SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended 12/31/00
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-14787
WATTS INDUSTRIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2916536
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(State of incorporation) (I.R.S. Employer Identification No.)
815 Chestnut Street, North Andover, MA 01845
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 688-1811
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, par value $.10 per share
Name of exchange on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Aggregate market value of the voting stock of the Registrant held by
non-affiliates of the Registrant on was $294,099,291.
As of February 15, 2001, 17,376,810 shares of Class A Common Stock, $.10
par value, 9,085,224 shares of Class B Common Stock, $.10 par value, of the
Registrant were outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on April 25, 2001, are incorporated by reference into
Part III of this Report.
1
PART I
Item 1. BUSINESS.
General
Watts Industries, Inc., (the "Company") designs, manufactures and sells an
extensive line of valves and other products for the water quality, water safety,
water flow control and water conservation markets. The Company is a leading
manufacturer and supplier of these products in both North America and Europe.
The Company's growth strategy emphasizes expanding brand preference with
customers, focusing on code development and enforcement, internal development of
new valve products and entry into new markets for specialized valves and related
products through diversification of its existing business, strategic
acquisitions in related business areas, both domestically and abroad, and
continued development of products and services for the home improvement, do it
yourself (DIY) retail market. Watts has focused on the valve industry since its
inception in 1874, when it was founded to design and produce steam regulators
for New England textile mills and power plants. The Company was incorporated in
Delaware in 1985.
The business description that follows describes the general development of
the Company's water markets, which it has addressed primarily through the
plumbing and heating and water quality products business for fiscal 2000. The
Company's former industrial, oil and gas businesses were spun-off from the
Company on October 18, 1999 and are described, as appropriate, as discontinued
operations. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for further information on these
discontinued operations.
The Company's plumbing and heating and water quality product lines include
temperature and pressure safety relief valves; water pressure regulators;
backflow preventers for preventing contamination of potable water caused by
reverse flow within water supply lines and fire protection equipment;
thermostatic mixing valves, ball valves, automatic control valves, water
distribution manifolds, thermostatic radiator valves, check valves, and valves
for water service primarily in residential and commercial environments; metal
and plastic water supply/drainage products including stop valves, tubular brass
products, faucets, drains, sink strainers, compression and flare fittings;
plastic tubing and braided metal hose connectors for residential construction
and home repair and remodeling; drain systems for laboratory drainage and high
purity process installations; water heater seismic-restraint straps, and water
heater stands and enclosures; and hydronic and electric radiant heating and snow
melting systems.
Within a majority of the product lines the Company manufactures and
markets, the Company believes that it has one of the broadest product lines in
terms of the distinct designs, sizes and configurations of its valves. Products
representing a majority of the Company's sales have been approved under
regulatory standards incorporated into state and municipal plumbing and heating,
building and fire protection codes, and similar approvals have been obtained
from various agencies in the European market. The Company has consistently
advocated the development and enforcement of performance and safety standards,
and is committed to providing products to meet these standards, particularly for
safety and control valve products. The Company maintains quality control and
testing procedures at each of its manufacturing facilities in order to produce
products in compliance with code requirements. Additionally, a majority of the
Company's manufacturing subsidiaries have either acquired or are working to
acquire ISO 9000, 9001 or 9002 certification from the International Organization
for Standardization (ISO).
On May 12, 2000 a wholly owned subsidiary of the Company acquired
McCraney, Inc. doing business as Spacemaker, located in Santa Ana, California.
Spacemaker's flagship product is a line of patented seismic water heater
restraint straps marketed under the Bear-Claw(R) brand. Spacemaker also
manufactures easy-to-assemble and install steel water heater stands and water
heater enclosures for outdoor applications. Spacemaker had twelve (12) months
sales prior to the acquisition of approximately $5 million. On August 30, 2000,
a wholly owned subsidiary of the Company acquired certain assets of Chiles Power
Supply, formerly doing business as Heatway, and its sister company Bask LLC,
both located in Springfield, Missouri. The Company now operates these assets in
a new company, Watts Heatway, Inc. Watts Heatway's key product lines are
hydronic radiant heating and snow melting systems and electric radiant floor
warming systems. Heatway's annualized sales prior to the acquisition were
approximately $11 million.
2
On January 5, 2001, the Company acquired Dumser Metallbau GmbH & Co. KG
located in Landau, Germany. The main products of Dumser are brass, steel, and
stainless steel manifolds used as the prime distribution device in hydronic
heating systems, for which it has gained the reputation as a market leader in
the European hydronic heating industry. A second range of products produced by
Dumser are "Boiler Sets" which comprise a wall-mounted cabinet to be installed
in the vicinity of the boiler, containing the factory assembled set of the
circulation pump, as well as the pressure, temperature and flow controls. This
"Boiler Set" is designed to save the installer time in the installation of a
hydronic heating circuit and changes a time-consuming and sometimes complex
series of tasks into one simple task. Dumser had approximately $24 million
(U.S.) total sales for the twelve months ended December, 2000. Dumser has a 51%
controlling share of Stern Rubinetti, a $4 million Italian manufacturing company
producing brass components located in Brescia, Italy.
The Company relies primarily on commissioned representative organizations,
some of whom maintain a consigned inventory of the Company's products, to market
its product lines. These organizations, which accounted for approximately 74% of
the Company's net sales in fiscal 2000, sell primarily to plumbing and heating
wholesalers and DIY Market accounts. The Company also sells products for the
residential construction and home repair and remodeling industries through
do-it-yourself plumbing retailers, national catalog distribution companies,
hardware stores, building material outlets and retail home center chains ("DIY
Markets") and through the Company's existing plumbing and heating wholesalers.
In addition, the Company sells products directly to certain large original
equipment manufacturers (OEM's) and private label accounts, and maintains direct
and indirect sales channels for water valves, relief valves, shut-off valves,
check valves, butterfly valves, ball valves and flow meters to the heating,
irrigation, and fire protection industries. The Company believes that sales to
the residential construction market may be subject to cyclical variations to a
greater extent than its other targeted markets. However, because the Company
sells into different geographic areas, to large and diverse customers, and has a
large replacement market, the potential adverse effects from cyclical variations
tend to be mitigated. No assurance can be given that the Company will be
protected from a broad downturn in the economy. There was no single customer
which accounted for more than 10% of the Company's net sales in the fiscal 2000.
The Company has a fully integrated and highly automated manufacturing
capability including bronze and iron foundry operations, machining operations,
plastic injection molding and assembly. The Company's foundry operations include
metal pouring systems, automatic core making, yellow brass forging and brass die
casting. The Company's machining operations feature computer-controlled machine
tools, high-speed chucking machines with robotics and automatic screw machines
for machining bronze, brass and steel components. The Company has invested
heavily in recent years to expand its manufacturing base and to ensure the
availability of the most efficient and productive equipment. The Company is
committed to maintaining its manufacturing equipment at a level consistent with
current technology in order to maintain high levels of quality and manufacturing
efficiencies. As part of this commitment, the Company has spent a total of
$69,119,000 on capital expenditures over the last three and one half years. The
Company has budgeted $18,100,000 for fiscal 2001 primarily for manufacturing
machinery and equipment. See "Properties" below. Except for Heatway and
Spacemaker, the Company has substantially completed its implementation of an
integrated enterprise-wide software system in its U.S. and Canadian locations
with a focus on inventory management, production scheduling, and electronic data
interchange. This has enabled the Company to provide better service to
customers, improve working capital management, lower transaction costs, and
improve e-commerce capabilities. Capital expenditures were $14,238,000,
$10,293,000, $21,532,000 and $23,056,000 for fiscal 2000, 1999.5, 1999 and 1998,
respectively. Depreciation and amortization for such periods were $20,071,000,
$9,225,000, $17,456,000 and $15,341,000 respectively.
Three significant raw materials used in the Company's production processes
are bronze ingot, brass rod, and cast iron. While the Company historically has
not experienced significant difficulties in obtaining these commodities in
quantities sufficient for its operations, there have been significant changes in
their prices. The Company's gross profit margins are adversely affected to the
extent that the selling prices of its products do not increase proportionately
with increases in the costs of bronze ingot, brass rod, and cast iron. Any
significant unanticipated increase or decrease in the prices of these
commodities could materially affect the Company's results of operations. The
Company manages this risk by monitoring related market prices, working with its
suppliers to achieve the maximum level of stability in their costs and related
pricing, seeking alternative supply sources when necessary and passing increases
in commodity costs to its customers, to the maximum extent possible, when they
occur. Additionally, on a limited basis, the Company uses commodity futures
contracts to manage this risk. No assurances can be given that such factors will
protect the Company from future changes in the prices for such raw materials.
See Item 7A. "Quantitative and Qualitative Disclosures About Market Risk."
3
The domestic and international markets for valves are intensely
competitive and include companies possessing greater financial, marketing and
other resources than the Company. Management considers product reputation,
price, effectiveness of distribution and breadth of product line to be the
primary competitive factors. The Company believes that new product development
and product engineering are also important to success in the valve industry and
that the Company's position in the industry is attributable in significant part
to its ability to develop new and innovative products quickly and to adapt and
enhance existing products. During fiscal 2000, the Company continued to develop
new and innovative products to enhance market position and is continuing to
implement manufacturing and design programs to reduce costs. The Company cannot
be certain that its efforts to develop new products will be successful or that
its customers will accept its new products. The Company employs approximately 47
engineers and technicians, excluding engineers working at Tianjin Tanggu, Watts
Valve Company Limited ("Tanguu Watts") the Company's joint venture, located in
the Peoples Republic of China, who engage primarily in these activities.
Although the Company owns certain patents and trademarks that it considers to be
of importance, it does not believe that its business and competitiveness as a
whole is dependent on any one or more patents or trademarks or on patent or
trademark protection generally.
The Company's financial information by geographic business segment is
contained in Note 17 of Notes to Consolidated Financial Statements incorporated
herein by reference. From time to time, the Company's results of operations may
be adversely affected by fluctuations in foreign exchange rates. Backlog was
$27,265,049 at February 9, 2001 and $28,889,000 at February 14, 2000. The
Company does not believe that its backlog at any point in time is indicative of
future operating results. The Company expects that available funds and funds
provided from the Company's operations are sufficient to meet anticipated
capital requirements. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations", below as it relates to the
impact of foreign exchange rates and capital requirements.
As previously announced, on October 18, 1999, the Company spun-off its
industrial, oil and gas businesses into a separate publicly traded company,
CIRCOR International, Inc. ("CIRCOR"). Under the terms of the spin-off
transaction, the Company distributed to shareholders a tax-free dividend of one
share of CIRCOR common stock for every two shares of Company common stock owned
as of the record date by that shareholder (the "Distribution"). The Company
continues to manufacture and distribute plumbing and heating and water quality
products through its three geographic business segments: North America, Europe,
and Asia.
As of December 31, 2000, the Company's domestic and foreign operations
employed approximately 2,668 people, plus 732 employees at Tanggu Watts. There
are no employees that are covered by collective bargaining agreements. The
Company believes that its employee relations are good.
Executive Officers
Information with respect to the executive officers of the Company is set forth
below:
Name Position Age
- ---- -------- ---
Timothy P. Horne Chairman of the Board, Chief Executive Officer, 62
President and Director
William C. McCartney Chief Financial Officer, Treasurer and Secretary 47
Michael O. Fifer Corporate Vice President 43
Robert T. McLaurin Corporate Vice President of Asian Operations 70
Lester J. Taufen General Counsel and Vice President of Legal Affairs, 57
and Assistant Secretary
Timothy P. Horne joined the Company in September 1959 and has been a
Director since 1962. Mr. Horne served as the Company's President from 1976 to
1978, from 1994 to April 1997 and again since October 1999. He has served as
Chief
4
Executive Officer since 1978 and he became the Company's Chairman of the Board
in April 1986. He has served as a Director of CIRCOR since its inception, in
1999.
William C. McCartney joined the Company in 1985 as Controller. He was
appointed the Company's Vice President of Finance in 1994, and served as
Corporate Controller of the Company from April 1988 to December 1999. Mr.
McCartney was appointed Chief Financial Officer, Treasurer and Secretary on
January 1, 2000.
Michael O. Fifer joined the Company in May 1994 and was appointed the
Company's Vice President of Corporate Development. He was appointed Corporate
Vice President in October 1999. Prior to joining the Company, Mr. Fifer was
Associate Director of Corporate Development with Dynatech Corp., a diversified
high-tech manufacturer, from 1991 to April 1994.
Robert T. McLaurin was appointed Corporate Vice President of Asian
Operations in August 1994. He served as the Senior Vice President of
Manufacturing of Watts Regulator Co. from 1983 to August 1994. He joined Watts
Regulator Company as Vice President of Manufacturing in 1978.
Lester J. Taufen joined the Company in January 1999 as Associate Corporate
Counsel. He was appointed General Counsel and Vice President of Legal Affairs,
and Assistant Secretary in January 2000. Prior to joining the Company, Mr.
Taufen was employed for 13 years at Elf Atochem North America, Inc. serving as
Senior Counsel.
Product Liability, Environmental and Other Litigation Matters
The Company is subject to a variety of potential liabilities connected
with its business operations, including potential liabilities and expenses
associated with possible product defects or failures and compliance with
environmental laws. The Company maintains product liability and other insurance
coverage which it believes to be generally in accordance with industry
practices. Nonetheless, such insurance coverage may not be adequate to protect
the Company fully against substantial damage claims which may arise from product
defects and failures.
James Jones Litigation
On June 25, 1997, Nora Armenta sued James Jones Company, Watts Industries,
Inc., which formerly owned James Jones, Mueller Co., and Tyco International
(U.S.) Inc. in the California Superior Court for Los Angeles County with a
complaint that sought tens of millions of dollars in damages. By this complaint
and an amended complaint filed on November 4, 1998 ("First Amended Complaint"),
Armenta, a former employee of James Jones, sued on behalf of 34 municipalities
as a qui tam plaintiff under the California False Claims Act. Late in 1998, the
Los Angeles Department of Water and Power ("DWP") intervened. To date, less than
half a dozen of the original thirty-four municipalities have subsequently
intervened.
The First Amended Complaint alleges that the Company's former subsidiary
(James Jones Company) sold products that did not meet contractually specified
standards used by the named municipalities for their water systems and falsely
certified that such standards had been met. Armenta claims that these
municipalities were damaged by their purchase of these products, and seeks
treble damages, legal costs, attorneys' fees and civil penalties under the False
Claims Act.
The DWP's intervention filed on December 9, 1998 adopted the First Amended
Complaint and added claims for breach of contract, fraud and deceit, negligent
misrepresentation, and unjust enrichment. The DWP original sought past and
future reimbursement costs, punitive damages, contract difference in value
damages, treble damages, civil penalties under the False Claims Act and costs of
the suit.
One of the First Amended Complaint's allegations is the suggestion that
because some of the purchased James Jones products are out of specification and
contain more lead than the `85 bronze specified, a risk to public health might
exist. The allegation is predicated on the average difference of about 2% lead
content in `81 bronze (6% to 8% lead) and `85 bronze (4% to 6% lead) alloys and
the assumption that this would mean increased lead levels in public drinking
water. This contention is not supported by the evidence and discovery available
to date.
5
In addition, bronze that does not contain more than 8% lead, like '81
bronze, is approved for home plumbing systems by the City of Los Angeles, and
the Federal Environmental Protection Agency defines metal for pipe fittings with
no more than 8% lead as "lead free" under Section 1417 of the Federal Safe
Drinking Water Act.
In December, 2000, the court allowed the Relator to file a Second Amended
Complaint, which added a number of new cities and water districts as plaintiffs
and brought the total number of plaintiffs to 161. During the quarter ended
December 31, 2000, the Company and the other defendants made an offer to settle
all of the claims of the DWP in this case. The DWP has indicated that it views
this offer favorably and that it intends to seek the offer's approval. On
January 19, 2001, the California False Claims Act claims filed by the City of
Pomona were dismissed. The Company expects the City of Pomona to file for
appellate review of this order, and the Company is currently unable to predict
the outcome of any appeal. On the present record, the vast majority of other
cities named in this lawsuit are subject to a legal challenge similar to that
which resulted in the dismissal of Pomona's False Claims Act case. As a result
of these developments and management's current assessment of the case, the
Company recorded a charge of $7,170,000 after tax in the quarter ended December
31, 2000, which represents the after tax impact of the Company's current
estimate of the cost to bring the entire case to resolution. This charge is
reported as a loss from discontinued operations. While this charge represents
the after tax impact of the Company's current estimate based on all available
information, litigation is inherently uncertain and the actual liability to the
Company to fully resolve the litigation could be materially higher than this
estimate.
The Company intends to continue to contest this matter vigorously.
Environmental
Certain of the Company's operations generate solid and hazardous wastes,
which are disposed of elsewhere by arrangement with the owners or operators of
disposal sites or with transporters of such waste. The Company's foundry and
other operations are subject to various federal, state and local laws and
regulations relating to environmental quality. Compliance with these laws and
regulations requires the Company to incur expenses and monitor its operations on
an ongoing basis. The Company cannot predict the effect of future requirements
on its capital expenditures, earnings or competitive position due to any changes
in federal, state or local environmental laws, regulations or ordinances.
The Company is currently a party to or otherwise involved in various
administrative or legal proceedings under federal, state or local environmental
laws or regulations involving a limited number of sites. Based on facts
presently known to it, the Company does not believe that the outcome of these
environmental proceedings will have a material adverse effect on its financial
condition or results of operations. Given the nature and scope of the Company's
manufacturing operations, there can be no assurance that the Company will not
become subject to other environmental proceedings and liabilities in the future
which may be material to the Company. See Note 15 of the Notes to the
Consolidated Financial Statements.
Other Litigation
Other lawsuits and proceedings or claims, arising from the ordinary course
of operations, are also pending or threatened against the Company and its
subsidiaries. Based on the facts currently known to it, the Company does not
believe that the ultimate outcome of these other litigation matters will have a
material adverse effect on its financial condition or results of operation. See
Note 15 of the Notes to the Consolidated Financial Statements.
Item 2. PROPERTIES.
The Company maintains 24 facilities worldwide with its corporate
headquarters located in North Andover, Massachusetts. The manufacturing
operations include four casting foundries, two of which are located in the
United States, one in Europe and one at Tianjin Tanggu Watts Valve Company
Limited ("Tanggu Watts"), a joint venture located in the People's Republic of
China, and it maintains one yellow brass forging foundry located in Italy.
Castings and forgings from these foundries and other components are machined and
assembled into finished valves at 18 manufacturing facilities located in the
United States, Canada, Europe and China. Many of these facilities contain sales
offices or warehouses from which the Company ships finished goods to customers
and commissioned representative organizations. All the Company's operating
facilities and the related real estate are
6
owned by the Company, except the buildings and land located in Tianjin, People's
Republic of China are leased by Tanggu Watts, under a lease agreement, the
remaining term of which is approximately 25 years and the Company's
manufacturing facility in Woodland, California, the remaining term of which is 3
years.
Certain of the Company's facilities are subject to mortgages and
collateral assignments under loan agreements with long-term lenders. In general,
the Company believes that its properties, including machinery, tools and
equipment, are in good condition, well maintained and adequate and suitable for
their intended uses. The Company believes that the manufacturing facilities are
currently operating at a level that management considers normal capacity. This
utilization is subject to change as a result of increases or decreases in sales.
Item 3. LEGAL PROCEEDINGS.
Item 3(a). The Company is from time to time involved in various legal and
administrative procedures. See Part I, Item 1, "Product Liability,
Environmental and Other Litigation Matters".
Item 3(b). See Part I, Item 1, "Product Liability, Environmental and Other
Litigation Matters".
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted during the fourth quarter of the fiscal
year covered by this Report to a vote of security holders through solicitation
of proxies or otherwise.
7
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Market Information
The following tabulation sets forth the high and low sales prices of the
Company's Class A Common Stock on the New York Stock Exchange during fiscal
2000, fiscal 1999.5 and fiscal 1999 and cash dividends paid per share. The
prices of the Company's Class A Common Stock reported below were retroactively
adjusted to reflect the effect of the spin-off of CIRCOR on October 18, 1999. No
adjustments were made to the dividends reported.
High Low Dividend High Low Dividend High Low Dividend
---- --- -------- ---- --- -------- ---- --- --------
2000 1999.5 1999
---- ------ ----
First Quarter $15.75 $12.38 $.0875 $16.32 $13.07 $.0875 $17.84 $12.10 $.0875
Second Quarter 13.38 10.38 .06 16.09 12.63 .0875 15.13 11.74 .0875
Third Quarter 13.13 9.56 .06 - - - 12.47 8.99 .0875
Fourth Quarter 13.88 9.75 .06 - - - 14.58 9.95 .0875
There is no established public trading market for the Class B Common Stock
of the Company, which is held exclusively by members of the Horne family and
management. The principal holders of such stock are subject to restrictions on
transfer with respect to their shares. Each share of Class B Common Stock (10
votes per share) of the Company is convertible into one share of Class A Common
Stock (1 vote per share). Aggregate common stock dividend payments for fiscal
2000, 1999.5 and 1999 were $7,107,000, $4,656,000 and $9,358,000, respectively.
While the Company presently intends to continue to pay cash dividends, the
payment of future cash dividends depends upon the Board of Directors' assessment
of the Company's earnings, financial condition, capital requirements and other
factors.
The number of record holders of the Company's Class A Common Stock as of
February 15, 2001 was 154. The Company believes that the number of beneficial
shareholders of the Company's Class A Common Stock was approximately 3,200 as of
February 15, 2001. The number of record holders of the Company's Class B Common
Stock as of February 15, 2001 was 9.
8
Item 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below should be read in conjunction
with the Company's consolidated financial statements, related Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein.
FIVE YEAR FINANCIAL SUMMARY
(Amounts in thousands, except per share information)
Twelve Six(1) (2) -------------Twelve Months----------------
Months Months Ended
Ended Ended June 30,
12/31/00 12/31/99 1999 1998 1997 1996(3)
-------- -------- ---- ---- ---- -------
Selected Data
Net sales $516,100 $261,019 $477,869 $444,735 $449,617 $413,961
Income (loss) from continuing operations 31,171 16,468 29,454 28,123 26,515 (24,824)
Income (loss) from discontinued operations,
net of taxes (7,170) (1,226) 6,502 25,246 25,232 (25,461)
Net income (loss) 24,001 15,242 35,956 53,369 51,747 (50,285)
Total assets 482,025 487,078 637,742 552,896 526,366 370,454
Long-term debt, net of current portion 105,377 123,991 118,916 71,647 94,841 111,715
Income (loss) per share from continuing
operations-diluted 1.17 0.61 1.10 1.03 0.97 (0.84)
Income (loss) per share from discontinued
operations - diluted (0.27) (0.05) 0.24 0.92 0.92 (0.86)
Net income (loss) per share-diluted 0.90 0.56 1.34 1.95 1.89 (1.70)
Cash dividends declared per common share .2675 0.175 0.350 0.330 0.295 0.265
1) On May 14, 1999, the Company filed a Form 10-Q in which it reported its
decision to change its fiscal year end from June 30 to a calendar year. As
a result the Company is reporting a six month transition period ending
December 31, 1999 (Fiscal 99.5). See Note 2 of the Notes to the
Consolidated Financial Statements.
2) Fiscal 1999.5 net income includes an after-tax charge of $861,000 related
to restructuring costs.
3) Fiscal 1996 net income includes an after tax charge of $44,682,000 related
to: restructuring cost of $22,390,000; an impairment of long-lived assets
of $24,603,000; other charges of $9,878,000 principally for product
liability costs, additional bad debt reserves and environmental
remediation cost; and additional inventory valuation reserves of
$6,566,000.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
On December 15, 1998, the Company announced its plan to spin-off its
industrial, oil and gas business as a separately traded public company, CIRCOR
International, Inc. Under the terms of the spin-off, which was completed on
October 18, 1999, the holders of Watts common stock received one share of CIRCOR
common stock for every two shares of Watts stock held. The Company's results of
operations for all periods presented reflect CIRCOR as discontinued operations.
On May 11, 1999, the Company's Board of Directors voted to amend the
Company's By-Laws to change the Company's fiscal year end from June 30 to a
calendar year. As a result the Company has reported a six month transition
period ending December 31, 1999.
9
Results of Operations
Twelve Months Ended December 31, 2000 Compared to
Twelve Months Ended December 31, 1999
Net sales for the twelve months ended December 31, 2000 increased
$6,444,000 (1.3%) to $516,100,000 compared to the same period in 1999. The
increase in net sales is attributable to the following:
Internal Growth $ 7,456 1.5%
Acquisitions 15,030 2.9%
Foreign Exchange (16,042) (3.1%)
-------- ----
Total Change $ 6,444 1.3%
======== ====
The increase in net sales from internal growth is attributable to
increased unit shipments of North American and European plumbing and heating
valves. North American increases were offset by recent softness in the housing
market resulting from increased interest rates during 2000. The growth in net
sales from acquired companies is due to the inclusion of Heatway, Spacemaker and
Cazzaniga S.p.A of Biassono, Italy which was acquired March 9, 1999. Excluding
the acquired revenue of Cazzaniga and the impact of foreign exchange, shipments
of European plumbing and heating valves were 3.1% higher than last year. The
decrease in sales due to foreign exchange is principally due to the devaluation
of the Euro, which depreciated almost 13% against the U.S. dollar during the
twelve month period ended December 31, 2000.
Watts monitors its net sales in three geographical segments: North
America, Europe and Asia. As outlined below, North America, Europe and Asia
accounted for 77.6%, 20.0%, and 2.4% of net sales, respectively, in the twelve
months ended December 31, 2000 compared to 76.1%, 21.3%, and 2.6% respectively,
in the twelve months ended December 31, 1999. The Company's net sales in these
groups for the twelve months ended December 31, 2000 and 1999 were as follows:
12/31/00 12/31/99 Change
-------- -------- ------
North America $400,384 $388,049 $12,335
Europe 103,085 108,579 (5,494)
Asia 12,631 13,028 (397)
-------- -------- -------
Total $516,100 $509,656 $ 6,444
======== ======== =======
The increase in North America is primarily due to the Watts Heatway and
Spacemaker acquisitions and to a lesser extent from increased unit sales. The
decrease in Europe is due to the impact of the Euro's devaluation against the
U.S. dollar. This was substantially offset by increased unit sales and the
inclusion of Cazzaniga. The decrease in Asia is primarily due to reduced demand
in the North American export market.
Gross profit for the twelve months ended December 31, 2000 decreased
$1,414,000 (0.8%), to $185,304,000 compared to the same period in 1999 and
decreased as a percentage of net sales from 36.6 percent to 35.9 percent. This
percentage reduction is attributable to price competition in certain markets the
company serves and additional production costs associated with new product
introductions in Europe. This was partially offset by the inclusion of acquired
companies currently operating at higher gross margins than the rest of the
Company.
Selling, general and administrative expenses for the twelve months
decreased $3,666,000 (2.8%) to $125,317,000 compared to the same period in 1999.
This decrease is attributable to decreased corporate headquarters expenses
resulting from the CIRCOR spinoff, the Euro's devaluation against the U.S.
dollar and reduced variable selling expenses. This was partially offset by the
inclusion of selling, general and administrative expenses of acquired companies.
Selling, general and administrative expenses for the twelve months decreased as
a percentage of sales from 25.3% in the twelve months ended December 31, 1999 to
24.3% in the twelve months ended December 31, 2000. This decreased percentage is
primarily due to decreased corporate headquarters expenses resulting from the
CIRCOR spin-off.
Operating income in the twelve months ended December 31, 2000 increased
$3,712,000 (6.6%) to $59,987,000 and increased as a percentage of sales to 11.6%
from 11.0% compared to the same period in 1999 due to increased net sales and
decreased selling, general and administrative expenses.
10
The Company's operating income by segment for the twelve months ended
December 31, 2000 and 1999 was as follows:
12/31/00 12/31/99 Change
-------- -------- ------
North America $55,661 $ 56,439 $ (778)
Europe 13,225 12,560 665
Asia 882 1,519 (637)
Corporate (9,781) (14,243) 4,462
------- -------- -------
Total $59,987 $ 56,275 $ 3,712
======= ======== =======
The decrease in North America is due to decreased unit prices in certain
markets. The increase in Europe is primarily due to increased net sales and the
Cazzaniga acquisition, substantially offset by the Euro's devaluation against
the U.S. dollar. The decrease in Asia is due to decreased net sales. The
decrease in corporate is to due reduced headquarter expenses attributable to the
CIRCOR spin-off.
Interest expense increased $1,964,000 to $9,897,000 in the twelve months
ended December 31, 2000 compared to the same period in 1999, primarily due to
increased effective interest rates.
The Company's effective tax rate for continuing operations increased from
35.9 percent to 36.7 percent in the twelve months ended December 31, 2000
compared to the same period in 1999. The increase is primarily attributable to a
revised tax structure required to execute the CIRCOR spin-off.
Income from continuing operations for the twelve months ended December 31,
2000 increased $474,000 (1.5%) to $31,171,000 or $1.17 per common share compared
to $1.15 per common share for the twelve months ended December 31, 1999 on a
diluted basis. The impact of foreign exchange, primarily due to the devaluation
of the Euro against the U.S. dollar, decreased income approximately $1,331,000
or $.05 per common share on a diluted basis in the period ended December 31,
2000.
For the twelve months ended December 31, 2000, discontinued operations
reported a net loss of $7,170,000 or $0.27 per share, on a diluted basis. This
loss results from a charge recorded during the fiscal year representing the
Company's current estimate of the after tax impact of the cost to bring the
James Jones Litigation to resolution. Additional details of the James Jones
litigation are provided in Part I, Item 1, Product Liability, Environmental and
Other Litigation Matters and in Note 15 of the Notes to the Consolidated
Financial Statements. For twelve months ended December 31, 1999, discontinued
operations reported a net loss of $3,143,000 or $0.12 per share, on a diluted
basis. Results for the twelve months ended December 31, 1999 were negatively
impacted by after tax charges of $11,599,000 for spin-off related costs,
including professional fees, facility relocation costs and income tax costs
associated with the reorganizing the Company's legal entity structure in
anticipation of the spin-off as well as legal fees associated with the James
Jones Litigation. Excluding these charges, discontinued operations would have
had net income of $8,456,000 ($0.32 per share) for the twelve months ended
December 31, 1999. Additional details of the spin-off transaction are provided
in Note 3 of the Notes to the Consolidated Financial Statements.
Results of Operations
Six Months Ended December 31, 1999 Compared to
Six Months Ended December 31, 1998
Net sales increased $31,869,000 (13.9%) to $261,019,000. The increase in
net sales is attributable to the following:
Internal Growth $20,234 8.8%
Acquisitions 17,061 7.4%
Foreign Exchange (5,426) (2.3%)
------- ----
Total Change $31,869 13.9%
======= ====
11
The increase in net sales from internal growth is primarily attributable
to increased unit shipments in the North American segment. The growth in net
sales from acquired companies is due to the inclusion of the net sales of
Cazzaniga S.p.A. of Biassono, Italy, which was acquired March 9, 1999. The
foreign exchange impact reflects the adverse affects of the Euro's devaluation
against the U.S. dollar during the period. Excluding Cazzaniga, shipments in the
European plumbing and heating market were 9.2% higher than last year.
Watts monitors its net sales in three geographical segments: North
America, Europe and Asia. As outlined below, North America, Europe and Asia
accounted for 73.9%, 22.6%, and 3.5% of net sales, respectively, in the six
months ended December 31, 1999 compared to 77.2%, 19.0%, and 3.8%, respectively
in the six months ended December 31, 1998. The Company's net sales in these
groups for the six months ended December 31, 1999 and 1998 were as follows:
12/31/99 12/31/98 Change
-------- -------- -------
North America $192,975 $176,918 $16,057
Europe 58,934 43,598 15,336
Asia 9,110 8,634 476
-------- -------- -------
Total $261,019 $229,150 $31,869
======== ======== =======
The increase in North America is due to increased unit sales. The increase
in Europe is due to the Cazzaniga acquisition and increased unit sales, which
were partially offset by the devaluation of the Euro against the U.S. dollar.
Gross profit increased $11,676,000 (14.0%) to $95,166,000 and remained
constant as a percentage of net sales at 36.4 percent. This increase is
attributable to increased net sales during the period.
During the period ended December 31, 1999 the Company recorded a
restructuring charge of $1,460,000 before taxes. The charge was comprised of
severance costs of $1,299,000, and contract termination costs of $134,000 and
other exit costs of $27,000. The Company consolidated certain Italian
manufacturing and warehouse facilities into the Cazzaniga facility in Biassono,
Italy. This project, which included the termination of 29 employees, was
completed during Fiscal 2000. Total program costs did not differ materially from
the original estimate.
Selling, general and administrative expenses increased $5,779,000 (9.9%)
to $64,148,000. This increase is primarily attributable to inclusion of the
selling, general and administrative expenses of Cazzaniga and increased variable
selling expenses, primarily commissions and freight costs.
Operating income in the six months ended December 31, 1999 increased
$4,437,000 (17.7%) to $29,558,000 due to the increased gross profit. Without the
restructuring charge operating income would have increased by 23.5% and
increased as a percentage of sales from 11.0% to 11.9%.
The Company's operating income by segment for the six months ended
December 31, 1999 and 1998 was as follows:
12/31/99 12/31/98 Change
-------- -------- ------
North America $27,793 $25,684 $2,109
Europe 7,252 5,682 1,570
Asia 731 822 (91)
Corporate (6,218) (7,067) 849
------- ------- ------
Total $29,558 $25,121 $4,437
======= ======= ======
The increase in North America is due to increased net sales. The increase
in Europe is primarily due to increased net sales and the Cazzaniga acquisition,
which were partially offset by the restructuring charge.
Interest expense increased $1,783,000 in the six months ended December 31,
1999, primarily due to increased levels of debt associated with the acquisition
of Cazzaniga.
12
The Company's effective tax rate for continuing operations increased from
32.1% to 35.2%. The increase is attributable to acquired companies operating in
higher tax rate jurisdictions than the rest of the Company, tax planning
strategies favorably impacting fiscal 1998 only and a revised tax structure
required to effect the Distribution.
Net income from continuing operations for the six months ended December
31, 1999 increased $1,243,000 (8.2%) to $16,468,000 or $.61 per common share
compared to $.56 per common share for the six months ended December 31, 1998 on
a diluted basis. Net income from continuing operations exclusive of the
restructuring charge would have increased $2,104,000 to $17,329,000 or $.64 per
common share on a diluted basis. The impact of foreign exchange, primarily due
to the devaluation of the Euro against the U.S. dollar, decreased net income
$.02 per common share on a diluted basis in the period ended December 31, 1999.
For the six months ended December 31, 1999, discontinued operations
generated a net loss of $1,226,000 ($0.05 per share), compared to net income of
$8,419,000 ($0.31 per share) for six months ended December 31, 1998. Results for
the six months ended December 31, 1999 were negatively impacted by an after tax
charge of $2,433,000 for spin-off related costs, including professional fees,
facility relocation costs and income tax costs associated with the reorganizing
the Company's legal entity structure in anticipation of the spin-off. Excluding
this charge, discontinued operations would have had net income of $1,207,000
($0.05 per share) for the six months ended December 31, 1999. Net sales for the
discontinued operations for the three months ended September 30, 1999 were
$76,957,000, a decrease of $3,699,000 (4.6%) from the comparable period in 1998.
The decrease in net sales is primarily attributable to lower demand for oil and
gas valve products. Declining prices, resulting from increased competition;
reduced manufacturing levels, resulting in lower absorption of fixed
manufacturing costs; and costs associated with the integration of acquired
companies negatively impacted operating profits during the six months ended
December 31, 1999. Additional details of the spin-off transaction are provided
in Note 3 of the Notes to the Consolidated Financial Statements.
Results of Operations
Twelve Months Ended June 1999 Compared to
Twelve Months Ended June 1998
Net sales for the twelve months ended June 30, 1999 increased by
$33,134,000 (7.5%) to $477,869,000 from $444,735,000 in the fiscal year ended
June 30, 1998. The increase in net sales is attributable to the following:
Internal Growth $26,208 5.9%
Acquisitions 10,095 2.3%
Divestitures (3,386) (0.8%)
Foreign Exchange 217 0.1%
------- ----
Total Change $33,134 7.5%
======= ====
The increase in net sales from internal growth is primarily attributable
to increased unit shipments in the North American segment. The growth in net
sales due to acquired companies is primarily attributable to the inclusion of
Cazzaniga S.p.A. of Biassono, Italy, which was acquired in March, 1999.
Excluding Cazzaniga, shipments in the European segment were consistent with the
prior year.
The Company monitors its net sales in three geographical segments: North
America, Europe and Asia. As outlined below, North America, Europe and Asia
accounted for 77.9%, 19.4% and 2.7% of net sales, respectively, in the twelve
months ended June 30, 1999 compared to 78.2%, 18.7% and 3.1%, respectively in
the twelve months ended June 30, 1998. The Company's net sales in these groups
for fiscal 1999 and 1998 were as follows:
6/30/99 6/30/98 Change
-------- -------- -------
North America $372,220 $348,004 $24,216
Europe 92,631 82,837 9,794
Asia 13,018 13,894 (876)
-------- -------- -------
Total $477,869 $444,735 $33,134
======== ======== =======
13
The increase in net sales in North America is primarily due to increased
unit shipments. The increase in Europe is due primarily to the acquisition of
Cazzaniga.
The Company's gross profit increased $12,541,000 (7.7%) to $175,124,000.
The increased gross profit is primarily attributable to increased sales. Gross
margin remained consistent at 36.6% in both fiscal 1999 and 1998.
Selling general and administrative expenses increased $7,774,000 (6.7%) to
$123,286,000. This increase is attributable to the inclusion of the expenses of
Cazzaniga, and increased variable selling expenses including commissions and
freight costs.
Operating income from continuing operations increased $4,767,000 (10.1%)
from $47,071,000 to $51,838,000 primarily due to increased gross profit.
The Company's operating income by segment for the twelve months ended June
30, 1999 and 1998 were as follows:
6/30/99 6/30/98 Change
-------- -------- ------
North America $ 54,094 $ 51,456 $2,638
Europe 11,228 8,258 2,970
Asia 1,608 1,984 (376)
Corporate (15,092) (14,627) (465)
-------- -------- ------
Total $ 51,838 $ 47,071 $4,767
======== ======== ======
The increase in North America is due to increased net sales and increased
gross profit. The increase in Europe is primarily due to the inclusion
Cazzaniga.
Other expense from continuing operations increased $1,256,000 to
$1,688,000. This increase is attributable to the Company's share of losses
related to its equity investment in Jameco International LLC. Increased minority
interest expense resulting from the improved performance at the Company's joint
venture in China also contributed to the increase in other expense.
Income from continuing operations increased $1,331,000 (4.7%) to
$29,454,000. This increase is primarily attributable to the income generated by
acquired companies and increased gross profit from existing companies.
The Company's consolidated results of operations are impacted by the
effect that changes in foreign exchange rates have on its international
subsidiaries operating results. Changes in foreign exchange rates had an
immaterial impact on net income in fiscal 1999.
Net income from discontinued operations was $6,502,000 ($0.24 per share)
for fiscal 1999, compared to $25,246,000 ($0.92 per share) for fiscal 1998 on a
diluted basis. Fiscal 1999 results were negatively impacted by an after tax
charge of $6,166,000 for spin-off related costs, including professional fees,
facility relocation costs and income tax costs associated with the reorganizing
of the Company's legal entity structure in anticipation of the spin-off. The
Company also recorded a charge to discontinued operations of $5,000,000
($3,000,000 net of tax), for legal expenses associated with the litigation
involving James Jones Company. James Jones Company was a subsidiary of the
Company in the municipal water works division until September 1996 when it was
sold to Tyco International Ltd. See Part I, Item 1, "Product Liability,
Environmental and Other Litigation Matters." Excluding these charges,
discontinued operations would have had net income of $15,668,000 ($0.58 per
share) for fiscal 1999. Net sales for the discontinued operations for fiscal
1999 were $321,711,000, an increase of $33,822,000 (11.7%) from fiscal 1998. The
increase in net sales is primarily attributable to the inclusion of net sales
from acquired companies. Excluding the impact of acquisitions, net sales of
domestic oil and gas valves declined 29.8% and net sales of international oil
and gas valves declined 20.9% during fiscal 1999. Declining prices, resulting
from increased competition; and reduced manufacturing levels, resulting in lower
absorption of fixed manufacturing costs, negatively impacted operating profits
during fiscal 1999. Additional details of the spin-off transaction are provided
in the Notes to the Consolidated Financial Statements (Note 3).
14
Liquidity and Capital Resources
During the twelve month period ended December 31, 2000, the Company
generated $57,754,000 in cash flow from continuing operations, an increase of
$15,554,000 (36.9%) over the comparable prior year period. The company's
continued emphasis on asset management has increased free cash flow (cash
provided by continuing operations less dividends and capital expenditures)
during the twelve months ended December 31, 2000 to $36,409,000 versus
$8,616,000 in the comparable prior year period. The Company has also increased
earnings before interest, taxes, depreciation and amortization (EBITDA) for
continuing operations 7.0% to $78,353,000 for the twelve months ended December
31, 2000 compared with $73,195,000 for the twelve months ended December 31,
1999. This improvement in cash flow has enabled the Company to reduce its long
term debt by $21,430,000 while completing and funding the acquisitions of
Heatway and Spacemaker, funding the purchase of $14,238,000 in capital equipment
and paying cash dividends to common shareholders. Capital expenditures were
primarily for manufacturing machinery and equipment as part of the Company's
commitment to continuously improve its manufacturing capabilities. The Company's
capital expenditure budget for the twelve months ended December 31, 2001 is
$18,100,000.
The Company maintains a revolving line of credit facility of $100,000,000,
which expires March 2003, to support the Company's acquisition program, working
capital requirements of acquired companies, and for general corporate purposes.
At December 31, 2000, the Company had $5,000,000 outstanding on the line of
credit and was in compliance with all banking covenants related to this
facility.
As of December 31, 2000, the Company maintained a syndicated credit
facility with a group of European banks in the amount of 23,600,000 Euros. This
credit facility has several tranches which provide credit to the Company for a
period through September 2004. The purpose of this credit facility is to fund
acquisitions in Europe, support the working capital requirements of acquired
companies, and for general corporate purposes. As of December 31, 2000,
19,000,000 Euros ($17,837,000) were borrowed under this line of credit. On
January 4, 2001, the Company increased this credit facility to 40,000,000 Euros.
This increase was utilized to fund the acquisition of Dumser Metallbau GmbH &
Co., KG on January 5, 2001. Dumser, located in Landau, Germany is a European
market leader in the manufacture and distribution of brass, steel, and stainless
steel manifolds used as the prime distribution device in hydronic heating
systems.
Working capital at December 31, 2000 was $137,142,000 compared to
$141,740,000 at December 31, 1999. The ratio of current assets to current
liabilities was 2.2 to 1 at December 31, 2000 and 2.3 to 1 at December 31, 1999.
Cash and cash equivalents were $15,235,000 at December 31, 2000, compared to
$13,016,000 at December 31, 1999. Debt as a percentage of total capital employed
(short term and long term debt as a percentage of the sum of short term and long
term debt plus equity) was 31.4% at December 30, 2000 compared to 37.1% at
December 31, 1999.
The Company anticipates that available funds and those funds provided from
current operations will be sufficient to meet current operating requirements and
anticipated capital expenditures for at least the next 24 months.
The Company from time to time is involved with product liability,
environmental proceedings and other litigation proceedings and incurs costs on
an ongoing basis related to these matters. With the exception of the charge
related to the James Jones Litigation, the Company has not incurred material
expenditures in fiscal 2000 in connection with any of these matters. See Part I,
Item 1, "Product Liability, Environmental and Other Litigation Matters".
Conversion To The Euro
On January 1, 1999, 11 of the 15 member countries of the European Union
adopted the Euro as their common legal currency and established fixed conversion
rates between their existing sovereign currencies and the Euro. The Euro trades
on currency exchanges and is available for non-cash transactions. The Euro
effects the Company as the Company has manufacturing and distribution facilities
in several of the member countries and trades extensively across Europe. The
long-term competitive implications of the conversion are currently being
assessed by the Company, however, the Company has experienced a reduction in the
risks associated with foreign exchange. At this time, the Company is not
anticipating that any significant costs will be incurred due to the introduction
and conversion to the Euro. The Company is in the process of implementing
systems to receive and make payments in Euros. The Company anticipates these
systems will be in place by January 1, 2002.
15
Responsibility for Financial Statements
The Company is responsible for the objectivity and integrity of the
accompanying consolidated financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States.
The financial statements of necessity include the Company's estimates and
judgments relating to matters not concluded by year-end. Financial information
contained elsewhere in the Annual Report and Form 10-K is consistent with that
included in the financial statements.
The Company maintains a system of internal accounting controls. Although
there are inherent limitations to the effectiveness of any system of accounting
controls, the Company believes that its system provides reasonable, but not
absolute, assurance that its assets are safeguarded from unauthorized use or
disposition and that its accounting records are sufficiently reliable to permit
the preparation of financial statements that conform in all material respects
with accounting principles generally accepted in the United States.
KPMG LLP, independent auditors, are engaged to render an independent
opinion regarding the fair presentation in the financial statements of the
Company's financial condition and operating results. Their report appears on
page 27. Their examination was made in accordance with auditing standards
generally accepted in the United States and included a review of the system of
internal accounting controls to the extent they considered necessary to
determine the audit procedures required to support their opinion.
The Audit Committee of the Board of Directors is composed solely of
independent directors, as defined by the New York Stock Exchange. The Committee
meets periodically and privately with the independent auditors and financial
officers of the Company, as it deems necessary, to review the quality of the
financial reporting of the Company and the internal accounting controls. The
Committee also reviews compliance with the Company's relationship with the
independent auditors. In addition, the Committee is responsible for recommending
the appointment of the Company's independent auditors.
Other
This report on Form 10-K may include statements which are not historical
facts and are considered forward looking within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward looking statements
reflect Watts Industries' current views about future events and financial
performance. Investors should not rely on forward looking statements, because
they are subject to a variety of risks, uncertainty, and other factors that
could cause actual results to differ materially from Watts Industries
expectations and Watts Industries expressly does not undertake any duty to
update forward looking statements. These factors include but are not limited to
the following: loss of market share through competition, introduction of
competing products by other companies, pressure on prices from competitors,
suppliers, and/or customers regulatory obstacles, lack of acceptance of new
products, changes in plumbing and heating markets, changes in global demand for
the Company's products, changes for distribution of the Company's products,
interest rates, foreign exchange fluctuations, cyclicality of industries in
which the Company markets certain of its products, and general economic factors
in markets where the Company's products are sold, manufactured, or marketed,
changes in the status of current litigations, including the James Jones case,
and other factors discussed in the Company's report filed with the Securities
and Exchange Commission.
Certain Factors Affecting Future Results
This report includes forward looking statements which reflect Watts
Industries' current views about future events and financial performance. Forward
looking statements do not relate strictly to historical or current facts and may
be identified by their use of words like "plan", "believe", "expect", "will",
"anticipate", "estimate" and other words of similar meaning. Investors should
not rely on forward looking statements because they are subject to a variety of
risks, uncertainties, and other factors that could cause actual results to
differ materially from our expectations. Some important factors that could cause
our actual results to differ materially from those projected in any such forward
looking statements are as follows:
16
Down economic cycles, particularly reduced levels of housing starts and
remodeling, have an adverse affect on our business and revenues.
The businesses of most of our customers, particularly plumbing and heating
wholesalers and home improvement retailers, is cyclical. Therefore, the level of
the Company's business activity has been cyclical, fluctuating with economic
cycles, in particular, with housing starts and remodeling levels. Housing starts
and remodeling are, in turn, heavily influenced by mortgage interest rates,
consumer debt levels, changes in disposable income, employment growth, consumer
confidence and, on a short term basis, weather conditions. There can be no
assurance that a downturn in these factors affecting housing starts and
remodeling will not occur and if housing and remodeling starts are materially
reduced, it is likely such reduction would have a material adverse effect on the
Company due to reduced revenue.
Economic, Political And Other Risks Associated With International Sales And
Operations Could Adversely Affect Our Business
Since we sell our products worldwide, our business is subject to risks
associated with doing business internationally. Our sales outside North America,
as a percentage of our total sales, was 22% in 2000. Accordingly, our future
results could be harmed by a variety of factors, including:
o changes in foreign currency exchange rates;
o changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
o trade protection measures and import or export licensing
requirements;
o potentially negative consequences from changes in tax laws;
o difficulty in staffing and managing widespread operations;
o differing labor regulations;
o differing protection of intellectual property; and
o unexpected changes in regulatory requirements.
Reductions in the supply of raw materials and increases in the prices of raw
materials could adversely affect our operating results
We require substantial amounts of raw materials (bronze, brass, cast iron)
and substantially all raw materials we require are purchased from outside
sources. The availability and prices of raw materials may be subject to
curtailment or change due to, among other things, new laws or regulations,
suppliers' allocations to other purchasers, interruptions in production by
suppliers, changes in exchange rates and worldwide price levels. Any change in
the supply of, or price for, these raw materials could adversely affect our
operating results.
Fluctuations in Foreign Exchange Rates could materially affect our reported
results
Exchange rates between the United States dollar, in which our results are
and will be reported, and the local currency in the countries in which we
provide many of our services, may fluctuate from quarter to quarter. Since we
report our interim and annual results in United States dollars, we are subject
to the risk of currency fluctuations. When the dollar appreciates against the
applicable local currency in any reporting period, the actual earnings generated
by our services in that country are diminished in the conversion.
17
We are exposed to fluctuations in foreign currencies as a significant
portion of our revenue, and certain of our costs, assets and liabilities, are
denominated in currencies other than U.S. dollars. Approximately 22% of our
revenue during 2000 was from sales outside of North America. For the twelve
months ended December 31, 2000 the depreciation of the Euro against the U.S.
dollar had an adverse impact on revenue of $15,958,000 and on earnings per share
of $.05. Our share of revenue in non-dollar denominated currencies may continue
to increase in future periods. We can offer no assurance that exchange rate
fluctuations will not have a material adverse effect on our results of
operations and financial condition.
We Face Intense Competition
We encounter intense competition in all areas of our business.
Additionally, customers for our products are attempting to reduce the number of
vendors from which they purchase in order to reduce the size and diversity of
their inventory. To remain competitive, we will need to invest continuously in
manufacturing, marketing, customer service and support and our distribution
networks. We anticipate that we may have to adjust the prices of some of our
products to stay competitive. We cannot assure you that we will have sufficient
resources to continue to make such investments or that we will maintain our
competitive position.
Environmental Compliance Costs And Liabilities Could Adversely Affect Our
Financial Condition
Our operations and properties are subject to increasingly stringent laws
and regulations relating to environmental protection, including laws and
regulations governing air emissions, water discharges, waste management and
workplace safety. Such laws and regulations can impose substantial fines and
sanctions for violations and require the installation of costly pollution
control equipment or operational changes to limit pollution emissions and/or
decrease the likelihood of accidental hazardous substance releases. We must
conform our operations and properties to these laws, and adapt to regulatory
requirements in all countries as these requirements change.
We have experienced, and expect to continue to experience, operating costs
to comply with environmental laws and regulations. In addition, new laws and
regulations, stricter enforcement of existing laws and regulations, the
discovery of previously unknown contamination or the imposition of new clean up
requirements could require us to incur costs or become the basis for new or
increased liabilities that could have a material adverse effect on our business,
financial condition or results of operations.
Third Parties May Infringe Our Intellectual Property, And We May Expend
Significant Resources Enforcing Our Rights Or Suffer Competitive Injury
Our success depends in part on our proprietary technology. We rely on a
combination of patents, copyrights, trademarks, trade secrets, confidentiality
provisions and licensing arrangements to establish and protect our proprietary
rights. If we fail to successfully enforce our intellectual property rights, our
competitive position could suffer, which could harm our operating results. We
may be required to spend significant resources to monitor and police our
intellectual property rights.
If We Cannot Continue Operating Our Manufacturing Facilities At Current Or
Higher Levels, Our Results Of Operations Could Be Adversely Affected.
We operate a number of manufacturing facilities for the production of our
products. The equipment and management systems necessary for such operations may
break down, perform poorly or fail resulting in fluctuations in manufacturing
efficiencies. Such fluctuations may affect our ability to deliver products to
our customers on a timely basis which could have a material adverse effect on
our business, financial condition or results of operations.
18
If We Experience Delays In Introducing New Products Or If Our Existing Or New
Products Do Not Achieve Or Maintain Market Acceptance, Our Revenues May
Decrease.
Our industry is characterized by:
o intense competition;
o changes in end-user requirements;
o technically complex products; and
o evolving product offerings and introductions.
We believe our future success will depend, in part, on our ability to
anticipate or adapt to these factors and to offer, on a timely basis, products
that meet customer demands. Failure to develop new and innovative products or to
custom design existing products could result in the loss of existing customers
to competitors or the inability to attract new business, either of which may
adversely affect our revenues.
Implementation Of Our Acquisition Strategy May Not Be Successful Which Could
Affect Our Ability To Increase Our Revenues Or Reduce Our Profitability.
One of our strategies is to increase our revenues and expand our markets
through acquisitions that will provide us with complementary water related
products. We expect to spend significant time and effort in expanding our
existing businesses and identifying, completing and integrating acquisitions. We
expect to face competition for acquisition candidates which may limit the number
of acquisition opportunities available to us and may result in higher
acquisition prices. We cannot be certain that we will be able to identify,
acquire or profitably manage additional companies or successfully integrate such
additional companies without substantial costs, delays or other problems. Also,
there can be no assurance that companies acquired in the future will achieve
revenues, profitability or cash flows that justify our investment in them. In
addition, acquisitions may involve a number of special risks, including:
o adverse short-term effects on our reported operating results;
o diversion of management's attention;
o loss of key personnel at acquired companies; or
o unanticipated management or operational problems or legal
liabilities.
Some or all of the above special risks could have a material adverse
effect on our business, financial condition or results of operations.
If We Fail To Manufacture And Deliver High Quality Products, We May Lose
Customers.
Product quality and performance are a priority for our customers. Our
products are used in control of temperature and pressure of water as well as
water quality and safety. These applications require products that meet
stringent performance and safety standards. If we fail to maintain and enforce
quality control and testing procedures, our products will not meet these
stringent performance and safety standards. Substandard products would seriously
harm our reputation resulting in both a loss of current customers to our
competitors and damage to our ability to attract new customers, which could have
a material adverse effect on our business, financial condition or results of
operations.
19
We Face Risks From Product Liability And Other Lawsuits Which May Adversely
Affect Our Business.
We, like other manufacturers and distributors of products designed to
control and regulate water, face an inherent risk of exposure to product
liability claims in the event that the use of our products results in personal
injury, property damage or business interruption to our customers. We may be
subjected to various product liability claims, including, among others, that our
products include inadequate or improper instructions for use or installation, or
inadequate warnings concerning the effects of the failure of our products.
Although we maintain strict quality controls and procedures, including the
testing of raw materials and safety testing of selected finished products, we
cannot be certain that our products will be completely free from defect. In
addition, in certain cases, we rely on third-party manufacturers for our
products or components of our products. Although we have liability insurance
coverage, we cannot be certain that this insurance coverage will continue to be
available to us at a reasonable cost, or, if available, will be adequate to
cover any such liabilities.
One particular products liability case in which the Company is a defendant
is Los Angeles Department of Water and Power, EX Rel. Nora Armenta v. James
Jones Company, ET AL. The Company recorded a charge of $7.1 million after tax in
the quarter ended December 31, 2000, which is management's estimate of the after
tax cost to bring this case to resolution. While this charge represents the
after tax impact of the Company's current estimate based on all available
information, litigation is inherently uncertain and the actual liability to the
Company to fully resolve the litigation could be materially higher than this
estimate. See Item 1, Part I - "Product Liability, Environmental and Other
Litigation Matters."
One of our Shareholders Can Exercise Substantial Influence Over Our Company
As of February 15, 2001, Timothy P. Horne, our Chairman and Chief
Executive beneficially owned 35.2% of our outstanding shares of common stock,
which 81.2% of the total outstanding voting power. As a result, Mr. Horne
effectively controls all matters affecting us. As long as Mr. Horne controls
shares representing at least a majority of the total voting power of our
outstanding stock, Mr. Horne will be able to unilaterally determine the outcome
of all stockholder votes and other stockholders will not be able to affect the
outcome of any stockholder vote. If Mr. Horne were to sell a significant amount
of common stock into the public market, the trading price of our common stock
could decline. See Part III, Item 12, "Security Ownership of Certain Beneficial
Owners and Management".
The foregoing list sets forth many, but not all, of the factors that could
impact upon our ability to achieve results described in any forward looking
statements. Investors are cautioned not to place undue reliance on such
statements that speak only as of the date made. Investors also should understand
that it is not possible to predict or identify all such factors and that this
list should not be considered a complete statement of all potential risks and
uncertainties. Investors should also realize that if underlying assumptions
prove inaccurate or unknown risks or uncertainties materialize, actual results
could vary materially from our projections. We do not undertake any obligation
to update any forward looking statements as a result of future events or
developments.
New Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities." was issued. The
Company adopted SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, on
January 1, 2001. The adoption of SFAS No. 133 has not had a material impact on
the Company's financial position or overall trends in results of operations and
has not resulted in significant changes to its financial risk management
practices. However, the adoption of SFAS No. 133 could result in more pronounced
quarterly fluctuations in other income and expense.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101. "Revenue Recognition." An amendment in June
2000 delayed the effective date until the fourth quarter of 2000. The adoption
of SAB 101 did not have a material impact on the consolidated financial
statements.
20
In May 2000, the Financial Accounting Standards Board's Emerging Issues
Task Force (EITF) reached a consensus on Issue No. 00-14, "Accounting for
Certain Sales Incentives." This issue addresses the recognition, measurement and
income statement classification for various types of sales incentives, including
discounts, coupons, rebates and free products. In November 2000, the EITF
revised the transition date such that the Company must adopt EITF 00-14 no later
than the second quarter of 2001. The Company will adopt the consensus in the
second quarter of 2001 and it is not expected to have a material impact on the
Company's financial statements
In July and September 2000, the EITF reached consensus on Issue No 00-10,
"Accounting for Shipping and Handling Fees and Costs." This issue addresses the
income statement classification for shipping and handling fees and costs. The
Company adopted the consensus in the fourth quarter of 2000. The adoption of
EITF Issue No. 00-10 did not have a material impact on the consolidated
financial statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company uses derivative financial instruments primarily to reduce
exposure to adverse fluctuations in foreign exchange rates, interest rates and
prices of certain raw materials used in the manufacturing process. The Company
does not enter into derivative financial instruments for trading purposes. As a
matter of policy, all derivative positions are used to reduce risk by hedging
underlying economic exposure. The derivatives the Company uses are instruments
with liquid markets.
The Company manages most of its foreign currency exposures on a
consolidated basis. The Company identifies all of its known exposures. As part
of that process, all natural hedges are identified. The Company then nets these
natural hedges from its gross exposures.
The Company's consolidated earnings, which are reported in United States
dollar are subject to translation risks due to changes in foreign currency
exchange rates. However, its overall exposure to such fluctuations is reduced by
the diversity of its foreign operating locations which encompass a number of
different European locations, Canada, and China.
The Company's foreign subsidiaries transact most business, including
certain intercompany transactions, in foreign currencies. Such transactions are
principally purchases or sales of materials and are denominated in European
currencies or the U.S. or Canadian dollar. The Company uses foreign currency
forward exchange contracts to manage the risk related to intercompany purchases
that occur during the course of a fiscal year and certain open foreign currency
denominated commitments to sell products to third parties. At December 31, 2000,
the Company had no forward contracts to buy foreign currencies and no unrealized
gains or losses. See Note 16 of the Notes to the Consolidated Financial
Statements.
The Company has historically had a very low exposure to changes in
interest rates. Interest rate swaps are used to mitigate the impact of interest
rate fluctuations on certain variable rate debt instruments. Information about
the Company's long-term debt including principal amounts and related interest
rates appears in Note 11 of the Notes to the Consolidated Financial Statements
included herein.
The Company purchases significant amounts of bronze ingot, brass rod and
cast iron which are utilized in manufacturing its many product lines. The
Company's operating results can be adversely affected by changes in commodity
prices if it is unable to pass on related price increases to its customers. The
Company manages this risk by monitoring related market prices, working with its
suppliers to achieve the maximum level of stability in their costs and related
pricing, seeking alternative supply sources when necessary and passing increases
in commodity costs to its customers, to the maximum extent possible, when they
occur. Additionally, on a limited basis, the Company uses commodity futures
contracts to manage this risk. See Note 16 of the Notes to the Consolidated
Financial Statements.
21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The index to financial statements is included in page 23 of this Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
The information appearing under the caption "Information as to Nominees
for Director" in the Registrant's Proxy Statement relating to the Annual Meeting
of Stockholders to be held on April 25, 2001 is incorporated herein by
reference. With respect to Directors and Executive Officers, the information
appearing under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's Proxy Statement relating to the Annual Meeting
of Stockholders to be held on April 25, 2001 is incorporated herein by
reference.
Executive Officers
Information with respect to the executive officers of the Company is set
forth in Item 1 of this Report under the caption "Executive Officers".
Item 11. EXECUTIVE COMPENSATION.
The information appearing under the caption "Compensation Arrangements" in
the Registrant's Proxy Statement relating to the Annual Meeting of Stockholders
to be held on April 25, 2001 is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Principal and Management
Stockholders" in the Registrant's Proxy Statement relating to the Annual Meeting
of Stockholders to be held on April 25, 2001 is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the caption "Compensation
Arrangements-Certain Relationships and Related Transactions" in the Registrant's
Proxy Statement relating to the Annual Meeting of Stockholders to be held on
April 25, 2001 is incorporated herein by reference.
22
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following financial statements are included in a separate section of
this Report commencing on the page numbers specified below:
Report of Independent Auditors 27
Consolidated Statements of Operations for the twelve months ended
December 31, 2000 and 1999 (unaudited), six months ended
December 31, 1999 and 1998 (unaudited) and the twelve months
ended June 30, 1999 and 1998 28
Consolidated Balance Sheets as of December 31, 2000,
December 31, 1999 and June 30, 1999 29
Consolidated Statements of Stockholders' Equity for the twelve months
ended December 31, 2000, six months ended December 31, 1999
and the twelve months ended June 30, 1999 and 1998 30-31
Consolidated Statements of Cash Flows for the twelve months ended
December 31, 2000 and 1999 (unaudited), six months ended
December 31, 1999 and
the twelve months ended June 30, 1999 and 1998. 32
Notes to Consolidated Financial Statements 33
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are included in
the Notes to the Consolidated Financial Statements, or are not required under
the related instructions or are inapplicable, and therefore have been omitted.
(a)(3) Exhibits
Exhibits 10.1-10.6, 10.8, 10.16, and 10.23 constitute all of the
management contracts and compensation plans and arrangements of the Company
required to be filed as exhibits to this Annual Report. Upon written request of
any stockholder to the Chief Financial Officer at the Company's principal
executive office, the Company will provide any of the Exhibits listed below.
23
Exhibit No. Description and Location
2.1 Distribution Agreement between Watts Industries, Inc. and
CIRCOR International, Inc. (20)
3.1 Restated Certificate of Incorporation, as amended. (12)
3.2 Amended and Restated By-Laws, as amended May 11, 1999. (1)
9.1 Horne Family Voting Trust Agreement-1991 dated as of October
31, 1991 (2), Amendments dated November 19, 1996 (18),
February 24, 1997 (18), June 5, 1997 (18), August 26, 1997
(18), and October 17, 1997. (21)
9.2 The Amended and Restated George B. Horne Voting Trust
Agreement-1997 dated as of September 14, 1999. (22)
10.1 Employment Agreement effective as of September 1, 1996 between
the Registrant and Timothy P. Horne. (14)
10.2 Supplemental Compensation Agreement effective as of September
1, 1996 between the Registrant and Timothy P. Horne. (14),
Amendment No. 1, dated July 25, 2000 (23)
10.3 Deferred Compensation Agreement between the Registrant and
Timothy P. Horne, as amended. (4)
10.4 1996 Stock Option Plan, dated October 15, 1996. (15)
10.5 1989 Nonqualified Stock Option Plan. (3)
10.6 Watts Industries, Inc. Retirement Plan for Salaried Employees
dated December 30, 1994, as amended and restated effective as
of January 1, 1994, (12), Amendment No. 1 (14), Amendment No.
2 (14), Amendment No. 3 (14), Amendment No. 4 dated September
4, 1996. (18), Amendment No. 5 dated January 1, 1998,
Amendment No. 6 dated May 3, 1999 (22), and Amendment No. 7
dated June 7, 1999. (22)
10.7 Registration Rights Agreement dated July 25, 1986. (5)
10.8 Executive Incentive Bonus Plan, as amended. (12)
10.9 Indenture dated as of December 1, 1991 between the Registrant
and The First National Bank of Boston, as Trustee, including
form of 8-3/8% Note Due 2003. (8)
10.10 Loan Agreement and Mortgage among The Industrial Development
Authority of the State of New Hampshire, Watts Regulator Co.
and Arlington Trust Company dated August 1, 1985. (4)
10.11 Amendment Agreement relating to Watts Regulator Co. (Canaan
and Franklin, New Hampshire, facilities) financing dated
December 31, 1985. (4)
10.12 Loan Agreement between The Rutherford County Industrial
Facilities and Pollution Control Financing Authority and Watts
Regulator Company dated September 1, 1994. (12)
10.13 Letter of Credit, Reimbursement and Guaranty Agreement dated
September 1, 1994 by and among the Registrant, Watts Regulator
Company and The First Union National Bank of North Carolina
(12), Amendment No. 1 (14), Amendment No. 2 dated October 1,
1996 (18), and Amendment No. 3 dated October 18, 1999 (11).
10.14 Trust Indenture from The Rutherford County Industrial
Facilities and Pollution Control Financing Authority to The
First National Bank of Boston, as Trustee, dated September 1,
1994. (12)
10.15 Amended and Restated Stock Restriction Agreement dated October
30, 1991 (2), Amendment dated August 26, 1997. (18)
10.16 Watts Industries, Inc. 1991 Non-Employee Directors'
Nonqualified Stock Option Plan (7), Amendment No. 1. (14)
10.17 Letters of Credit relating to retrospective paid loss
insurance programs. (10)
10.18 Form of Stock Restriction Agreement for management
stockholders. (5)
10.20 Loan Agreement dated September 1987 with, and related Mortgage
to, N.V. Sallandsche Bank. (6)
10.21 Agreement of the sale of shares of Intermes, S.p.A., RIAF
Holding A.G. and the participations in Multiscope Due S.R.L.
dated November 6, 1992. (9)
10.22 Amended and Restated Revolving Credit Agreement dated March
27, 1998 between and among Watts Investment Company, certain
financial institutions, BankBoston N.A., as Administrative
Agent, and the Registrant, as Guarantor (17), and First
Amendment to Amended and Restated Revolving Credit Agreement
dated October 18, 1999 (11).
10.23 Watts Industries, Inc. Management Stock Purchase Plan dated
October 17, 1995 (13), Amendment No. 1 dated August 5, 1997.
(18), Amendment No 2, dated November 1, 1999*
10.24 Stock Purchase Agreement dated as of June 19, 1996 by and
among Mueller Co., Tyco Valves Limited, Watts Investment
Company, Tyco International Ltd. and Watts Industries, Inc.
(16)
11 Statement Regarding Computation of Earnings per Common Share.
(19)
21 Subsidiaries. *
23 Consent of KPMG LLP. *
24
Incorporated By Reference To:
(1) Relevant exhibit to Registrant's Form 10-Q for quarter ended March 31,
1999.
(2) Relevant exhibit to Registrant's Form 8-K dated November 14, 1991.
(3) Relevant exhibit to Registrant's Form 10-K for the year ended June 30,
1989.
(4) Relevant exhibit to Registrant's Form S-1 (No. 33-6515) dated June 17,
1986.
(5) Relevant exhibit to Registrant's Form S-1 (No. 33-6515) as part of the
Second Amendment to such Form S-1 dated August 21, 1986.
(6) Relevant exhibit to Registrant's Form S-1 (No. 33-27101) dated February
16, 1989.
(7) Relevant exhibit to Registrant's Amendment No. 1 to Form 10-K for year
ended June 30, 1992.
(8) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1992.
(9) Relevant exhibit to Registrant's Amendment No. 2 dated February 22, 1993
to Form 8-K dated November 6, 1992.
(10) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1993.
(11) Relevant exhibit to Registrant's Form 10-Q for quarter ended September 30,
1999.
(12) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1995.
(13) Relevant exhibit to Registrant's Form S-8 (No. 33-64627) dated November
29, 1995.
(14) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1996.
(15) Relevant exhibit to Registrant's Form S-8 (No. 333-32685) dated August 1,
1997.
(16) Relevant exhibit to Registrant's Form 8-K dated September 4, 1996.
(17) Relevant exhibit to Registrant's Form 10-Q for quarter ended March 31,
1998.
(18) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1997.
(19) Notes to Consolidated Financial Statements, Note 2 of this Report.
(20) Exhibit 2.1 to CIRCOR International, Inc. Amendment No. 1 to its
registration statement on Form 10 filed on September 22, 1999. (File No.
000-26961).
(21) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1998.
(22) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1999.
(23) Relevant exhibit to Registrant's Form 10-Q for quarter ended September 30,
2000
* Filed as an exhibit to this Report with the Securities and Exchange
Commission
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for quarter ending December 31,
2000.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WATTS INDUSTRIES, INC.
By: /s/ Timothy P. Horne
--------------------
Timothy P. Horne
Chairman of the Board,
Chief Executive Officer and
President
DATED: March 14, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Timothy P. Horne Chairman of the Board, March 14, 2001
- -------------------- Chief Executive Officer,
Timothy P. Horne President (Principal
Executive Officer)
and Director
/s/ William C. McCartney Chief Financial Officer March 14, 2001
- ------------------------ and Treasurer (Principal
William C. McCartney Financial and Accounting
Officer),
Secretary
/s/ Kenneth J. McAvoy Director March14, 2001
- ---------------------
Kenneth J. McAvoy
/s/ Gordon W. Moran Director March 14, 2001
- -------------------
Gordon W. Moran
/s/ Daniel J. Murphy, III Director March 14, 2001
- -------------------------
Daniel J. Murphy, III
/s/ Roger A. Young Director March 14, 2001
- ------------------
Roger A. Young
26
Independent Auditors' Report
The Board of Directors and Stockholders
Watts Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Watts
Industries, Inc. and subsidiaries as of December 31, 2000 and 1999, and June 30,
1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year ended December 31, 2000, the six month
period ended December 31, 1999 and the fiscal years ended June 30, 1999 and
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Watts Industries,
Inc. and subsidiaries as of December 31, 2000 and 1999, and June 30, 1999, and
the results of their operations and their cash flows for the year ended December
31, 2000, the six month period ended December 31, 1999, and the fiscal years
ended June 30, 1999 and 1998 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
February 9, 2001
27
Watts Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share information)
------------For the Twelve Months Ended--------- For the Six Months Ended
December 31, June 30, June 30, December 31,
2000 1999 1999 1998 1999 1998
--------- --------- --------- --------- --------- ---------
(unaudited) (unaudited)
Net sales ...................................... $ 516,100 $ 509,656 $ 477,869 $ 444,735 $ 261,019 $ 229,150
Cost of goods sold ............................. 330,796 322,938 302,745 282,152 165,853 145,660
--------- --------- --------- --------- --------- ---------
GROSS PROFIT .............................. 185,304 186,718 175,124 162,583 95,166 83,490
Selling, general and administrative expenses ... 125,317 128,983 123,286 115,512 64,148 58,369
Restructuring Charge ........................... -- 1,460 -- -- 1,460 --
--------- --------- --------- --------- --------- ---------
OPERATING INCOME .......................... 59,987 56,275 51,838 47,071 29,558 25,121
--------- --------- --------- --------- --------- ---------
Other (income) expense:
Interest income ........................... (827) (841) (923) (1,228) (331) (413)
Interest expense .......................... 9,897 7,933 6,150 6,514 4,456 2,673
Other ..................................... 1,705 1,276 1,688 432 22 434
--------- --------- --------- --------- --------- ---------
10,775 8,368 6,915 5,718 4,147 2,694
--------- --------- --------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ....................... 49,212 47,907 44,923 41,353 25,411 22,427
Provision for income taxes ..................... 18,041 17,210 15,469 13,230 8,943 7,202
--------- --------- --------- --------- --------- ---------
INCOME FROM CONTINUING
OPERATIONS ................................ 31,171 30,697 29,454 28,123 16,468 15,225
Income (loss) from discontinued
operations, net of taxes .................. (7,170) (3,143) 6,502 25,246 (1,226) 8,419
--------- --------- --------- --------- --------- ---------
NET INCOME ................................ $ 24,001 $ 27,554 $ 35,956 $ 53,369 $ 15,242 $ 23,644
========= ========= ========= ========= ========= =========
Basic EPS
Income (loss) per share:
Continuing operations ..................... $ 1.18 $ 1.16 $ 1.10 $ 1.04 $ 0.62 $ 0.57
Discontinued operations ................... (0.27) (0.12) 0.24 0.93 (0.05) 0.31
--------- --------- --------- --------- --------- ---------
NET INCOME ................................ $ 0.91 $ 1.04 $ 1.34 $ 1.97 $ 0.57 $ 0.88
========= ========= ========= ========= ========= =========
Weighted average number of shares .............. 26,409 26,498 26,736 27,109 26,453 26,935
========= ========= ========= ========= ========= =========
Diluted EPS
Income (loss) per share:
Continuing operations ..................... $ 1.17 $ 1.15 $ 1.10 $ 1.03 $ 0.61 $ 0.56
Discontinued operations ................... (0.27) (0.12) 0.24 0.92 (0.05) 0.31
--------- --------- --------- --------- --------- ---------
NET INCOME ................................ $ 0.90 $ 1.03 $ 1.34 $ 1.95 $ 0.56 $ 0.87
========= ========= ========= ========= ========= =========
Weighted average number of shares .............. 26,551 26,684 26,799 27,423 27,081 27,062
========= ========= ========= ========= ========= =========
Dividends per share ....................... $ 0.268 $ 0.350 $ 0.350 $ 0.330 $ 0.175 $ 0.175
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
28
Watts Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except share information)
December 31, December 31, June 30,
2000 1999 1999
------------ ------------ ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 15,235 $ 13,016 $ 12,774
Trade accounts receivable, less allowance for doubtful accounts
of $6,614, $6,730 and $7,747, respectively ...................... 97,718 94,305 89,315
Inventories ........................................................ 108,951 112,821 110,552
Prepaid expenses and other assets .................................. 6,850 12,922 10,193
Deferred income taxes .............................................. 20,486 19,774 21,271
Net current assets of discontinued operations ...................... -- -- 122,971
--------- --------- ---------
Total Current Assets ............................................... 249,240 252,838 367,076
PROPERTY, PLANT AND EQUIPMENT, NET ....................................... 125,810 130,231 129,163
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $14,665, $11,997, and $10,921, respectively .................. 98,179 95,311 96,285
Other .............................................................. 8,796 8,698 9,027
Net noncurrent assets of discontinued operations ................... -- -- 36,191
--------- --------- ---------
TOTAL ASSETS ............................................................. $ 482,025 $ 487,078 $ 637,742
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................... $ 39,569 $ 46,904 $ 35,579
Accrued expenses and other liabilities ............................. 59,088 48,629 48,843
Accrued compensation and benefits .................................. 12,200 9,882 12,692
Current portion of long-term debt .................................. 1,241 5,683 2,050
--------- --------- ---------
Total Current Liabilities ...................................... 112,098 111,098 99,164
LONG-TERM DEBT, NET OF CURRENT PORTION ................................... 105,377 123,991 118,916
DEFERRED INCOME TAXES .................................................... 15,463 13,630 13,070
OTHER NONCURRENT LIABILITIES ............................................. 9,770 11,150 11,450
MINORITY INTEREST ........................................................ 6,775 7,707 7,487
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value; 5,000,000 shares
authorized; no shares issued or outstanding ..................... -- -- --
Class A Common Stock, $.10 par value; 80,000,000 shares
authorized; 1 vote per share; 17,225,965; 16,888,507 and
16,158,807 shares,respectively, issued and outstanding .......... 1,723 1,689 1,616
Class B Common Stock, $.10 par value; 25,000,000 shares
authorized; 10 votes per share; 9,235,224; 9,485,247 and
10,285,247 shares, respectively,issued and outstanding .......... 924 949 1,029
Additional paid-in capital ......................................... 35,996 35,330 36,069
Retained earnings .................................................. 213,627 196,733 364,089
Treasury stock ..................................................... -- -- --
Accumulated Other Comprehensive Income ............................. (19,728) (15,199) (15,148)
--------- --------- ---------
Total Stockholders' Equity ...................................... 232,542 219,502 387,655
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................... $ 482,025 $ 487,078 $ 637,742
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
29
Watts Industries, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Amounts in thousands, except share information)
Class A Class B
Common Stock Common Stock
--------------------------------------------------
Shares Amount Shares Amount
---------------------------------------------------
Balance at June 30, 1997 ....................................................... 15,797,460 $ 1,580 11,215,627 $ 1,121
Comprehensive income:
Net income .........................................................
Cumulative translation adjustment ..................................
Comprehensive income .........................................
Shares of Class B Common Stock converted to Class A Common Stock ......... 918,800 91 (918,800) (91)
Shares of Class A Common Stock issued upon the exercise of stock options.. 153,400 16
Shares of Class A Common Stock exchanged upon the exercise of
stock options and retired .......................................... (10,633) (1)
Purchase of treasury stock, 100,000 shares @ cost ........................
Net change in restricted stock units .....................................
Common Stock dividends ...................................................
---------------------------------------------------
Balance at June 30, 1998 ....................................................... 16,859,027 1,686 10,296,827 1,030
Comprehensive income:
Net income .........................................................
Cumulative translation adjustment ..................................
Comprehensive income .........................................
Shares of Class B Common Stock converted to Class A Common Stock ......... 11,580 1 (11,580) (1)
Shares of Class A Common Stock issued upon the exercise of stock options.. 3,700 1
Purchase of treasury stock, 615,000 shares @ cost ........................
Retirement of treasury stock ............................................. (715,500) (72)
Net change in restricted stock units .....................................
Common Stock dividends ...................................................
---------------------------------------------------
Balance at June 30, 1999 ....................................................... 16,158,807 1,616 10,285,247 1,029
Comprehensive income:
Net income .........................................................
Cumulative translation adjustment ..................................
Comprehensive income .........................................
Shares of Class B Common Stock converted to Class A Common Stock ......... 800,000 80 (800,000) (80)
Shares of Class A Common Stock issued upon the exercise
of stock options ................................................... 29,700 3
Purchase of treasury stock, 100,000 shares @ cost ........................
Retirement of treasury stock ............................................. (100,000) (10)
Net change in restricted stock units .....................................
Spin off of Industrial, Oil and Gas Group ................................
Common Stock dividends ...................................................
---------------------------------------------------
Balance at December 31, 1999 ................................................... 16,888,507 1,689 9,485,247 949
Comprehensive income:
Net income .........................................................
Cumulative translation adjustment ..................................
Comprehensive income .........................................
Shares of Class B Common Stock converted to Class A Common Stock ......... 250,023 25 (250,023) (25)
Shares of Class A Common Stock issued upon the exercise of stock options.. 39,609 4
Purchase of treasury stock, 10,000 shares @ cost .........................
Retirement of treasury stock ............................................. (10,000) (1)
Net change in restricted stock units ..................................... 57,826 6
Common Stock dividends ...................................................
---------------------------------------------------
Balance at December 31, 2000 ................................................... 17,225,965 $ 1,723 9,235,224 $ 924
===================================================
30
Accumulated
Additional Other
Paid-In Retained Comprehensive
Capital Earnings Income
---------------------------------------------
Balance at June 30, 1997 ......................................................... $44,643 $293,170 ($ 6,875)
Comprehensive income:
Net income ........................................................... 53,369
Cumulative translation adjustment .................................... (4,455)
Comprehensive income ...........................................
Shares of Class B Common Stock converted to Class A Common Stock ...........
Shares of Class A Common Stock issued upon the exercise of stock options.... 2,998
Shares of Class A Common Stock exchanged upon the exercise of
stock options and retired ............................................ (265)
Purchase of treasury stock, 100,000 shares @ cost ..........................
Net change in restricted stock units ....................................... 271
Common Stock dividends ..................................................... (8,974)
---------------------------------------------
Balance at June 30, 1998 ......................................................... 47,647 337,565 (11,330)
Comprehensive income:
Net income ........................................................... 35,956
Cumulative translation adjustment .................................... (3,818)
Comprehensive income ...........................................
Shares of Class B Common Stock converted to Class A Common Stock ...........
Shares of Class A Common Stock issued upon the exercise of stock options.... 60
Purchase of treasury stock, 615,000 shares @ cost ..........................
Retirement of treasury stock ............................................... (11,926)
Net change in restricted stock units ....................................... 288
Common Stock dividends ..................................................... (9,432)
---------------------------------------------
Balance at June 30, 1999 ......................................................... 36,069 364,089 (15,148)
Comprehensive income:
Net income ........................................................... 15,242
Cumulative translation adjustment .................................... (51)
Comprehensive income ...........................................
Shares of Class B Common Stock converted to Class A Common Stock ...........
Shares of Class A Common Stock issued upon the exercise
of stock options ..................................................... 511
Purchase of treasury stock, 100,000 shares @ cost ..........................
Retirement of treasury stock ............................................... (1,295)
Net change in restricted stock units ....................................... 45
Spin off of Industrial, Oil and Gas Group .................................. (177,942)
Common Stock dividends ..................................................... (4,656)
---------------------------------------------
Balance at December 31, 1999 ..................................................... 35,330 196,733 (15,199)
Comprehensive income:
Net income ........................................................... 24,001
Cumulative translation adjustment .................................... (4,529)
Comprehensive income ...........................................
Shares of Class B Common Stock converted to Class A Common Stock ...........
Shares of Class A Common Stock issued upon the exercise of stock options.... 309
Purchase of treasury stock, 10,000 shares @ cost ...........................
Retirement of treasury stock ............................................... (104)
Net change in restricted stock units ....................................... 461
Common Stock dividends ..................................................... (7,107)
---------------------------------------------
Balance at December 31, 2000 ..................................................... $35,996 $213,627 ($19,728)
=============================================
Total
Treasury Stockholders'
Stock Equity
---------------------------
Balance at June 30, 1997 ......................................................... $ -- $333,639
Comprehensive income:
Net income ........................................................... 53,369
Cumulative translation adjustment .................................... (4,455)
--------
Comprehensive income ........................................... 48,914
--------
Shares of Class B Common Stock converted to Class A Common Stock ...........
Shares of Class A Common Stock issued upon the exercise of stock options.... 3,014
Shares of Class A Common Stock exchanged upon the exercise of
stock options and retired ............................................ (266)
Purchase of treasury stock, 100,000 shares @ cost .......................... (2,583) (2,583)
Net change in restricted stock units ....................................... 271
Common Stock dividends ..................................................... (8,974)
------------------------
Balance at June 30, 1998 ......................................................... (2,583) 374,015
Comprehensive income:
Net income ........................................................... 35,956
Cumulative translation adjustment .................................... (3,818)
--------
Comprehensive income ........................................... 32,138
--------
Shares of Class B Common Stock converted to Class A Common Stock ...........
Shares of Class A Common Stock issued upon the exercise of stock options.... 61
Purchase of treasury stock, 615,000 shares @ cost .......................... (9,415) (9,415)
Retirement of treasury stock ............................................... 11,998
Net change in restricted stock units ....................................... 288
Common Stock dividends ..................................................... (9,432)
------------------------
Balance at June 30, 1999 ......................................................... -- 387,655
Comprehensive income:
Net income ........................................................... 15,242
Cumulative translation adjustment .................................... (51)
--------
Comprehensive income ........................................... 15,191
--------
Shares of Class B Common Stock converted to Class A Common Stock ...........
Shares of Class A Common Stock issued upon the exercise
of stock options ..................................................... 514
Purchase of treasury stock, 100,000 shares @ cost .......................... (1,305) (1,305)
Retirement of treasury stock ............................................... 1,305
Net change in restricted stock units ....................................... 45
Spin off of Industrial, Oil and Gas Group .................................. (177,942)
Common Stock dividends ..................................................... (4,656)
------------------------
Balance at December 31, 1999 ..................................................... -- 219,502
Comprehensive income:
Net income ........................................................... 24,001
Cumulative translation adjustment .................................... (4,529)
--------
Comprehensive income ........................................... 19,472
--------
Shares of Class B Common Stock converted to Class A Common Stock ...........
Shares of Class A Common Stock issued upon the exercise of stock options.... 313
Purchase of treasury stock, 10,000 shares @ cost ........................... (105) (105)
Retirement of treasury stock ............................................... 105
Net change in restricted stock units ....................................... 467
Common Stock dividends ..................................................... (7,107)
------------------------
Balance at December 31, 2000 ..................................................... $ -- $232,542
========================
31
Watts Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
For the Six
---------For the Twelve Months Ended--------- Months Ended
December 31, June 30, June 30, December 31,
2000 1999 1999 1998 1999
-------- --------- -------- -------- --------
(unaudited)
OPERATING ACTIVITIES
Income from continuing operations ............................... $ 31,171 $ 30,697 $ 29,454 $ 28,123 $ 16,468
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation .............................................. 16,963 15,495 14,745 12,908 7,869
Amortization .............................................. 3,108 2,701 2,711 2,433 1,356
Deferred income taxes (benefit) ........................... 1,380 (2,983) (2,823) 884 154
Gain/Loss on disposal of property, plant and equipment .... 296 18 (19) (1,152) 23
Equity in undistributed earnings of affiliates ............ (120) 747 712 (192) (78)
Changes in operating assets and liabilities, net of
effects from business acquisitions and divestures:
Accounts receivable ................................. (5,544) (2,343) (876) (2,493) (5,883)
Inventories ......................................... 3,648 (13,589) (532) (8,959) (2,830)
Prepaid expenses and other assets ................... 5,529 (4,478) (1,050) 408 (2,456)
Accounts payable, accrued expenses and
other liabilities ................................. 1,323 15,935 5,964 6,275 14,386
-------- --------- -------- -------- --------
Net cash provided by operating activities .................... 57,754 42,200 48,286 38,235 29,009
-------- --------- -------- -------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment ...................... (14,238) (24,283) (21,532) (23,056) (10,293)
Proceeds from sale of property, plant and equipment ............. 587 2,291 2,337 7,253 --
Increase in other assets ........................................ (616) (617) (415) (578) (862)
Business acquisitions, net of cash acquired ..................... (9,982) (27,935) (28,422) (1,129) --
-------- --------- -------- -------- --------
Net cash used in investing activities ........................ (24,249) (50,544) (48,032) (17,510) (11,155)
-------- --------- -------- -------- --------
FINANCING ACTIVITIES
Proceeds from long-term borrowings .............................. 71,000 112,453 81,121 68,779 59,089
Payments of long-term debt ...................................... (92,430) (77,697) (47,138) (85,971) (49,831)
Proceeds from exercise of stock options ......................... 675 556 61 2,715 556
Dividends ....................................................... (7,107) (9,301) (9,358) (8,936) (4,656)
Purchase and retirement of common stock ......................... -- (6,849) (9,415) (2,583) (1,305)
-------- --------- -------- -------- --------
Net cash provided by (used in) financing activities .......... (27,862) 19,162 15,271 (25,996) 3,853
-------- --------- -------- -------- --------
Effect of exchange rate changes on cash and cash equivalents .......... (496) 1,437 2,620 (207) 302
Net cash used in discontinued operations .............................. (2,928) (13,852) (16,138) (2,412) (21,767)
-------- --------- -------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................... 2,219 (1,597) 2,007 (7,890) 242
Cash and cash equivalents at beginning of year .................. 13,016 14,613 10,767 18,657 12,774
-------- --------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR .............................. $ 15,235 $ 13,016 $ 12,774 $ 10,767 $ 13,016
======== ========= ======== ======== ========
NON CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of businesses
Fair value of assets acquired ............................... $ 10,826 $ 61,303 $ 61,963 $ 1,129 --
Cash paid ................................................... 9,982 27,935 28,422 1,129 --
-------- --------- -------- -------- --------
Liabilities assumed ......................................... 844 33,368 33,541 -- --
The accompanying notes are an integral part of these consolidated financial
statements.
32
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements
(1) Description of Business
Watts Industries, Inc. (the Company) designs, manufactures and sells an
extensive line of valves for the plumbing and heating and water quality
markets located predominately in North America, Europe, and Asia.
(2) Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority and wholly-owned subsidiaries. Upon consolidation, all
significant intercompany accounts and transactions are eliminated. The
financial statements of the Company reflect the industrial oil and gas
businesses as discontinued operations for periods prior to a spin-off
transaction that was completed on October 18, 1999 (see Note 3).
Change in Fiscal Year
Effective July 1, 1999, the Company changed its fiscal year end from June
30 to December 31. Accordingly, the audited financial statements include
the results for the twelve month period ended December 31, 2000, ("fiscal
2000") the six month period ended December 31, 1999 ("transition period"),
and the prior fiscal years ended June 30, 1999 ("fiscal 1999") and June
30, 1998 ("fiscal 1998"). In addition to the basic audited financial
statements and related notes, unaudited financial information for the
twelve-month period ended December 31, 1999 and the six month period ended
December 31, 1998 have been presented to enhance comparability.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of
three months or less at the date of original issuance.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets
of businesses acquired. This balance is amortized over 40 years using the
straight-line method. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired businesses. The amount of
goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
provided on a straight-line basis over the estimated useful lives of the
assets, which range from 10 to 40 years for buildings and improvements and
3 to 15 years for machinery and equipment.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
33
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)
Foreign Currency Translation
Balance sheet accounts of foreign subsidiaries are translated into United
States dollars at fiscal year end exchange rates. Operating accounts are
translated at weighted average exchange rates for each period. Net
translation gains or losses are adjusted directly to a separate component
of stockholders' equity. The Company does not provide for U.S. income
taxes on foreign currency translation adjustments since it does not
provide for such taxes on undistributed earnings of foreign subsidiaries.
Stock Based Compensation
As allowed under Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, the Company accounts for its
stock-based employee compensation plans in accordance with the provisions
of APB Opinion No. 25, Accounting for Stock Issued to Employees.
Net Income Per Common Share
Basic net income per common share is calculated by dividing net income by
the weighted average number of common shares outstanding. The calculation
of diluted earnings per share assumes the conversion of all dilutive
securities (see Note 13).
Income and number of shares used to compute net earnings per share from
continuing operations, basic and assuming full dilution, are reconciled
below:
Twelve Months Ended Six Months Ended
December 31, 2000 December 31, 1999
---------------------------------- ----------------------------------
(Amounts in thousands, except per share information)
Income
from Per Income from Per
Continuing Share Continuing Share
Operations Shares Amount Operations Shares Amount
---------- ------ ---------- ---------- ------ ----------
Basic EPS $ 31,171 26,409 $ 1.18 $ 16,468 26,453 $ 0.62
Dilutive
securities
principally
common
stock options 142 628
------ ------
Diluted EPS $ 31,171 26,551 $ 1.17 $ 16,468 27,081 $ 0.61
========== ====== ========== ========== ====== ==========
Twelve Months Ended Twelve Months Ended
June 30,1999 June 30,1998
---------------------------------- ----------------------------------
(Amounts in thousands, except per share information)
Income Income
from Per from Per
Continuing share Continuing share
Operations Shares amount Operations Shares amount
---------- ------ ---------- ---------- ------ ----------
Basic EPS $ 29,454 26,736 $ 1.10 $ 28,123 27,109 $ 1.04
Dilutive
securities
principally
common
stock options 63 314
------ ------
Diluted EPS $ 29,454 26,799 $ 1.10 $ 28,123 27,423 $ 1.03
========== ====== ========== ========== ====== ==========
Derivative Financial Instruments
The Company uses derivative instruments, principally swaps, forward
contracts and options to achieve its financing strategy and to hedge
foreign currency and commodity exposures. These contracts hedge
transactions and balances for periods consistent with their committed
exposures, and do not constitute investments independent of these
exposures. The Company does not hold or issue financial instruments for
trading purposes, nor is it a party to any leveraged contracts.
Realized and unrealized foreign exchange gains and losses on financial
instruments are recognized and offset foreign exchange gains and losses on
the underlying exposures. Any gain or loss from a financial instrument
that ceases to be an effective hedge is recognized in the statement of
operations. The interest rate differential paid or received on swap
agreements is recognized as an adjustment to interest expense.
Shipping and Handling
Shipping and handling costs included in selling, general and
administrative expense amounted to $19,492,000 for the year ended December
31, 2000, $9,053,000 for the six month period ended December 31, 1999, and
$17,943,000 and $14,961,000 for the fiscal years ended June 30, 1999 and
1998, respectively.
Revenue Recognition
Revenue from sale of products is recognized when goods are shipped and
title passes to the customer.
34
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)
Basis of Presentation
Certain amounts in fiscal years 1999.5, 1999 and 1998 have been
reclassified to permit comparison with the 2000 presentation.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
New Accounting Standards
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities." was
issued. The Company adopted SFAS No. 133, as amended by SFAS No. 137 and
SFAS No. 138, on January 1, 2001. The adoption of SFAS No. 133 has not had
a material impact on the Company's financial position or overall trends in
results of operations and has not resulted in significant changes to its
financial risk management practices. However, the adoption of SFAS No. 133
could result in more pronounced quarterly fluctuations in other income and
expense.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101. "Revenue Recognition." An amendment in
June 2000 delayed the effective date until the fourth quarter of 2000. The
adoption of SAB 101 did not have a material impact on the consolidated
financial statements.
In May 2000, the Financial Accounting Standards Board's Emerging Issues
Task Force (EITF) reached a consensus on Issue No. 00-14, "Accounting for
Certain Sales Incentives." This issue addresses the recognition,
measurement and income statement classification for various types of sales
incentives, including discounts, coupons, rebates and free products. In
November 2000, the EITF revised the transition date such that the Company
must adopt EITF 00-14 no later than the second quarter of 2001. The
Company will adopt the consensus in the second quarter of 2001 and it is
not expected to have a material impact on the Company's financial
statements
In July and September 2000, the EITF reached consensus on Issue No 00-10,
"Accounting for Shipping and Handling Fees and Costs." This issue
addresses the income statement classification for shipping and handling
fees and costs. The Company adopted the consensus in the fourth quarter of
2000. The adoption of EITF Issue No. 00-10 did not have a material impact
on the consolidated financial statements.
(3) Discontinued Operations
On December 18, 1998, the Company announced its intention to spin-off its
industrial, oil and gas businesses to its shareholders as an independent
publicly traded company. The spin-off was effected as a tax-free
distribution on October 18, 1999 ("Distribution Date"). Owners of Watts
common stock as of October 6, 1999 received one share of common stock of
CIRCOR International, Inc. ("CIRCOR"), the new company, for every two
shares of Watts Class A or Class B common stock held. Coincident with the
Distribution Date, the Company received $96.0 million in cash from CIRCOR
as repayment of inter-company loans and advances.
The historical operating results of CIRCOR are shown, net of tax, as
discontinued operations in the consolidated statements of operations. Net
assets of discontinued operations in the consolidated balance sheet
include those assets and liabilities attributable to the CIRCOR businesses
at June 30, 1999. Included in the historical operating results of the
discontinued operations is an allocation of the Company's interest expense
based on an allocation of the Company's debt to discontinued operations.
Income taxes have been allocated to discontinued operations based on their
pretax income and calculated on a separate company basis pursuant to the
requirements of Statement of Financial Accounting Standards No. 109.
In September 1996, the Company divested its Municiple Water Group of
businesses, which included Henry Pratt, James Jones Company and Edward
Barber and Company Ltd. Costs and expenses related to the Municipal Water
35
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)
Group, for fiscal 2000 and 1999 relate to legal and settlement costs
associated with the James Jones litigation (see Note 15).
Condensed operating statement data of the discontinued operations is
summarized below:
Twelve Months Six Months Twelve Months Twelve Months
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
2000 1999 1999 1998
------------- ------------ -------------- -------------
(in thousands)
Net sales $ -- $ 85,473 $321,711 $287,889
Costs and expenses:
Municipal Water Group 11,950 -- 5,000 --
CIRCOR -- 85,604 299,385 248,161
-------- -------- -------- --------
Total costs and expenses 11,950 85,604 304,385 248,161
-------- -------- -------- --------
Income (loss) before income taxes (11,950) (131) 17,326 39,728
Provision for income taxes (4,780) 1,095 10,824 14,482
-------- -------- -------- --------
Income (loss) from discontinued
operations, net of taxes $ (7,170) $ (1,226) $ 6,502 $ 25,246
======== ======== ======== ========
(4) Restructuring Activities
On December 2, 1999, the Company announced a restructuring of its
operations in Italy to consolidate the warehousing and manufacturing
operations of its existing Italian operation into the facilities of its
newly acquired Italian subsidiary, Cazzaniga S.p.A. This restructuring
program, which included the termination of 29 employees (primarily
manufacturing) was completed during 2000, however, actual cash payments
for severance related to terminated employees and lease costs related to
vacated facilities will continue for several quarters. Program spending
for employee severance and related benefits, lease termination costs and
other exit costs did not differ materially from the original estimates.
Details of the restructuring are as follows:
Initial Utilized Utilized
Provision during 1999 during 2000 Total Program
--------- ----------- ----------- -------------
(in thousands)
Severance and related benefits $ 1,299 $ 192 $ 678 $ 1,150
Lease termination costs 134 -- 56 134
Other exit costs 27 -- 27 27
------- ------ ------ -------
Total $ 1,460 $ 192 $ 761 $ 1,311
======= ====== ====== =======
(5) Business Acquisitions
On August 30, 2000, a wholly owned subsidiary of the Company acquired
certain assets of Chiles Power Supply and Bask LLC, located in
Springfield, Missouri for approximately $3 million. The acquired business,
now operating under the name Watts Heatway, manufactures and distributes a
complete line of hydronic and electric radiant heating and snow melting
systems. Heatway's annualized sales prior to acquisition were
approximately $11 million.
On May 12, 2000, a wholly owned subsidiary of the Company acquired
McCraney, Inc., located in Santa Ana, California for approximately $7
million. McCraney, doing business as Spacemaker, manufactures a complete
line of
36
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)
seismic restraint straps for water heaters as well as water heater stands
and enclosures. Spacemaker's last twelve months sales were approximately
$5 million.
During 1999, the Company acquired Cazzaniga S.p.A. located in Biassono,
Italy for approximately $28 million. Cazzaniga is an integrated
manufacturer of plumbing and heating products with annual sales of
approximately $35 million.
During fiscal 1999 and 1998, the Company also acquired several valve
companies which were included as part of the industrial, oil and gas
businesses that were spun-off into a separate publicly traded company,
CIRCOR. The aggregate purchase price of these acquisitions was
approximately $118 million.
All acquisitions have been accounted for under the purchase method of
accounting. Their results of operations since acquisition, which have been
included in the Company's consolidated financial statements, have not
materially affected the consolidated financial position, results of
operations or liquidity of the Company.
(6) Allowance for Doubtful Trade Accounts Receivable
Activity in the allowance for doubtful trade accounts receivable is a
follows:
Twelve Months Six Months Twelve Months Twelve Months
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
2000 1999 1999 1998
------------- ------------ ------------- -------------
(in thousands)
Balance at beginning of year $ 6,730 $ 7,747 $ 6,821 $ 6,236
Additions, charged to operations 1,211 87 1,728 2,201
Other additions, primarily related
to acquisitions 25 98 747 --
Deductions, losses charged
to reserves (1,352) (1,202) (1,549) (1,616)
--------- --------- --------- -------
Balance at end of year $ 6,614 $ 6,730 $ 7,747 $ 6,821
========= ========= ========= =======
(7) Inventories
Inventories consist of the following:
December 31, December 31, June 30,
2000 1999 1999
------------- ------------ -------------
(in thousands)
Raw materials $ 35,483 $ 37,786 $ 35,243
Work in process 16,390 13,724 13,720
Finished goods 57,078 61,311 61,589
--------- --------- ---------
Balance at end of year $ 108,951 $ 112,821 $ 110,552
========= ========= =========
37
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)
(8) Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31, December 31, June 30,
2000 1999 1999
------------ ------------ ---------
(in thousands)
Land $ 8,297 $ 7,937 $ 7,964
Buildings and improvements 55,779 56,478 53,867
Machinery and equipment 131,642 154,490 148,952
Construction in progress 6,774 7,787 7,932
--------- --------- ---------
202,492 226,692 218,715
Accumulated Depreciation (76,682) (96,461) (89,552)
--------- --------- ---------
$ 125,810 $ 130,231 $ 129,163
========= ========= =========
(9) Income Taxes
The significant components of the Company's deferred income tax
liabilities and assets are as follows:
December 31, December 31, June 30,
2000 1999 1999
------------ ------------ --------
(in thousands)
Deferred income tax liabilities:
Excess tax over book depreciation $ 12,216 $ 11,676 $ 11,386
Inventory -- 772 1,027
Other 3,247 1,182 657
-------- -------- --------
Total deferred income tax liabilities 15,463 13,630 13,070
-------- -------- --------
Deferred income tax assets:
Accrued expenses 11,433 11,868 13,037
Net operating loss carry forward 4,102 9,262 10,918
Other 5,705 4,064 3,441
-------- -------- --------
Total deferred income tax assets 21,240 25,194 27,396
Valuation allowance (754) (5,420) (6,125)
-------- -------- --------
Net deferred income tax assets 20,486 19,774 21,271
-------- -------- --------
Net deferred income tax asset $ 5,023 $ 6,144 $ 8,201
======== ======== ========
The decrease in the valuation allowance during Fiscal 2000 is due to
realization of net operating loss carryforward benefits resulting from tax
planning strategies undertaken by the Company.
38
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)
The provision for income taxes from continuing operations is based on the
following pre-tax income:
Twelve Months Six Months Twelve Months Twelve Months
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
2000 1999 1999 1998
------------- ------------ ------------- -------------
(in thousands)
Domestic $ 35,565 $ 18,424 $ 33,787 $ 34,609
Foreign 13,647 6,987 11,136 6,744
-------- -------- -------- --------
$ 49,212 $ 25,411 $ 44,923 $ 41,353
======== ======== ======== ========
The provision for income taxes from continuing operations consists of the
following:
Twelve Months Six Months Twelve Months Twelve Months
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
2000 1999 1999 1998
------------- ------------ ------------- -------------
(in thousands)
Current tax expense $ 10,294 $ 7,177 $ 12,698 $ 10,551
Federal 4,544 1,721 2,820 2,164
Foreign 1,845 214 385 1,416
-------- -------- -------- --------
State 16,683 9,112 15,903 14,131
-------- -------- -------- --------
Deferred tax expense (benefit) 1,554 (553) (577) (129)
Federal (414) 450 212 (750)
Foreign 218 (66) (69) (22)
-------- -------- -------- --------
State 1,358 (169) (434) (901)
-------- -------- -------- --------
$ 18,041 $ 8,943 $ 15,469 $ 13,230
======== ======== ======== ========
Actual income taxes reported from continuing operations are different than
would have been computed by applying the federal statutory tax rate to
income from continuing operations before income taxes. The reasons for
this difference are as follows:
Twelve Months Six Months Twelve Months Twelve Months
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
2000 1999 1999 1998
------------- ------------ ------------- -------------
(in thousands)
Computed expected federal
income expense (benefit) $ 17,224 $ 8,894 $ 15,723 $ 14,474
State income taxes, net of federal
tax benefit 1,341 96 366 1,614
Goodwill Amortization 714 342 1,058 714
Foreign tax rate and
regulation differential (646) (205) (664) (1,830)
Other, net (592) (184) (1,014) (1,742)
-------- -------- -------- --------
$ 18,041 $ 8,943 $ 15,469 $ 13,230
======== ======== ======== ========
39
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)
At December 31, 2000, the Company has foreign net operating loss
carryforwards of $10.8 million for income tax purposes. $10.6 million of
the foreign net operating losses can be carried forward indefinitely, with
the remainder expiring in fiscal years 2001 through 2003. Undistributed
earnings of the Company's foreign subsidiaries amounted to approximately
$57 million at December 31, 2000, and $43 million at December 31, 1999,
$45 million at June 30, 1999 and $33 million at June 30, 1998,
respectively. Those earnings are considered to be indefinitely reinvested
and, accordingly, no provision for U.S. federal and state income taxes has
been recorded thereon. Upon distribution of those earnings, in the form of
dividends or otherwise, the Company will be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and withholding
taxes payable to the various foreign countries. Determination of the
amount of U.S. 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 $2.9 million would be payable upon remittance of all
previously unremitted earnings at December 31, 2000.
The Company made income tax payments of $18.4 million for the fiscal year
ended December 31, 2000, $11.2 million for the six month period ended
December 31, 1999 and $24.8 million for the fiscal year ended June 30,
1999 and $17.2 million for the fiscal year ended June 30, 1998.
(10) Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
December 31, December 31, June 30,
2000 1999 1999
------------ ------------ --------
(in thousands)
Commissions and sales incentives payable $ 11,261 $ 9,734 $ 11,401
Accrued insurance costs 11,434 11,217 10,801
Net Pension Liability 3,668 3,870 4,467
Other 18,549 20,415 17,835
Income Taxes Payable 5,217 (390) (661)
Accrued legal/settlement 8,959 3,783 5,000
-------- -------- --------
$ 59,088 $ 48,629 $ 48,843
======== ======== ========
40
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)
(11) Financing Arrangements
Long-term debt consists of the following:
December 31, December 31, June 30,
2000 1999 1999
------------ ------------ --------
(in thousands)
8-3/8%, debentures due December 2003 $ 75,000 $ 75,000 $ 75,000
Revolving line of credit facility, accruing interest
at a variable rate(7.18%, 5.37% and 6.79% at
December 31, 2000, December 31, 1999
and June 30,1999, respectively)
of either Eurodollar rate plus .185%,
Prime Rate or a competitive money market rate to
be specified by the Lender, and expiring March 2003 5,000 22,000 104,000
23.6 million Euro line of Credit, accruing interest at a
variable rate of EURIBOR plus .75% (4.3% at
December 31, 2000), and expiring September 2004 17,837 22,134 20,223
Industrial Revenue Bonds, maturing September 2002
accruing interest at a variable rate based on weekly
tax-exempt interest rates (5.20%, 4.07%, and 3.96%
at December 31,2000, December 31, 1999
and June 30, 1999, respectively) 5,000 5,000 5,000
Other (at interest rates ranging from 4.4% to 11.3%) 3,781 5,540 13,740
Allocation to discontinued operations -- -- (96,997)
--------- --------- ---------
106,618 129,674 120,966
Less: current portion 1,241 5,683 2,050
--------- --------- ---------
$ 105,377 $ 123,991 $ 118,916
========= ========= =========
Coincident to the Distribution Date for the spin-off transaction, the
Company received $96.0 million in cash from CIRCOR as repayment of
inter-company loans and advances from the Company. This amount was based
on a formula that allocated borrowings between the Company and CIRCOR
based on their relative levels of business acquisition activity. Based on
this methodology, borrowings amounting to approximately $97.0 million were
allocated to discontinued operations at June 30, 1999.
Principal payments during each of the next five fiscal years are due as
follows (in thousands): 2001 - $1,241; 2002 - $9,341; 2003 - $80,017; and
2004 - $14,662 and 2205 - $17. Interest paid for all periods presented in
the accompanying consolidated financial statements approximates interest
expense.
Certain of the Company's loan agreements contain covenants that require,
among other items, the maintenance of certain financial ratios, and limit
the Company's ability to enter into secured borrowing arrangements.
(12) Common Stock
Since fiscal 1997, the Company's Board of Directors has authorized the
repurchase of 4,380,200 shares of the Company's common stock in the open
market and through private purchases. Since the inception of this
repurchase program, 3,605,700 shares of the Company's common stock have
been repurchased and retired.
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 5,925,664 shares of Class A Common
Stock for issuance under its stock-based compensation plans and 9,235,224
shares for conversion of Class B Stock to Class A Common Stock.
41
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)
(13) Stock-Based Compensation
The Company has several stock option plans under which key employees and
outside directors have been granted incentive (ISOs) and nonqualified
(NSOs) options to purchase the Company's Class A common stock. Generally,
options become exercisable over a five-year period at the rate of 20% per
year and expire ten years after the date of grant. ISOs and NSOs granted
under the plans have exercise prices of not less than 100% and 50% of the
fair market value of the common stock on the date of grant, respectively.
At December 31, 2000; 3,212,019 shares of Class A common stock were
authorized for future grants of options under the Company's stock option
plans.
The following is a summary of stock option activity and related
information:
Twelve Months Ended Six Months Ended Twelve Months Ended Twelve Months Ended
December 31, 2000 December 31, 1999 June 30, 1999 June 30, 1998
------------------- ------------------- ------------------- ----------------------
Weighted Weighted Weighted Weighted
average average average average
(Options in thousands) exercise exercise exercise exercise
Options price Options price Options price(b) Option price(b)
------- -------- ------- -------- ------- -------- ------ --------
Outstanding at beginning of year 1,960 $13.25 1,481 $13.38 1,362 $12.93 1,348 $13.58
Granted 208 11.68 178 12.34 201 11.87 284 16.24
Canceled (415) 13.79 (9) 11.17 (78) 13.82 (117) 13.39
Exercised (39) 8.55 (30) 13.50 (4) 10.59 (153)(c) 12.56
Spin-off related conversion
to CIRCOR options(a) -- -- (358) 11.17 -- -- -- --
Spin-off related modification
of Watts options(b) -- -- 698 -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Outstanding at end of year 1,714 $13.03 1,960 $13.25 1,481 $13.38 1,362 $12.93
====== ====== ====== ====== ====== ====== ====== ======
Exercisable at end of year 1,103 $13.31 1,244 $13.36 808 $13.26 619 $13.18
====== ====== ====== ====== ====== ====== ====== ======
(a) Effective on the date of the CIRCOR spin-off, Watts stock
options held by CIRCOR employees were terminated and replaced
by new CIRCOR stock options.
(b) Immediately following the spin-off, the number of options were
increased and exercise prices were decreased (the
"modification") to preserve the economic value of those
options that existed just prior to the spin-off transaction
for holders of Watts stock options.
(c) Includes 13,100 options in 1998 exercised in exchange for
10,633 shares of Class A common shares which were contributed
to Treasury and subsequently retired.
The following table summarizes information about options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------------------- ---------------------------
Weighted
average Weighted Weighted
(Options in thousands) remaining average average
Number contractual exercise Number exercise
Range of Exercise Prices outstanding life (years) price exercisable price
------------------------ ----------- ------------ -------- ----------- --------
$6.90 - $7.36 5 0.3 $ 7.35 5 $ 7.35
$9.20 - $10.59 265 6.0 10.58 220 10.58
$10.72 - $12.44 774 7.1 11.83 289 11.43
$14.29 - $16.40 670 4.4 15.43 589 15.30
----- -----
1,714 4.4 13.03 1,103 13.31
===== =====
42
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)
The Company has a Management Stock Purchase Plan that allows for the
granting of Restricted Stock Units (RSUs) to key employees to purchase up
to 1,000,000 shares of Class A common stock at 67% of the fair market
value on the date of grant. RSUs vest annually over a three-year period
from the date of grant. The difference between the RSU price and fair
market value at the date of award is amortized to compensation expense
ratably over the vesting period. At December 31, 2000, 244,000 RSUs were
outstanding. Dividends declared for RSUs that remain unpaid at December
31, 2000 total $78,000.
Pro forma information regarding net income and net income per share is
required by SFAS No. 123 for awards granted after June 30, 1995 as if the
Company had accounted for its stock-based awards to employees under the
fair value method of SFAS 123. The weighted average grant date fair value
of options granted are $2.02 at December 31, 2000 and $3.04, $2.47, $3.50
at December 31, 1999 and June 30, 1999 and 1998, respectively. The fair
value of the Company's stock-based awards to employees was estimated using
a Black-Scholes option pricing model and the following assumptions:
Twelve months Six months Twelve Months Twelve Months
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
2000 1999 1999 1998
------------- ------------ ------------- -------------
Expected life (years) 5.0 5.0 5.0 5.0
Expected stock price volatility 15.0% 15.0% 15.0% 15.0%
Expected dividend yield 2.3% 1.4% 1.9% 1.3%
Risk-free interest rate 4.93% 6.77% 5.92% 5.54%
The Company's pro forma information follows:
Twelve months Six months Twelve Months Twelve Months
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
2000 1999 1999 1998
------------- ------------ ------------- -------------
(in thousands, except per share information)
Net income - as reported $24,001 $15,242 $35,956 $53,369
Net income - pro forma 23,313 14,835 34,863 52,443
Basic EPS - as reported 0.91 0.57 1.34 1.97
Basic EPS - pro forma 0.88 0.56 1.30 1.93
Diluted EPS - as reported 0.90 0.56 1.34 1.95
Diluted EPS - pro forma 0.88 0.55 1.30 1.91
(14) Employee Benefit Plans
The Company sponsors defined benefit pension plans covering substantially
all of its domestic employees. Benefits are based primarily on years of
service and employees' compensation. The funding policy of the Company for
these plans is to contribute annually the maximum amount that can be
deducted for federal income tax purposes. Additionally, substantially all
of the Company's domestic employees are eligible to participate in a
401(k) savings plan. Under this plan, the Company matches a specified
percentage of employee contributions, subject to certain limitations.
43
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)
The components of benefit expense are as follows:
Twelve Months Six Months Twelve Months Twelve Months
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
2000 1999 1999 1998
------------- ------------ ------------- -------------
Components of net benefit expense (in thousands)
Service cost - benefits earned $ 1,314 $ 631 $ 1,485 $ 953
Interest costs on benefits obligation 2,371 1,131 2,220 2,081
Estimated return on assets (2,931) (1,358) (2,686) (1,970)
------- ------- ------- -------
754 404 1,019 1,064
Net amortization /deferral (271) 78 215 222
------- ------- ------- -------
Total benefit expense $ 483 $ 482 $ 1,234 $ 1,286
======= ======= ======= =======
The funded status of the defined benefit plan and amounts recognized in
the balance sheet follow:
December 31, December 31, June 30,
2000 1999 1999
------------ ------------ --------
Change in projected benefit obligation (in thousands)
Balance at beginning of period $ 30,088 $ 33,520 $ 31,786
Service cost 1,314 631 1,485
Interest cost 2,371 1,131 2,220
Actuarial (gain)/loss (1,068) (4,288) (903)
Amendments/curtailments 181 -- --
Benefits paid (1,083) (906) (1,068)
-------- -------- --------
Balance at end of period 31,803 30,088 33,520
======== ======== ========
Change in fair value of plan assets
Balance at beginning of period 33,228 29,787 29,446
Actual return on assets 1,376 4,343 933
Employer contributions 422 4 476
Benefits paid (1,083) (906) (1,068)
-------- -------- --------
Fair value of plan assets at end of period 33,943 33,228 29,787
======== ======== ========
Plan assets in excess of (less than) benefit
obligation 2,141 3,140 (3,733)
Unrecognized transition obligation (911) (2,384) (1,322)
Unrecognized prior service costs 1,192 2,340 1,388
Unrecognized net actuarial gain/(loss) (5,895) (9,429) 1,604
-------- -------- --------
Net accrued benefit costs $ (3,473) $ (6,333) $ (2,063)
======== ======== ========
Accrued benefit liability (443) (18) (446)
Intangible asset 443 18 446
The weighted average assumptions used in determining the obligations of
pension benefit plans are shown below:
December 31, December 31, June 30, June 30,
2000 1999 1999 1998
------------ ------------ -------- --------
Discount rate 8.00% 7.75% 7.00% 7.00%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
44
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)
Subsequent to the spin-off of CIRCOR which took place on October 18, 1999,
CIRCOR became liable for the payment of all pension plan benefits earned
by CIRCOR employees prior to and following the spin-off who retire after
the spin-off. The Company's pension plan transferred assets to the CIRCOR
pension plan and the amount of the assets was calculated based on the
relative percentage of the Projected Benefit Obligation. Such amount was
adjusted to comply with the asset allocation methodology set forth in
section 4044 of the Employee Retirement Income Security Act of 1974, as
amended.
(15) Contingencies and Environmental Remediation
Contingencies
In April 1998, the Company became aware of a complaint that was filed
under seal in the State of California alleging violations of the
California False Claims Act. The complaint alleges that a former
subsidiary of the Company (James Jones Company) sold products utilized in
municipal water systems that failed to meet contractually specified
standards and falsely certified that such standards had been met. The
complaint further alleges that the municipal entities have suffered tens
of millions of dollars in damages as a result of defective products and
seeks treble damages, reimbursement of legal costs and penalties.
During the quarter ended December 31, 2000, the Company made an offer to
settle all of the claims of the Los Angeles Department of Water and Power
in the James Jones case (Los Angeles Department of Water and Power, ex
rel. Nora Amenta v. James Jones Company, et al). The Los Angeles
Department of Water and Power has indicated that it views this offer
favorably and that it intends to seek its approval. On January 19, 2001
the California False Claims Act claims filed by the City of Pomona were
dismissed. The Company expects the City of Pomona to file for appellate
review of this order, and the Company is currently unable to predict the
outcome of any appeal. On the present record, the vast majority of the
other cities named in this lawsuit are subject to a legal challenge
similar to that which resulted in the dismissal of Pomona's False Claims
Act case. As a result of these developments and management's current
assessment of the case, the Company recorded a charge of $7,170,000 after
tax in the quarter ended December 31, 2000 which represents the Company's
current estimate of the cost to bring the entire case to resolution. This
charge is reported as loss from discontinued operations. While this charge
represents the after tax impact of the Company's current estimate based on
all available information, litigation is inherently uncertain and the
actual liability to the Company to fully resolve the litigation could be
materially higher than this estimate.
Environmental Remediation
The Company has been named a potentially responsible party with respect to
a limited number of identified contaminated sites. The level of
contamination varies significantly from site to site as do the related
levels of remediation efforts. Environmental liabilities are recorded
based on the most probable cost, if known, or on the estimated minimum
cost of remediation. The Company's accrued estimated environmental
liabilities are based on assumptions, which are subject to a number of
factors and uncertainties. Circumstances which can affect the reliability
and precision of these estimates include identification of additional
sites, environmental regulations, level of cleanup required, technologies
available, number and financial condition of other contributors to
remediation and the time period over which remediation may occur. The
Company recognizes changes in estimates as new remediation requirements
are defined or as new information becomes available. The Company estimates
that its accrued environmental remediation liabilities will likely be paid
over the next five to ten years.
45
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)
(16) Financial Instruments
Fair Value
The carrying amounts of cash and cash equivalents, trade receivables and
trade payables approximate fair value because of the short maturity of
these financial instruments.
The fair value of the Company's 8-3/8% notes, due December 2003, is based
on quoted market prices. The fair value of the Company's variable rate
debt approximates its carrying value. The carrying amount and the
estimated fair market value of the Company's long-term debt, including the
current portion, are as follows:
December 31, December 31, June 30,
2000 1999 1999
------------ ------------ ---------
(in thousands)
Carrying amount $ 106,618 $ 129,674 $ 217,963
Estimated fair value $ 109,768 $ 131,452 $ 222,441
Derivative Instruments
The Company uses foreign currency forward exchange contracts to reduce the
impact of currency fluctuations on certain anticipated intercompany
purchase transactions that are expected to occur within the fiscal year
and certain other foreign currency transactions. Related gains and losses
are recognized when the contracts expire, which is generally in the same
period as the underlying foreign currency denominated transaction. These
contracts do not subject the Company to significant market risk from
exchange movement because they offset gains and losses on the related
foreign currency denominated transactions. At June 30, 1999, the Company
had forward contracts to buy foreign currencies with a notional value $9.0
million and a fair market value (loss) of ($0.6) million. These contracts
were transferred to CIRCOR as part of the spin-off transaction. At
December 31, 2000 and 1999, the Company had no outstanding forward
contracts to buy foreign currencies.
The Company uses commodity futures contracts to fix the price on a certain
portion of certain raw materials used in the manufacturing process. These
contracts highly correlate to the actual purchases of the commodity and
the contract values are reflected in the cost of the commodity as it is
actually purchased. At June 30, 1999, the Company had outstanding
contracts with a notional value of $3.5 million and a fair value of $0.2
million. In December 1999, these contacts were sold and the Company
realized a gain of approximately $0.5 million. This gain was deferred at
December 31, 1999 and was off-set against the costs of January and
February 2000 raw material purchases, hedged in the original transaction.
There were no commodity contracts outstanding at December 31, 2000 and
1999.
The Company also enters into derivative contracts that convert specific
variable rate borrowings into fixed rate debt instruments. At December 31,
2000, the Company had an outstanding interest rate swap that converted 20
million Euro of the borrowings under variable rate EURO Line of Credit to
a fixed rate borrowings at 4.3%. This swap agreement expires in September
2002 and has a fair value of $ 0.2 million at December 31, 2000.
46
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)
(17) Segment Information
The following table presents certain operating segment information:
North Corporate/
America Europe Asia Other Consolidated
-------- -------- -------- ---------- ------------
Twelve Months Ended (in thousands)
December 31, 2000
Net Sales $400,384 $103,085 $ 12,631 $ -- $516,100
Operating income 55,661 13,225 882 (9,781) 59,987
Identifiable assets 332,621 125,213 24,191 -- 482,025
Capital expenditures 11,466 2,558 214 -- 14,238
Depreciation and amortization 14,229 5,185 657 -- 20,071
Six Months Ended December 31, 1999
Net Sales $192,975 $ 58,934 $ 9,110 $ -- $261,019
Operating income 27,793 7,252 731 (6,218) 29,558
Identifiable assets 327,431 136,246 23,401 -- 487,078
Capital expenditures 8,764 1,396 133 -- 10,293
Depreciation and amortization 6,373 2,537 315 -- 9,225
Twelve Months Ended June 30, 1999
Net Sales $372,220 $ 92,631 $ 13,018 $ -- $477,869
Operating income 54,094 11,228 1,608 (15,092) 51,838
Identifiable assets 481,648 133,720 22,374 -- 637,742
Capital expenditures 17,987 3,471 74 -- 21,532
Depreciation and amortization 12,851 3,921 684 -- 17,456
Twelve Months Ended June 30, 1998
Net Sales $348,004 $ 82,837 $ 13,894 $ -- $444,735
Operating income 51,456 8,258 1,984 (14,627) 47,071
Identifiable assets 441,714 87,463 23,719 -- 552,896
Capital expenditures 19,839 2,621 596 -- 23,056
Depreciation and amortization 11,491 3,182 668 -- 15,341
Each operating segment is individually managed and has separate financial
results that are reviewed by the Company's chief operating decision-maker.
All intercompany transactions have been eliminated, and intersegment
revenues are not significant.
47
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)
(18) Quarterly Financial Information (unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(in thousands, except per share information)
Twelve Months ended December 31, 2000:
Net sales $131,651 $131,184 $125,656 $127,609
Gross profit 47,374 47,229 45,856 44,845
Net income from continuing operations 7,940 8,027 7,670 7,534
Net income 7,940 8,027 7,670 364
Per common share:
Basic
Income from continuing operations .30 .30 .29 .28
Net income .30 .30 .29 .01
Diluted
Income from continuing operations .30 .30 .29 .28
Net income .30 .30 .29 .01
Dividends per common share .0875 .0600 .0600 .0600
Six months ended December 31, 1999:
Net sales $131,375 $129,644
Gross profit 47,940 47,226
Net income from continuing operations 9,042 7,426
Net income 8,297 6,945
Per common share:
Basic
Income from continuing operations .34 .28
Net income .31 .26
Diluted
Income from continuing operations .34 .28
Net income .31 .26
Dividends per common share .0875 .0875
Twelve Months ended June 30, 1999:
Net sales $114,007 $115,225 $117,855 $130,782
Gross profit 41,824 41,748 42,771 48,781
Net income from continuing operations 7,893 7,332 6,905 7,324
Net income 12,388 11,256 6,905 5,407
Per common share:
Basic
Income from continuing operations .29 .27 .26 .27
Net income .46 .42 .26 .20
Diluted
Income from continuing operations .29 .27 .26 .27
Net income .46 .42 .26 .20
Dividends per common share .0875 .0875 .0875 .0875
Twelve Months ended June 30, 1998:
Net sales $112,495 $112,498 $108,802 $110,940
Gross profit 41,819 41,150 39,664 39,950
Net income from continuing operations 7,326 7,613 7,259 5,925
Net income 13,620 13,609 14,041 12,099
Per common share:
Basic
Income from continuing operations .27 .28 .27 .22
Net income .50 .50 .52 .45
Diluted
Income from continuing operations .27 .28 .26 .22
Net income .50 .50 .51 .44
Dividends per common share .0775 .0775 .0875 .0875
48
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)
(19) Subsequent Events
On January 5, 2001, the Company acquired Dumser Metallbau GmbH & Co. KG
located in Landau, Germany for approximately $22 million. The main
products of Dumser are brass, steel, and stainless steel manifolds used as
the prime distribution device in hydronic heating systems. Dumser had
approximately $24 million (U.S.) in total sales for the twelve months
ended December 31, 2000. Dumser has a 51% controlling share of Stern
Rubunetti, a $4 million Italian manufacturing company producing brass
components located in Brescia, Italy. This acquisition is accounted for
under the purchase method of accounting.
49
Exhibit Index
Exhibit Description
- ------- -----------
10.23 Amendment No. 2 to Watts Industries, Inc. Management Stock Purchase
Plan
21 Direct and Indirect Subsidiaries of Watts Industries, Inc.
23 Consent of KPMG LLP.