044 21,436
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 17.0 17.7 19.3 17.5 17.2
- - ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 37,758 31,058 27,611 24,197 21,732
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 16.9 17.1 19.0 17.7 17.5
- - ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 14,743 12,133 13,306 11,427 10,312
- - ------------------------------------------------------------------------------------------------------------------------------------
% of earnings before income taxes 39.0 39.1 48.2 47.2 47.5
- - ------------------------------------------------------------------------------------------------------------------------------------
Net earnings 23,015 18,925 14,305 12,770 11,420
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 10.3 10.4 9.8 9.3 9.2
- - ------------------------------------------------------------------------------------------------------------------------------------
Net earnings before unusual charges & accounting change -- -- -- -- --
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net earnings before unusual charges & accounting change -- -- -- -- --
- - ------------------------------------------------------------------------------------------------------------------------------------
Investment Data
Total assets $246,821 $176,760 $148,241 $115,337 $103,829
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash and short-term investments 79,099 40,405 41,905 16,735 11,905
- - ------------------------------------------------------------------------------------------------------------------------------------
Current assets 175,333 118,925 99,542 71,590 65,124
- - ------------------------------------------------------------------------------------------------------------------------------------
Current ratio 5.8 to 1 5.1 to 1 6.6 to 1 5.6 to 1 3.7 to 1
- - ------------------------------------------------------------------------------------------------------------------------------------
Working capital 145,300 95,734 84,345 58,831 47,636
- - ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures 12,257 10,704 7,127 11,688 9,840
- - ------------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense 8,807 6,793 5,399 4,356 3,261
- - ------------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 59,225 52,877 44,793 38,659 31,496
- - ------------------------------------------------------------------------------------------------------------------------------------
Capital employed:
- - -------------------
Total debt 67,165 24,448 23,045 23,611 21,582
- - ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 143,714 122,944 104,982 75,813 64,052
- - ------------------------------------------------------------------------------------------------------------------------------------
Capital employed 210,879 147,392 128,027 99,424 85,634
- - ------------------------------------------------------------------------------------------------------------------------------------
Debt as a % of capital employed 31.9 16.6 18.0 23.7 25.2
- - ------------------------------------------------------------------------------------------------------------------------------------
Return on Investment Data
Return on average stockholders' investment less
ending cash and short-term investments - % 21.9 23.1 21.0 21.7 24.5
- - ------------------------------------------------------------------------------------------------------------------------------------
Return on average stockholders' investment - % 17.3 16.6 15.8 18.3 19.4
- - ------------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Net earnings - Fully diluted/Before unusual charges &
accounting change $ .91 $ .75 $ .58 $ .56 $ .50
- - ------------------------------------------------------------------------------------------------------------------------------------
Common cash dividends paid .07 .05 .03 .04 .02
- - ------------------------------------------------------------------------------------------------------------------------------------
Ending stockholders' equity 5.69 4.88 4.23 3.31 2.80
- - ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - Fully diluted 25,922 25,186 24,816 22,896 22,870
- - ------------------------------------------------------------------------------------------------------------------------------------
Operating Data 1984 1983 1982 1981 1980
Net sales $102,551 $77,211 $71,626 $66,023 $54,777
- - ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 39,912 30,608 25,253 21,734 16,668
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 38.9 39.6 35.3 32.9 30.4
- - ------------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 22,517 17,732 14,469 11,838 10,442
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 22.0 23.0 20.2 17.9 19.1
- - ------------------------------------------------------------------------------------------------------------------------------------
Operating income 17,395 12,876 10,784 9,896 6,226
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 17.0 16.7 15.1 15.0 11.4
- - ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 17,818 13,226 11,283 9,919 6,216
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 17.4 17.1 15.8 15.0 11.3
- - ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 8,306 5,975 4,895 4,765 3,024
- - ------------------------------------------------------------------------------------------------------------------------------------
% of earnings before income taxes 46.6 45.2 43.4 48.0 48.6
- - ------------------------------------------------------------------------------------------------------------------------------------
Net earnings 9,512 7,251 6,388 5,154 3,192
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 9.3 9.4 8.9 7.8 5.8
- - ------------------------------------------------------------------------------------------------------------------------------------
Net earnings before unusual charges & accounting change -- -- -- -- --
- - ------------------------------------------------------------------------------------------------------------------------------------
% of net earnings before unusual charges & accounting change -- -- -- -- --
- - ------------------------------------------------------------------------------------------------------------------------------------
Investment Data
Total assets $80,745 $67,369 $58,150 $49,756 $34,476
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash and short-term investments 18,966 11,772 13,319 4,020 2,819
- - ------------------------------------------------------------------------------------------------------------------------------------
Current assets 60,671 50,092 43,332 35,407 24,026
- - ------------------------------------------------------------------------------------------------------------------------------------
Current ratio 3.8 to 1 4.3 to 1 4.1 to 1 2.8 to 1 4.5 to 1
- - ------------------------------------------------------------------------------------------------------------------------------------
Working capital 44,701 38,521 32,659 22,948 18,694
- - ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures 5,081 5,670 1,483 2,100 2,229
- - ------------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense 2,357 1,954 1,710 1,779 924
- - ------------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 19,582 16,956 13,419 13,647 7,635
- - ------------------------------------------------------------------------------------------------------------------------------------
Capital employed:
- - -------------------
Total debt 9,707 10,145 9,249 6,215 4,009
- - ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 53,475 44,622 37,393 31,255 25,537
- - ------------------------------------------------------------------------------------------------------------------------------------
Capital employed 63,182 54,767 46,642 37,470 29,546
- - ------------------------------------------------------------------------------------------------------------------------------------
Debt as a % of capital employed 15.4 18.5 19.8 16.6 13.6
- - ------------------------------------------------------------------------------------------------------------------------------------
Return on Investment Data
Return on average stockholders' investment less
ending cash and short-term investments - % 25.9 22.9 22.1 19.3 14.4
- - ------------------------------------------------------------------------------------------------------------------------------------
Return on average stockholders' investment - % 19.4 17.7 18.6 17.9 13.3
- - ------------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Net earnings - Fully diluted/Before unusual charges &
accounting change $ .42 $ .32 $ .26 $ .21 $ .15
- - ------------------------------------------------------------------------------------------------------------------------------------
Common cash dividends paid -- -- .01 -- --
- - ------------------------------------------------------------------------------------------------------------------------------------
Ending stockholders' equity 2.34 1.95 1.55 1.30 1.22
- - ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - Fully diluted 22,860 22,860 24,110 24,122 20,890
- - ------------------------------------------------------------------------------------------------------------------------------------
27
Acquisitions (Fiscal Years)
1995-Tianjin Tanggu Watts Valve Company, Ltd.,
Jameco Industries, Inc.,
Cryolab
1994-Enpoco,
LeHage Industries, Inc.
1993-Edward Barber & Company Ltd.,
Intermes Group,
Rockford Controls,
Waletzko GmbH
1992-Contromatics,
Henry Pratt Company
1991-Bailey,
SFR-France,
Circle Seal Controls
1990-Nicholson Steam Trap,
Leslie Controls
1989-Eagle Valve Company,
KF Industries,
Taras Valve,
Epps Mfg. Ltd.,
A.S.M.E. Steam Pop Relief Valves
1988-Ocean B.V.,
Flippen Float Valves
1987-Muesco Valve Company,
Prier Frost-Proof Hydrants,
James Jones Company
1985-Spence Engineering Company,
Hale Oilfield Products
1874-Watts Regulator Company - Founded
A LEADER IN VALVE TECHNOLOGY
WATTS(R)
INDUSTRIES, INC.
SINCE 1874
28
(INSIDE BACK COVER)
Directors
Timothy P. Horne
Chairman of the Board,
President and
Chief Executive Officer
of the Corporation
David A. Bloss, Sr.
Executive Vice President
of the Corporation
Kenneth J. McAvoy
Chief Financial Officer,
Treasurer, Secretary
of the Corporation
Frederic B. Horne
Corporate Vice President
of the Corporation
Noah T. Herndon
Partner of Brown Brothers
Harriman & Company
Gordon W. Moran
President and Chief Executive
Officer
Hollingsworth & Vose Company
Wendy E. Lane
Chairman
Lane Holdings, Inc.
Daniel J. Murphy, III
Chairman
Northmark Bank
Corporate Officers
Timothy P. Horne
Chairman of the Board,
President and
Chief Executive Officer
David A. Bloss, Sr.
Executive Vice President
Kenneth J. McAvoy
Chief Financial Officer,
and Executive Vice President
of European Operations
Frederic B. Horne
Corporate Vice President
Suzanne M. Zabitchuck
Corporate Counsel and
Assistant Secretary
William C. McCartney
Vice President of
Finance and Controller
Robert T. McLaurin
Corporate Vice President
Asian Operations
Michael O. Fifer
Vice President
Corporate Development
Division Officers
Paul A. Lacourciere
Executive Vice President
Watts Regulator Company
Kevin R. Sweeney
Executive Vice President
Water Products Division
Ernest E. Elliott
Vice President
Water Products Division
Alfred S. Schommer
Group Vice President
Industrial and Oil & Gas
Edward G. Holtgraver
Group Vice President
Municipal Water
Charles S. Wolley
Group Vice President
Steam
Victor L. Pitt
President
Watts Industries (Canada) Inc.
Jean-Marc Sassier
Managing Director
Watts Industries Europe
Corporate Information
Executive Offices
815 Chestnut Street
North Andover, MA 01845-6098
Tel. (508) 688-1811
Fax: (508) 688-5841
Registrar and Transfer Agent
The First National Bank of Boston
100 Federal Street
Boston, MA 02110
Counsel
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
Auditors
Ernst & Young
200 Clarendon Street
Boston, MA 02116
Annual Meeting
October 18, 1994
10:00 am
Andover Inn
Andover, MA
Stock Listing
National Market System
of NASDAQ
Ticker Symbol: WATTA
Form 10-K
Stockholders may obtain
without charge a copy of the
Company's most recent Annual
Report on Form 10-K filed
with the Securities and Exchange
Commission by writing to
Watts Industries, Inc.
Attn: Chief Financial Officer
815 Chestnut St.
North Andover, MA 01845-6098
(BACK COVER)
The Companies of
Watts Industries, Inc.
PLUMBING & HEATING
Watts Regulator Company, Water Products Division
North Andover, MA
Watts Industries (Canada) Inc.
Woodbridge, Ontario, Canada
Watts SFR SA, Fressenneville, France
Intermes SpA, Caldaro, Italy
MTR GmbH, Gemmrigheim, Germany
G.R.C. Controls S.A., Badalona (Barcelona), Spain
Jameco Industries, Inc., Wyandanch, NY
WATER QUALITY
Watts Regulator Company, Backflow Prevention Division
North Andover, MA
Watts Ocean B.V., AB Eerbeek, Netherlands
MUNICIPAL WATER
Henry Pratt Company, Aurora, IL
James Jones Company, El Monte, CA
Watts ACV, Inc., Houston, TX
Edward Barber & Company, Ltd., United Kingdom
Tianjin Tanggu Watts Valve Company, Ltd.
Tianjin, People's Republic of China
STEAM
Leslie Controls, Inc., Tampa, FL
Spence Engineering Company, Inc., Walden, NY
Nicholson Steam Trap, Inc., Walden, NY
R.G. Laurence Company, Inc., Tampa, FL
INDUSTRIAL
Watts Regulator Co, Industrial Division
North Andover, MA
Contromatics, Milford, NH
Circle Seal Controls, Inc., Corona, CA
OIL & GAS
KF Industries, Inc., Oklahoma City, OK
Hale Oilfield Products, Houston, TX
(WATTS COMPANY LOGO)