SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
___
/ X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996 or
___
/ / Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number 0-14787 -
WATTS INDUSTRIES, INC. -
(Exact name of registrant as specified in its charter)
DELAWARE 04-2916536 -
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
815 Chestnut Street, North Andover, MA 01845 -
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 688-1811
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No_____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at April 30, 1996
- ------------------------------ -----------------------------
Class A Common, $.10 par value 18,315,738
Class B Common, $.10 par value 11,365,627
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information Page #
Item 1. Condensed Consolidated Balance Sheets 3
at March 31, 1996 and June 30, 1995.
Condensed Consolidated Statements of 4
Operations for the Three Months Ended
March 31, 1996 and March 31, 1995.
Condensed Consolidated Statements of 5
Operations for the Nine Months Ended
March 31, 1996 and March 31, 1995.
Condensed Consolidated Statements of 6
Cash Flows for the Nine Months Ended
March 31, 1996 and March 31, 1995.
Notes to Condensed Consolidated 7,8,
Financial Statements. 9,10
Item 2. Management's Discussion and Analysis 11,12,
of Financial Condition and Results of 13,14,
Operations. 15,16
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K. 17
Signatures 18
Exhibit Index 19
Exhibit 11 - Computation of Per Share 20
Earnings.
Exhibit 27 - Financial Data Schedule 21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share information)
(Unaudited)
Mar. 31, June 30,
1996 1995
_________ _________
CURRENT ASSETS
Cash and cash equivalents..........................$ 0 $ 4,257
Short-term investments............................. 0 4,483
Trade accounts receivable, less allowance
for doubtful accounts of $9,244 and $5,416....... 93,355 94,646
Inventories:
Finished goods............................... 67,275 78,850
Work in process.............................. 40,906 30,619
Raw materials................................ 70,735 67,602
_________ _________
178,916 177,071
Prepaid expenses and other current assets.......... 15,813 12,545
Deferred tax benefit............................... 28,767 12,636
Net Assets held for sale - current .................. 44,794 39,454
_________ _________
Total Current Assets.......................... 361,645 345,092
OTHER ASSETS
Intangible assets, net............................. 6,723 7,743
Goodwill........................................... 80,476 116,282
Other.............................................. 6,052 9,116
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost.............. 250,872 247,870
Less allowance for depreciation................... (110,904) (102,096)
NET ASSETS HELD FOR SALE - LESS CURRENT ................ 49,771 51,974
_________ _________
TOTAL ASSETS $ 644,635 $ 675,981
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable...................................$ 45,645 $ 34,789
Accrued expenses................................... 73,278 46,120
Accrued compensation and related items............. 7,764 7,280
Income taxes....................................... 4,779 3,129
Current portion of long-term debt.................. 8,751 11,751
_________ _________
Total Current Liabilities..................... 140,217 103,069
LONG-TERM DEBT, less current portion.................. 125,954 132,489
DEFERRED INCOME TAXES................................. 15,985 16,372
OTHER LIABILITIES..................................... 10,691 11,304
MINORITY INTEREST..................................... 6,788 7,110
STOCKHOLDERS' EQUITY
Class A Common Stock, $.10 par value;
80,000,000 shares authorized, 18,315,738
shares issued and outstanding at March 31.......... 1,831 1,822
Class B Common Stock, $.10 par value;
25,000,000 shares authorized, 11,365,627
shares issued and outstanding at March 31.......... 1,137 1,140
Additional paid-in capital......................... 96,262 95,496
Retained earnings.................................. 245,349 307,493
Equity adjustment from translation................. 421 (314)
_________ _________
Total Stockholders' Equity...................... 345,000 405,637
_________ _________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............$ 644,635 $ 675,981
========= =========
See accompanying notes to condensed consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share information)
(Unaudited)
Three Months Ended
________ _____________
Mar.31, Mar.31,
1996 1995
_________ _________
Net sales .........................................$ 159,823 $ 152,973
Cost of goods sold ................................ 114,882 97,101
_________ _________
GROSS PROFIT ................................. 44,941 55,872
Selling, general & administrative expenses ........ 51,053 34,605
Restructuring charges & Other ..................... 19,891 0
Impairment of Long-lived Assets ................... 63,065 0
_________ _________
OPERATING INCOME (LOSS) ...................... (89,068) 21,267
Other (income) expense:
Interest income .............................. (163) (357)
Interest expense ............................. 2,521 2,574
Other - net .................................. 159 (364)
_________ _________
2,517 1,853
_________ _________
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ............... (91,585) 19,414
Income tax provision (benefit) .................... (11,282) 7,663
_________ _________
INCOME (LOSS) FROM CONTINUING OPERATIONS .....$ (80,303) $ 11,751
INCOME FROM DISCONTINUED OPERATIONS .......... 1,030 980
_________ _________
NET INCOME (LOSS) ............................$ (79,273) $ 12,731
========= =========
Primary and fully-diluted earnings (loss) per share:
CONTINUING OPERATIONS .......................... ($2.70) $0.40
DISCONTINUED OPERATIONS ........................ $0.03 $0.03
_________ _________
NET INCOME (LOSS) .............................. ($2.67) $0.43
========= =========
Cash dividends per share........................... $ .0700 $ .0625
========= =========
See accompanying notes to condensed consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share information)
(Unaudited)
Nine Months Ended
________ _____________
Mar.31, Mar.31,
1996 1995
_________ _________
Net sales .........................................$ 470,545 $ 426,977
Cost of goods sold ................................ 312,770 268,360
_________ _________
GROSS PROFIT ................................. 157,775 158,617
Selling, general & administrative expenses ........ 123,104 98,160
Restructuring charges & Other ..................... 19,891 0
Impairment of Long-lived Assets ................... 63,065 0
_________ _________
OPERATING INCOME (LOSS) ...................... (48,285) 60,457
Other (income) expense:
Interest income .............................. (540) (1,460)
Interest expense ............................. 7,496 6,838
Other - net .................................. 981 587
_________ _________
7,937 5,965
_________ _________
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ............... (56,222) 54,492
Income tax provision (benefit) .................... 2,366 21,593
_________ _________
INCOME (LOSS) FROM CONTINUING OPERATIONS .....$ (58,588) $ 32,899
INCOME FROM DISCONTINUED OPERATIONS .......... 2,226 2,387
_________ _________
NET INCOME (LOSS) ............................$ (56,362) $ 35,286
========= =========
Primary and fully-diluted earnings (loss) per share:
CONTINUING OPERATIONS .......................... ($1.97) $1.11
DISCONTINUED OPERATIONS ........................ $0.08 $0.08
_________ _________
NET INCOME (LOSS) .............................. ($1.89) $1.19
========= =========
Cash dividends per share........................... $ .1950 $ .1725
========= =========
See accompanying notes to condensed consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share information)
(Unaudited)
Nine Months Ended
________ _____________
Mar. 31, Mar. 31,
1996 1995
_________ _________
OPERATING ACTIVITIES
Net earnings (loss) $ (56,362) $ 35,286
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Restructuring 12,611
Impairment of long-lived assets 56,135
Depreciation and amortization 17,524 15,027
Provision for deferred income taxes (1,649) 918
Gain on disposal of fixed assets (15) (422)
Changes in operating assets and liabilities, net of effects
from business acquisitions and discontinued operations:
Accounts receivable (964) (20,958)
Inventories (14,470) 671
Prepaid expenses and other assets (804) (5,059)
Accounts payable and accrued expenses 8,392 6,450
Accrued restructuring charge 20,886 0
Change in Discontinued Operations (2,298) (730)
_________ _________
NET CASH PROVIDED BY OPERATING ACTIVITIES 38,986 31,183
INVESTING ACTIVITIES
Additions to property, plant and equipment (20,161) (17,827)
Proceeds from disposal of equipment 2,267 1,229
Increase in intangible assets (1,392) (482)
Discontinued Operations:
Additions to property, plant and equipment (839) (2,430)
Proceeds from disposal of equipment 17 0
Business acquisitions, net of cash acquired (13,110) (76,828)
Repayment of debt of acquired businesses 0 (13,709)
Net changes in short-term investments 4,483 53,756
_________ _________
NET CASH USED IN INVESTING ACTIVITIES (28,735) (56,291)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 681 1,775
Proceeds of long-term borrowings 42,567 31,430
Payments of long-term debt (52,425) (2,775)
Cash dividends (5,782) (5,100)
_________ _________
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (14,959) 25,330
Effect of exchange rate changes on cash
and cash equivalents 451 (454)
_________ _________
(DECREASE) IN CASH AND CASH EQUIVALENTS (4,257) (232)
Cash and cash equivalents at beginning of period 4,257 6,067
_________ _________
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 0 $ 5,835
========= =========
See accompanying notes to condensed consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all
necessary adjustments, consisting only of adjustments of a
normal recurring nature, exclusive of the restructuring
charge discussed below, to present fairly Watts Industries,
Inc.'s Condensed Consolidated Balance Sheet as of March 31,
1996, the Condensed Statements of Consolidated Operations
for the three and nine months ended March 31, 1996 and March
31, 1995, and the Condensed Statements of Consolidated Cash
Flows for the nine months ended March 31, 1996 and March 31,
1995.
The balance sheet at June 30, 1995 has been derived from the
audited financial statements at that date. The accounting
policies followed by the Company are described in the June
30, 1995 financial statements which are contained in the
Company's 1995 Annual Report. It is suggested that these
financial statements be read in conjunction with the
financial statements and notes included in the 1995 Annual
Report to Stockholders and the Management's Discussion and
Analysis of Financial Condition and Results of Operations
section of this report.
During the quarter ended March 31, 1996, the Company recorded an
after tax charge of $89,600,000, or $3.02 per share. This
charge includes $63,000,000 of asset write downs, primarily
goodwill as a result of the adoption of Financial Accounting
Standard No. 121 regarding impairment of long lived assets.
The charge also includes approximately $13,000,000
associated with plant consolidation and downsizing,
$9,000,000 of asset writedowns, and $4,000,000 of other
charges.
In January 1996, the Board of Directors of the Company approved a
plan to dispose of the Company's Waterworks Group of
businesses, including Henry Pratt Company, James Jones
Company and Edward Barber & Co., Ltd. The results of
operations of these companies for the nine months ended
March 31, 1996 have been reported as income from
discontinued operations, net of income taxes, and the income
statement for the nine months ended March 31, 1995 has been
reclassified to conform with the 1996 presentation.
The following table sets forth
summary information relating to
the Waterworks Group:
Dollars in thousands Nine months
ended
March 31, March 31,
1996 1995
Revenues $61,655 $59,110
Costs and expenses $57,909 $55,172
Income before income taxes $3,746 $3,938
Income taxes $1,520 $1,551
Income from Discontinued Operations $2,226 $2,387
2. On July 28, 1994, a wholly owned subsidiary of the Company
purchased Jameco Industries, Inc. ("Jameco") of
Wyandanch, New York. Jameco is a manufacturer of metal and
plastic water supply products, including valves, tubular
products and sink strainers that are sold primarily to
residential construction and home repair and remodeling
markets in the United States and overseas. Jameco had net
sales of approximately $65,000,000 for the twelve months
ended June 30, 1995.
In August of 1994, a wholly owned subsidiary of the Company
entered into a joint venture with Tanggu Valve Company in
Tianjin, Peoples Republic of China. The Company's
investment represents a 60% interest in the joint venture.
On November 18, 1994, a wholly owned subsidiary of the Company
purchased Pibiviesse S.p.A. ("PBVS") located in Nerviano,
Italy. PBVS manufactures a complete range of trunnion
mounted ball valves with manufacturing capabilities up
through 60 inch diameter and inclusive of Class 2500
pressure ratings to meet the demanding requirements of
international pipeline projects. PBVS has annual net sales
of approximately $25,000,000.
In August and December of 1994, a wholly owned subsidiary of the
Company acquired two product lines. One product line is a
line of cryogenic valves used in industrial applications.
The other product line is check and relief valves used in
aerospace and military applications.
On March 1, 1995, a wholly owned subsidiary of the Company
purchased Anderson-Barrows Metals Corporation ("Anderson-
Barrows") of Palmdale, California. Anderson-Barrows is a
manufacturer of compression and flare fittings, plastic
tubing and braided metal hose connectors which are sold
primarily to the domestic residential construction and home
repair and remodeling markets. Anderson-Barrows has annual
net sales of approximately $31,000,000.
In July of 1995, a wholly owned subsidiary of the Company
entered into a joint venture with Suzhou Valve Factory
(SUFA) in Suzhou, Peoples Republic of China, to manufacture
ball valves for the industrial and oil and gas markets. The
Company has invested $6,000,000 which represents a 60%
interest in the joint venture.
On August 28, 1995, a wholly owned subsidiary of the Company
purchased Societe des Etablissements Rene Trubert
S.A.("Trubert") of Chartres, France. Trubert is a
manufacturer of thermostatic mixing valves sold primarily to
commercial and industrial applications to accurately control
the temperature of water for human safety and process
control. Trubert had net sales of approximately $8,000,000
for the twelve months ended June 30, 1995.
On August 31, 1995, a wholly owned subsidiary of the Company
acquired the Keane product line from Keane Controls
Corporation. This product line consists of solenoid valves
and regulators used in high pressure applications. The
annual sales of these products are approximately $1,500,000.
On September 29, 1995, a wholly owned subsidiary acquired the
Kieley Mueller Control Valve product line from International
Valve Corporation. This product line consists of linear and
rotary control valves sold primarily for industrial process
applications to accurately control the pressure, flow, and
temperature of steam and process fluids. The annual sales
of these products are approximately $2,800,000.
The aggregate purchase price for these investments was
$98,500,000 after certain adjustments, plus acquired debt of
$33,701,000. The Company has repaid $23,817,000 of debt
acquired with three of the companies.
3. Certain of the Company's operations generate solid and
hazardous wastes, which are disposed of elsewhere by
arrangement with the owners or operators of disposal sites
or with transporters of such waste. The Company's foundry
and other operations are subject to various federal, state
and local laws and regulations relating to environmental
quality. Compliance with these laws and regulations
requires the Company to incur expenses and monitor its
operations on an ongoing basis. The Company cannot
predict the effect of future requirements on its capital
expenditures, earnings or competitive position due to
any changes in federal, state or local environmental laws,
regulations or ordinances.
The Company is currently a party to or otherwise involved with
various administrative or legal proceedings under federal,
state or local environmental laws or regulations involving a
number of sites, in some cases as a participant in a group
of potentially responsible parties. Three of these sites,
the Sharkey and Combe Landfills in New Jersey, and the San
Gabriel Valley/El Monte, California water basin matter, are
listed on the National Priorities List. With respect to the
Sharkey Landfill, the Company has been allocated .75% of the
remediation costs, an amount which is not material to the
Company. No allocations have been made to date with respect
to the Combe Landfill or San Gabriel Valley sites. The EPA
has formally notified several entities that they have been
identified as being potentially responsible parties with
respect to the San Gabriel Valley site. As the Company was
not included in this group, its potential involvement in
this matter is uncertain at this point given that either the
PRPs named to date or the EPA could seek to expand the list
of potentially responsible parties. In addition to the
foregoing, the Solvent Recovery Service of New England site
and the Old Southington landfill site, both in Connecticut,
are on the National Priorities List but, with respect
thereto, the Company has resort to indemnification from
third parties and based on currently available information,
the Company believes it will be entitled to participate in a
de minimis capacity.
With respect to the Combe Landfill, the Company is one of
approximately 30 potentially responsible parties. The
Company and all other PRP's have received a Supplemental
Directive from the New Jersey Department of Environmental
Protection & Energy in 1994 seeking to recover approximately
$9 million in the aggregate for the operation, maintenance,
and monitoring of the implemented remedial action taken up
to that time in connection with the Combe Landfill North
site. Certain of the PRP's, including the Company, are
currently negotiating with the state only to assume
maintenance of this site in an effort to reduce future
costs. The Company and the remaining PRPs have also
received a formal demand from the U.S. Environmental
Protection Agency to recover approximately $17 million
expended to date in the remediation of this site.
Given the number of parties involved in most environmental sites,
the multiplicity of possible solutions, the evolving
technology and the years of remedial activity required, it
is difficult to estimate with certainty the total cost of
remediation, the timing and extent of remedial actions which
may be required, and the amount of liability, if any, of
the Company alone or in relation to that of other
responsible parties. Based on facts presently known to it,
the Company does not believe that the outcome of these
proceedings will have a material adverse effect on its
financial condition, results of operations, or its
liquidity.
The Company has established balance sheet accruals which it
currently believes are adequate in light of the potential
exposure of pending and threatened environmental litigation
and proceedings of which it has knowledge. In this regard,
with respect to certain of these matters, the Company has
resort either to some degree of insurance coverage or
indemnifications from third parties which are expected to
defray to some extent the effect thereof. With respect to
insurance, coverage of some of these claims has been
disputed by the carriers based on standard reservations and,
therefore, recovery is questionable, a factor which has been
considered in the Company's evaluation of these matters.
Although difficult to quantify based on the complexity of
the issues and the limitation on available information, the
Company believes that its accruals for the estimated costs
associated with such matters adequately provide for the
Company's estimated foreseeable liability for these sites,
however, 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.
4. Subsequent to March 31, 1996, the Company's Board of Directors
authorized the purchase of up to two million (2,000,000)
shares of the Company's Class A Common Stock in the open
market. The Company has purchased 1,254,900 shares under
this share repurchase program through May 13, 1996. The
Company has utilized its line of credit in making these
purchases.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Management Initiatives
During the quarter ended March 31, 1996, the Company reevaluated its
strategy and decided to restructure its business in an effort to improve
the efficiency of the Company's worldwide operations.
Divestiture
As previously announced, the Company has decided to divest itself
of the Municipal Water Group of Companies, which consist of
Henry Pratt Company, James Jones Company, and Edward Barber
& Company. This divestiture will enable the Company to
focus its acquisition and growth strategies on its core
markets, namely Plumbing & Heating and Water Quality, and
Industrial and Oil & Gas.
The results of operations of the Municipal Water Group for fiscal
1996 have been reported as income from discontinued
operations, net of income taxes, and the statement of
operations for prior periods has been reclassified to
conform with the fiscal 1996 presentation.
The Company does not anticipate a significant gain or loss upon
the divestiture of the Municipal Water Group.
Restructuring Activities
The Company has also decided to undertake certain restructuring
initiatives aimed at improving the efficiency of certain of
its operations it is continuing. The two most significant
initiatives are the relocation of Jameco Industries and the
downsizing of PBVS.
The Company has decided to relocate the manufacturing operations
at Jameco Industries from Wyandanch, New York to a Watts
Regulator plant in Spindale, North Carolina. The Company
expects it will take approximately nine months to complete
this relocation although unanticipated events could affect
the cost and timing of the relocation initiative. The
Company has also decided to implement a plan to streamline
and downsize the operations of its PBVS subsidiary.
In addition, the Company has identified efficiencies that it
expects will improve operations at a number of its other
divisions. In connection with achieving these efficiencies,
the Company has written off assets and accrued expenses in
the current quarter's operating results totaling $13.7
million.
In connection with the recording of the reorganization plan, the
Company has recorded provisions for severing 290 employees
($9 million), inventory write downs ($9.5 million) and other
exit costs ($10.9 million). In accordance with the
provisions of EIFT Consensus No. 94-3, costs remaining to
complete the restructuring, which are expected to amount to
approximately $2-4 million, will be recorded in the future
by the Company as incurred, with the majority of this amount
expected to be incurred in the Company's fiscal 1996 fourth
quarter.
The provision for severance and other exit costs are included in
the restructuring activities line in the statement of
operations. The inventory write-downs are reflected in the
cost of sales.
Impairment
The Company has identified an impairment event affecting certain
long-lived assets primarily with its Italian subsidiaries,
PBVS and Intermes, and has concluded these assets were
impaired. The Company has taken a charge of $63 million to
write-down the affected assets to fair value in accordance
with the implementation of FASB 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of".
Conclusion
The after tax charge for all these initiatives recorded in the
current quarter was $89.6 million. The after tax cash
impact of the charge is expected to be approximately $9 million.
It is expected that the restructuring plan will require more than
two years to complete with some positive effects being
realized during fiscal 1997, although unanticipated events
could affect the cost and timing of the restructuring plan.
Results of Operations
Quarter Ended March 31, 1996 Compared to
Quarter Ended March 31, 1995
Net sales from continuing operations increased $6,850,000 (4.5%)
to $159,823,000. This increase was attributable to the
inclusion of the net sales of acquired companies and the
Company's Chinese joint venture located in Tianjin, Peoples
Republic of China. These acquisitions principally included
Anderson-Barrows Metals Corporation ("Anderson-Barrows")
acquired in March 1995, located in California, and Societe
des Etablissements Rene Trubert S. A. ("Trubert") acquired
in August of 1995, located in Chartres, France. Exclusive of
these acquisitions, net sales from continuing operations
would have been flat with the prior period. Within North
America, the Company had decreased unit shipments of steam
valves and plumbing and heating products which were
partially offset by increased unit shipments of industrial
valves. The Company had increased net sales from continuing
operations in Europe of $2,600,000. Approximately 25% of
this increase was due to the strength of the foreign
currencies versus the U.S. dollar. The remaining increase
was attributable to the inclusion of the net sales of
Trubert. The Company intends to maintain its strategy of
seeking acquisition opportunities as well as expanding its
existing market position to achieve sales growth.
Gross profit from continuing operations decreased $10,931,000
(19.6%) to $44,941,000 and decreased as a percentage of net
sales from 36.5% to 28.1%. This decreased percentage was
primarily attributable to the inclusion of $9,508,000 in
costs related primarily to inventory writedowns as part of
the restructuring plan discussed above. Gross profit from
continuing operations exclusive of these charges would have
been $54,449,000 or 34.1% of net sales.
This decreased percentage was primarily attributable to lower
gross margins experienced within the Oil and Gas group as a
result of competitive pricing pressures and unfavorable
manufacturing variances. In addition, unfavorable
manufacturing variances associated with reduced production
levels caused by lower sales volume experienced within the
Steam group adversely impacted the gross margin. The
inclusion of certain acquired companies which operate at a
lower gross margin than the rest of the Company adversely
impacted the gross margin.
Selling, general and administrative expenses from continuing
operations increased $16,448,000 (47.5%) to $51,053,000.
This increase is primarily attributable to the inclusion of
$13,753,000 in costs related to the restructuring plan
discussed above and the inclusion of expenses of acquired
companies discussed in Note 2 above.
As part of its restructuring plan, the Company recorded
$19,891,000 related to discontinued product lines, severance
costs, plant consolidations, and asset writedowns.
Interest income from continuing operations decreased $194,000
(54.3%) to $163,000 due to decreased levels of cash and
short-term investments.
Interest expense from continuing operations decreased $53,000 to
$2,521,000. This decrease is attributable to the lower
average indebtedness experienced during the quarter.
Net earnings (loss) from continuing operations decreased
$92,054,000 (783.4%) to $(80,303,000). Net earnings from
continuing operations exclusive of the restructuring charge
would have decreased $2,422,000 to $9,329,000.
The change in foreign exchange rates had an immaterial impact on
the net results of operations.
The weighted average number of common shares outstanding on March
31, 1996, increased to 29,732,876 from 29,695,621 for
primary earnings per share. Primary and fully diluted loss
per share from continuing operations was ($2.70) for the
quarter ended March 31, 1996 compared to earnings of $ .40
for the quarter ended March 31, 1995. Earnings from
discontinued operations for the quarter ended March 31, 1996
were $.03 compared to $.03 for the quarter ended March 31,
1995. As a result of the Company's share repurchase
program, as described in Note 4 above, the Company
anticipates the average number of common shares outstanding
to decrease in future periods.
Nine Months Ended March 31, 1996 Compared to
Nine Months Ended March 31, 1995
Net sales from continuing operations increased $43,568,000
(10.2%) to $470,545,000. This increase was attributable to
the inclusion of the net sales of acquired companies and the
Company's Chinese joint venture located in Tianjin, Peoples
Republic of China. These acquisitions principally included
Anderson-Barrows, Trubert, and Pibiviesse S.p.A. ("PBVS")
which was acquired in November 1994, located in Italy.
Exclusive of acquisitions net sales from continuing
operations would have increased $3,421,000 (1%). Within
North America, the Company had decreased unit shipments of
steam valves, and increased unit shipments of industrial
valves. The Company had increased net sales from continuing
operations in Europe of $16,500,000. Approximately 20% of
this increase was due to the strength of the foreign
currencies versus the U.S. dollar. The remaining increase
was attributable to the inclusion of the net sales of
Trubert and PBVS and increased unit shipments of plumbing
and heating products in Italy. The Company intends to
maintain its strategy of seeking acquisition opportunities
as well as expanding its existing market position to achieve
sales growth.
Gross profit from continuing operations decreased $842,000 (.05%)
to $157,775,000 and decreased as a percentage of net sales
from 37.2% to 33.5%. This decreased percentage was
primarily attributable to the inclusion of $9,508,000 in
costs related primarily to inventory writedowns as part of
the restructuring plan discussed above. Gross profit from
continuing operations, exclusive of these charges, would
have been $167,283,000 or 35.6% of net sales. This
decreased percentage was primarily attributable to lower
gross margins experienced within the Oil and Gas group as a
result of competitive pricing and unfavorable manufacturing
variances. In addition, unfavorable manufacturing variances
associated with reduced production levels caused by lower
sales volume experienced within the Steam group adversely
impacted the Company's gross margin. The inclusion of
certain acquired companies which operate at a lower gross
margin than the rest of the Company adversely impacted the
gross margin. Gross profit was also adversely affected by
increased raw material costs of bronze ingot, brass rod, and
carbon and stainless steel which, due to competitive pricing
pressures, could not be completely recovered through price
increases.
Selling, general and administrative expenses from continuing
operations increased $24,944,000 (25.4%) to $123,104,000.
This increase is primarily attributable to the inclusion of
$13,753,000 in costs related to the restructuring plan
discussed above and the expenses of acquired companies
discussed in Note 2 above.
Interest income from continuing operations decreased $920,000
(63.0%) to $540,000 due to decreased levels of cash and
short-term investments.
Interest expense from continuing operations increased $658,000
(9.6%) to $7,496,000. This increase is attributable to the
increased levels of debt incurred in association with the
acquisitions discussed in Note 2 above.
Net earnings (loss) from continuing operations decreased
$91,487,000 (278.1%) to $(58,588,000). Net earnings from
continuing operations exclusive of the restructuring charge
would have decreased $1,855,000 to $31,044,000.
The change in foreign exchange rates had an immaterial impact on
the net results of operations.
The weighted average number of common shares outstanding on March
31, 1996, increased to 29,757,391 from 29,696,511 for
primary earnings per share. Primary and fully diluted loss
per share from continuing operations were ($1.97) for the
nine months ended March 31, 1996 compared to earnings of
$1.11 for the nine months ended March 31, 1995. Earnings
from discontinued operations for the nine months ended March
31, 1996 were $.08 compared to $.08 for the nine months
ended March 31, 1995. As a result of the Company's share
repurchase program, as described in Note 4 above, the
Company anticipates the average number of common shares
outstanding to decrease in future periods.
Liquidity and Capital Resources
The recording of the Company's restructuring charge, noted above,
had an adverse impact on the Company's retained earnings and
working capital. The restructuring charge, however, did not
have any impact on the Company's ability to borrow funds in
the future under its existing credit facilities. The net
cash impact to the Company to implement the restructuring
charge is expected to be approximately $9,000,000 although
unanticipated events could affect the ultimate final cash
impact to the Company.
During the nine months ended March 31, 1996, the Company invested
in four acquisitions and one joint venture. In August of
1995, a wholly owned subsidiary of the Company purchased
Societe des Etablissements Rene Trubert S.A. of Chartres,
France. Trubert is a manufacturer of thermostatic mixing
valves sold primarily for commercial and industrial
applications to accurately control the temperature of water
for human safety and process control. Trubert had net sales
of approximately $8,000,000 for the twelve months ended June
30, 1995. Also, in August and November of 1995, a wholly
owned subsidiary of the Company invested a total of
$6,000,000 in the Suzhou Watts Valve Co., Ltd. joint venture
located in Suzhou, Peoples Republic of China. This joint
venture was established to manufacture ball valves for the
industrial and oil and gas markets. The Company's
investment represents a 60% interest in the joint venture.
In August 1995, a wholly owned subsidiary of the Company
acquired the Keane product line from Keane Controls
Corporation. This product line consists of solenoid valves
and regulators used in high pressure applications. The
annual sales of these products are approximately $1,500,000.
In September 1995, a wholly owned subsidiary of the Company
acquired the Kieley Mueller Control Valve product line from
International Valve Corporation. This product line consists
of linear and rotary control valves sold primarily for
industrial process applications to accurately control the
pressure, flow, and temperature of steam and process fluids.
The annual sales of these products are approximately
$2,800,000. In March of 1996, a wholly owned subsidiary of
the Company purchased Artec, GmbH ("Artec") of Oberhausen,
Germany. Artec assembles and distributes under floor
heating systems, radiator connection systems and plumbing
pipe systems for the German plumbing and heating market.
Artec had net sales of approximately $4,500,000 for the
twelve months ended December 31, 1995. The aggregate
purchase price for these investments was $21,800,000.
During the nine months ended March 31, 1996, the Company spent
$20,161,000 on capital expenditures for continuing
operations, primarily manufacturing machinery and equipment,
as part of its commitment to continuously improve its
manufacturing capabilities.
Working capital from continuing operations at March 31, 1996 was
$176,634,000 compared to $202,569,000 at June 30, 1995.
This decrease in working capital was primarily the result of
the recording of the restructuring charge during the quarter
ended March 31, 1996. Cash and short-term investments were
$0 at March 31, 1996 compared to $8,740,000 at June 30,
1995. The ratio of current assets to current liabilities
from continuing operations was 2.26:1 at March 31, 1996
compared to 2.96:1 at June 30, 1995. Debt as a percentage
of total capital employed, exclusive of restructuring
related items, was 23.7% at March 31, 1996 compared to
26.3% at June 30, 1995.
In order to support the Company's acquisition program, working
capital requirements, and for general corporate purposes,
the Company entered into a five-year commitment for an
unsecured line of credit for $125,000,000 expiring on August
31, 1999. As of March 31, 1996, there was $26,500,000
outstanding under this credit facility.
Subsequent to March 31, 1996, the Company purchased 1,254,900
shares through May 13, 1996, under the share repurchase
program discussed in Note 4 above through the utilization of
its line of credit. The outstanding balance under this
credit facility, as of May 13, 1996, is $56,800,000.
The Company from time to time is involved with environmental
proceedings and incurs costs on an ongoing basis related to
environmental matters. The Company has been or expects to be
named a potentially responsible party with respect to
currently identified contaminated sites, which are in
various stages of the remediation process. The Company has
evaluated its potential exposure based on all currently
available information and has recorded its estimate of its
liability for environmental matters. The ultimate outcome
of these environmental matters cannot be determined. The
Company currently anticipates that it will not incur
significant expenditures in fiscal 1996 in connection with
any of these environmentally contaminated sites. Please see
Note 3 to the accompanying consolidated financial
statements.
The Company anticipates that available funds and funds provided
from current operations will be sufficient to meet current
operating requirements and anticipated capital expenditures
for at least the next 24 months.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
There were no reports filed on form 8-K during the quarter
ended March 31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
WATTS INDUSTRIES, INC.
Date: May 15, 1996 By: /s/Timothy P. Horne
Timothy P. Horne
President
Date: May 15, 1996 By: /s/Kenneth J. McAvoy
Kenneth J. McAvoy
Chief Financial
Officer
and Treasurer
EXHIBIT INDEX
Listed and indexed below are all Exhibits filed as part of this
report.
Exhibit No. Description
3.1 Restated Certificate of Incorporation, as
amended. (1)
3.2 Amended and Restated By-Laws. (2)
11 Statement re computation of per share
earnings *
27 Financial Data Schedule *
(1) Incorporated by reference to the relevant exhibit to the
Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on September 28, 1995.
(2) Incorporated by reference to the relevant exhibit to the
Registrant's Annual Report on Form 8-K filed with the
Securities and Exchange Commission on May 15, 1992.
* Filed herewith.
<TABLE>
EXHIBIT 11
WATTS INDUSTRIES , INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
Three Months Ended Nine Months Ended
March 31 March 31
______________________________ ______________________________
1996 1995 1996 1995
<CAPTION> ______________________________ ______________________________
<S> <C> <C> <C> <C>
PRIMARY
Average shares
Outstanding 29,732,876 29,600,853 29,757,391 29,549,100
Net effect of
dilutive stock
options -
based on the
treasury stock
method using
average market
price 0 94,768 0 147,411
______________________________ ______________________________
Total 29,732,876 29,695,621 29,757,391 29,696,511
============================== ==============================
Net earnings
(loss) ($79,273,181) $12,731,481 ($56,361,875) $35,286,133
============================== ==============================
Earnings (loss)
per share ($ 2.67) $ .43 ($ 1.89) $ 1.19
============================== ==============================
FULLY-DILUTED
Average shares
Outstanding 29,732,882 29,600,853 29,768,696 29,549,100
Net effect of
dilutive stock
options -
based on the
treasury stock
method using
the quarter-end
market price, if
higher than
average
market price 0 100,468 0 154,457
______________________________ ______________________________
Total 29,732,882 29,701,321 29,768,696 29,703,557
============================== ==============================
Net earnings
(loss) ($79,273,181) $12,731,481 ($56,361,875) $35,286,133
============================== ==============================
Earnings (loss)
per share ($ 2.67) $ .43 ($ 1.89) $ 1.19
============================== ==============================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM MARCH 31, 1996 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 93,355
<ALLOWANCES> 9,244
<INVENTORY> 178,916
<CURRENT-ASSETS> 361,645
<PP&E> 139,968
<DEPRECIATION> 110,904
<TOTAL-ASSETS> 644,635
<CURRENT-LIABILITIES> 140,217
<BONDS> 134,705
<COMMON> 2,968
0
0
<OTHER-SE> 342,032
<TOTAL-LIABILITY-AND-EQUITY> 644,635
<SALES> 470,545
<TOTAL-REVENUES> 470,545
<CGS> 312,770
<TOTAL-COSTS> 518,830<F1>
<OTHER-EXPENSES> 7,937<F2>
<LOSS-PROVISION> 4,191
<INTEREST-EXPENSE> 7,496
<INCOME-PRETAX> (56,222)
<INCOME-TAX> 2,366
<INCOME-CONTINUING> (58,588)
<DISCONTINUED> 2,226
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (56,362)
<EPS-PRIMARY> ($1.89)
<EPS-DILUTED> ($1.89)
<FN>
<F1> INCLUDES ONLY COST OF GOODS SOLD, OPERATING EXPENSES AND RESTRUCTURING CHARGES.
<F2> INCLUDES INTEREST EXPENSE AND LOSS PROVISION SHOWN BELOW.
</FN>
</TABLE>
