UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from __________ to
____________
Commission file number 0-14787
WATTS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2916536
(State of incorporation) (I.R.S. Employer Identification No.)
815 Chestnut Street, North Andover, MA 01845
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (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, 1997
Class A Common, $.10 par value 15,847,460
Class B Common, $.10 par value 11,265,627
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information Page #
Item 1. Condensed Consolidated Balance Sheets at
March 31, 1997 and June 30, 1996 3
Condensed Consolidated Statements of
Operations for the Three Months Ended
March 31, 1997 and March 31, 1996 4
Condensed Consolidated Statements of
Operations for the Nine Months Ended
March 31, 1997 and March 31, 1996 5
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended
March 31, 1997 and March 31, 1996 6
Notes to Condensed Consolidated Financial
Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-16
Part II. Other Information
Item 1. Legal Proceedings 16-18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
Exhibit 11 - Computation of Per Share Earnings 21
Exhibit 27 - Financial Data Schedule 22
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share information)
(Unaudited) (Audited)
March 31, June 30,
1997 1996
_________ _________
CURRENT ASSETS
Cash and cash equivalents.......................$ 3,380 $ 0
Trade accounts receivable, less allowance
for doubtful accounts of $7,855 and $8,822.... 133,117 116,370
Inventories:
Finished goods............................ 83,124 86,922
Work in process........................... 33,710 30,994
Raw materials............................. 67,366 64,182
_________ _________
184,200 182,098
Prepaid expenses and other current assets....... 13,020 9,283
Deferred income taxes .......................... 21,722 24,662
Net assets of discountinued operations.......... 0 78,401
_________ _________
Total Current Assets....................... 355,439 410,814
OTHER ASSETS
Intangible assets, net.......................... 5,776 6,248
Goodwill, net................................... 111,131 79,489
Other........................................... 6,118 6,457
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost.......... 275,379 260,328
Less allowance for depreciation................. (124,087) (112,378)
_________ _________
151,292 147,950
_________ _________
TOTAL ASSETS $ 629,756 $ 650,958
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................$ 45,340 $ 46,022
Accrued expenses and other current liabilities.. 74,854 78,573
Accrued compensation and benefits............... 10,300 7,756
Income taxes payable............................ 3,707 687
Current portion of long-term debt............... 2,310 2,907
_________ _________
Total Current Liabilities.................. 136,511 135,945
LONG-TERM DEBT, less current portion............... 132,742 160,243
DEFERRED INCOME TAXES.............................. 13,211 13,842
OTHER NONCURRENT LIABILITIES....................... 9,307 10,291
MINORITY INTEREST.................................. 11,482 11,054
STOCKHOLDERS' EQUITY
Class A Common Stock, $.10 par value;1 vote per
share 80,000,000 shares authorized, 15,775,860
shares issued and outstanding at March 31....... 1,578 1,686
Class B Common Stock, $.10 par value;10 votes per
share 25,000,000 shares authorized, 11,265,627
shares issued and outstanding at March 31....... 1,126 1,136
Additional paid-in capital...................... 45,725 67,930
Retained earnings............................... 283,756 249,415
Cumulative translation adjustment............... (5,682) (584)
_________ _________
Total Stockholders' Equity................. 326,503 319,583
_________ _________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.........$ 629,756 $ 650,958
========= =========
See accompanying notes to condensed consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended
____________________
March 31, March 31,
1997 1996
_________ _________
Net sales .........................................$ 184,191 $ 159,823
Cost of goods sold ................................ 120,461 114,882
_________ _________
GROSS PROFIT ................................... 63,730 44,941
Selling, general & administrative expenses ........ 40,983 51,053
Restructuring charges.............................. 0 19,891
Impairment of long-lived assets.................... 0 63,065
_________ _________
OPERATING INCOME (LOSS)......................... 22,747 (89,068)
Other (income) expense:
Interest income ................................ (125) (163)
Interest expense ............................... 2,715 2,521
Other - net .................................... (280) 159
_________ _________
2,310 2,517
_________ _________
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ................. 20,437 (91,585)
Income tax provision (benefit) .................... 7,548 (11,282)
_________ _________
INCOME (LOSS)FROM CONTINUING OPERATIONS ........$ 12,889 $ (80,303)
INCOME FROM DISCONTINUED OPERATIONS ............ 0 1,030
_________ _________
NET INCOME (LOSS)...............................$ 12,889 $ (79,273)
========= =========
Primary and fully-diluted income (loss) per share :
CONTINUING OPERATIONS ............................ $.47 ($2.70)
DISCONTINUED OPERATIONS .......................... 0.00 0.03
__________ _________
NET INCOME (LOSS)................................. $.47 ($2.67)
========== =========
Cash dividends per share............................. $ .0775 $ .0700
========== =========
See accompanying notes to condensed consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
Nine Months Ended
_____________________
March 31, March 31,
1997 1996
_________ _________
Net sales .........................................$ 534,419 $ 470,545
Cost of goods sold ................................ 350,181 312,770
_________ _________
GROSS PROFIT ................................... 184,238 157,775
Selling, general & administrative expenses ........ 118,087 123,104
Restructuring charges.............................. 0 19,891
Impairment of long-lived assets.................... 0 63,065
_________ _________
OPERATING INCOME (LOSS)......................... 66,151 (48,285)
Other (income) expense:
Interest income ................................ (397) (540)
Interest expense ............................... 7,938 7,496
Other - net .................................... 170 981
_________ _________
7,711 7,937
_________ _________
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ................. 58,440 (56,222)
Income tax provision .............................. 21,454 2,366
_________ _________
INCOME (LOSS)FROM CONTINUING OPERATIONS ........$ 36,986 $ (58,588)
INCOME FROM DISCONTINUED OPERATIONS ............ 79 2,226
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS .... 3,208 0
_________ _________
NET INCOME (LOSS)...............................$ 40,273 $ (56,362)
========= =========
Primary and fully-diluted income (loss) per share :
CONTINUING OPERATIONS ............................ $1.35 ($1.97)
DISCONTINUED OPERATIONS .......................... 0.00 0.08
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS ...... 0.12 0.00
__________ _________
NET INCOME (LOSS)................................. $1.47 ($1.89)
========== =========
Cash dividends per share............................. $ .2175 $ .1950
========== =========
See accompanying notes to condensed consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine Months Ended
___________________
March 31, March 31,
1997 1996
_________ _________
OPERATING ACTIVITIES
Income (loss) from continuing operations $ 36,986 $ (58,588)
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Restrucuring (4,335) 18,734
Impairment of long-lived assets 0 63,065
Depreciation and amortization 17,026 17,508
Provision (benefit) for deferred income taxes 1,080 (18,234)
Gain on disposal of fixed assets (561) (15)
Changes in operating assets and liabilities,
net of effects from business acquisitions :
Accounts receivable (16,966) 2,550
Inventories (2,612) (5,282)
Prepaid expenses and other assets (2,621) 786
Accounts payable and accrued expenses (3,370) 18,279
_________ _________
24,627 38,803
Net cash provided by
discontinued operations 653 842
_________ _________
NET CASH PROVIDED BY OPERATING ACTIVITIES 25,280 39,645
INVESTING ACTIVITIES
Additions to property, plant and equipment (21,075) (19,906)
Proceeds from disposal of equipment 1,756 2,267
Increase in intangible assets (771) (1,392)
Discontinued Operations:
Additions to property, plant and equipment (142) (839)
Proceeds from disposal of equipment 0 17
Proceeds from sale of discontinued operations 90,581 0
Business acquisitions, net of cash acquired (37,575) (13,110)
Net changes in short-term investments 0 4,483
_________ _________
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 32,774 (28,480)
FINANCING ACTIVITIES
Purchase and retirement of common stock (23,069) 0
Proceeds from exercise of stock options 746 681
Proceeds of long-term borrowings 91,376 42,567
Payments of long-term debt (119,088) (52,425)
Cash dividends (5,932) (5,782)
_________ _________
NET CASH USED IN FINANCING ACTIVITIES (55,967) (14,959)
Effect of exchange rate changes on cash and
cash equivalents 1,293 451
_________ _________
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,380 (3,343)
Cash and cash equivalents at beginning of period 0 3,343
_________ _________
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,380 $ 0
========= =========
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, to present fairly Watts Industries, Inc.'s Condensed
Consolidated Balance Sheet as of March 31, 1997, the Condensed
Consolidated Statements of Operations for the three and nine months
ended March 31, 1997 and March 31, 1996, and the Condensed
Consolidated Statements of Cash Flows for the nine months ended
March 31, 1997 and March 31, 1996.
The balance sheet at June 30, 1996 has been derived from the
audited financial statements at that date. Certain amounts have
been reclassified to conform with the 1997 presentation. The
accounting policies followed by the Company are described in the
June 30, 1996 financial statements which are contained in the
Company's 1996 Annual Report. It is suggested that these financial
statements be read in conjunction with the financial statements and
notes included in the 1996 Annual Report to stockholders.
Additional information about certain accounting policies
follows.
Revenue Recognition
The Company records revenue, net of a provision for estimated
returns and allowances, upon shipment.
Property, Plant and Equipment
The estimated useful lives of each major class of property,
plant and equipment are as follows:
Buildings and improvements 10-40 years
Machinery and equipment 5-15 years
Long-Lived Assets
Impairment losses on long-lived assets are recognized when
indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the
assets carrying amount. The amount of such losses is recorded by
reducing the value of the affected long-lived assets to fair value,
as determined using information that is available in the
circumstances.
2. In January 1996, the Board of Directors of the Company
approved a plan to dispose of the Company's Municipal Water Group
of businesses, including Henry Pratt Company, James Jones Company
and Edward Barber & Co., Ltd. These companies were sold on
September 4, 1996. The results of operations of these companies
for all periods prior to the sale have been reported as income from
discontinued operations, net of income taxes.
The following table sets
forth summary information
relating to the Municipal
Water Group:
Dollars in thousands
July 1, 1996 Nine Months Ended
through September 4, 1996 March 31, 1996
Revenues $13,958 $61,655
Costs and expenses $13,830 $57,909
Income before income taxes $ 128 $3,746
Income taxes $ 49 $1,520
Income from Discontinued
Operations $ 79 $2,226
3. The Company decided to undertake certain restructuring
initiatives aimed at improving the efficiency of certain of its
continuing operations during the quarter ended March 31, 1996. The
two most significant restructuring initiatives are the relocation
of Jameco Industries, Inc. ("Jameco") from Wyandanch, New York to
the Company's existing Spindale, North Carolina manufacturing
facility and the downsizing of Pibiviesse S.p.A. ("PBVS").
As a result of this initiative, the Company recorded a
$25,415,000 restructuring charge during the year ended June 30,
1996. This charge was made to recognize severance payments, other
incremental costs and asset write-downs that were expected to
result from the restructuring. At March 31, 1997, $8,743,000 of
the estimated costs of the restructuring initiative remained
unpaid. Such unpaid costs were principally future severance
payments and contract termination costs.
During the twelve months ended March 31, 1997, 236 employees
were released and $3,628,000 in severance payments were made to
those employees. There were no additional severance expense
provisions or other adjustments to the related accrued liability
during that period. The Company presently expects that, on a net
basis, approximately 54 additional employees will be released in
connection with the restructuring initiative and that the balance
of accrued but unpaid severance costs are expected to be paid
before June 1999.
Other payments made in connection with the Company's
restructuring initiative during the twelve months ended March 31,
1997 amounted to $4,487,000 and were made principally in connection
with the relocation of Jameco and the downsizing of PBVS. It is
presently expected that these initiatives will be complete by June
30, 1997 and June 30, 1998, respectively. There were no other
expense provisions for such costs or other adjustments to the
related accrued liability during the nine months ended March 31,
1997.
4. In August of 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 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.
In August of 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,
at the time of the acquisition, were approximately $1,500,000.
In August of 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, at the
time of the acquisition, were 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 underfloor 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.
In September of 1996, a wholly owned subsidiary of the Company
purchased certain assets and assumed certain liabilities of
Consolidated Precision Corporation ("CPC") of Riviera Beach,
Florida. CPC is a manufacturer of high quality control valves,
manual and actuated shutoff valves, cryogenic filters, valve
manifolds, and bayonet fittings for the cryogenic, ultra-high
purity, and industrial gas markets. CPC had sales of approximately
$2,500,000 for the 12 months ended May 31, 1996.
In January of 1997, a wholly owned subsidiary of the Company
purchased Ames Co., Inc. ("Ames") of Woodland, California. Ames
designs, manufactures and markets UL/FM certified backflow
prevention valves for use in the fire protection market. Ames had
sales for the twelve months ended December 31, 1996 of
approximately $27,000,000.
The aggregate purchase price for these acquisitions was
approximately $53,200,000.
During the quarter ended March 31, 1997, the Company entered
into a joint venture with the agent who has been marketing the
imported vitreous china and faucets product lines, which have
annual sales of approximately $15,000,000 in the DIY market and
were originally part of the Jameco business. This decision should
improve sales volume and profitability for this product line. The
Company will have a 49% ownership and report future activities as a
minority interest. The effective date of this joint venture is
expected to be June 1, 1997.
5. On April 16, 1996, July 17, 1996, and April 15, 1997 the Board
of Directors authorized the Company to repurchase 2,000,000 shares,
1,000,000 shares, and 500,000 shares, respectively, of its Class A
Common Stock through open market and private purchases. Since the
commencement of the share repurchase plan, the Company has
purchased 2,680,200 shares for an aggregate price of $51,635,978.
The funds used to finance these stock purchases were generated from
the sale of the Municipal Water Group.
6. Certain of the Company's loan agreements contain covenants
that require, among other items, the maintenance of certain
financial ratios and net worth and limit the Company's ability to
enter into secured borrowing arrangements. Under its most
restrictive loan covenant, which requires the Company to maintain a
net worth of not less than the sum of $295,000,000 and 50% of
cumulative consolidated net income of the Company for full fiscal
years subsequent to June 30, 1996, the Company had $31,500,000
available for the payment of dividends at March 31, 1997.
7. In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings per Share, which is required to
be adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new
requirements for calculating earnings per share, the dilutive
effect of common stock equivalents will be excluded. The impact is
expected to result in an increase in primary earnings per share in
the quarter ended March 31, 1997 of $0.005 per share. The impact
of Statement No. 128 on the calculation of fully diluted earnings
per share for the quarter ended March 31, 1997 is expected to be
immaterial.
Item 2. WATTS INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Management Initiatives
In fiscal 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 part of this strategy, the Company decided to divest itself
of the Municipal Water Group of Companies, which consisted of Henry
Pratt Company, James Jones Company, and Edward Barber & Company
Ltd. This divestiture was completed on September 4, 1996 resulting
in an after-tax gain of $3,208,000 subject to potential post
closing adjustments. The proceeds were used primarily to reduce
long-term debt and fund the Company's share repurchase program.
This divestiture will enable the Company to focus its acquisition
and growth strategies on its core markets, namely Plumbing and
Heating and Water Quality, and Industrial, and Oil and Gas.
The results of operations of the Municipal Water Group for
fiscal 1997 have been reported as income from discontinued
operations, net of income taxes, and the statement of earnings for
prior periods has been reclassified to conform with the fiscal 1997
presentation.
Restructuring Activities
The Company also decided to undertake certain restructuring
initiatives aimed at improving the efficiency of certain of its
continuing operations. The two most significant initiatives are
the relocation of Jameco Industries, Inc. ("Jameco") and the
downsizing of Pibiviesse S.p.A. ("PBVS").
The Company has decided to relocate the manufacturing
operations of Jameco from Wyandanch, New York to a Watts Regulator
plant in Spindale, North Carolina. The expansion of the Spindale
facility, which will house the Jameco activity, is complete. The
Company is currently moving manufacturing equipment and
implementing administrative and information systems in North
Carolina. The Company anticipates this relocation will be completed
during this fiscal year. The Company also initiated a plan to
consolidate and downsize the operations of its PBVS subsidiary in
Italy. This consolidation will be completed during fiscal 1998.
These actions will result in reduced headcount and a reduction in
certain fixed overhead costs.
Impairment of Long-Lived Assets
The impairment of long-lived assets charge mainly pertains to
the Company's Italian subsidiaries. Management concluded that the
goodwill at Intermes was impaired due to a change in interpretation
of the Italian tax law regarding the deductibility of goodwill
amortization coupled with decreasing margins and operating profits.
In addition, PBVS had experienced significant losses since
acquisition. In connection with the reevaluation of its business
strategy in Italy, management concluded an impairment had occurred
and has recorded a loss by reducing the value of affected long-
lived assets, primarily goodwill, to fair value, as determined
using a discounted cash flow approach.
Conclusion
In fiscal 1996 the Company recorded an after-tax charge of
$92,986,000, including $63,065,000 for impairment of long-lived
assets, as part of these restructuring costs. The charge was
recorded as follows:
Fiscal 1996 (000's)
Quarter Ended
3/31/96 6/30/96 Total
Cost of Goods Sold $ 9,508 $ 9,508
Selling, General & Administrative 13,753 13,753
Restructuring 19,891 $5,524 25,415
Impairment of Long-Lived Assets 63,065 _____ 63,065
106,217 5,524 111,741
Income Tax Benefit 16,585 2,170 18,755
After-Tax Charge $89,632 $3,354 $92,986
The $25,415,000 of restructuring expense includes $9,300,000
of severance; $8,400,000 of asset write-downs for assets to be
abandoned or sold; and $7,700,000 of exit costs. The $7,700,000 of
exit costs are comprised primarily of lease and other contract
termination costs and employee and plant relocation costs.
The $13,753,000 of expense recorded in selling, general and
administrative expense is primarily comprised of $4,000,000 of
product liability costs; $3,500,000 of bad debts; $2,000,000 of
environmental reserves; and $1,000,000 of consulting fees.
It is expected that the restructuring plan will require at
least two additional fiscal years to complete with some positive
effects being realized during this fiscal year, although
unanticipated events could affect the cost and timing of the
restructuring plan.
Results of Operations
Quarter Ended March 31, 1997 Compared to
Quarter Ended March 31, 1996
Net sales from continuing operations increased $24,368,000
(15.3%) to $184,191,000. This increase was primarily attributable
to increased unit shipments of both oil and gas valves and plumbing
and heating valves. The increased unit shipments of oil and gas
valves is supported by a strong worldwide oil and gas market. The
increased unit shipments of plumbing and heating valves is
primarily attributable to increased penetration into the home
improvement retail market. The inclusion of the net sales of
acquired companies accounted for $7,278,000 of the sales increase.
These acquisitions include Ames Co., Inc. ("Ames") acquired in
January of 1997 located in Woodland, California; Consolidated
Precision Corporation ("CPC") acquired in September of 1996 located
in Riviera Beach, Florida; and Artec, GmbH ("Artec") acquired in
March of 1996 located in Oberhausen, Germany. The Company
experienced a sales increase of $17,090,000 (10.7%) excluding the
impact of acquisitions. The dollar strengthened relative to the
functional currency of several of the Company's subsidiaries during
the quarter ended March 31, 1997. Had these foreign exchange rates
remained constant with the foreign exchange rates in effect during
the quarter ended March 31, 1996, the Company would have
experienced a sales increase of 12.9%, excluding the impact of
acquisitions. The Company intends to maintain its strategy of
seeking acquisition opportunities as well as expanding its existing
market position to achieve sales growth.
Gross profit from continuing operations increased $18,789,000
(41.8%) to $63,730,000. Excluding the $9,508,000 of inventory write-
downs included in cost of sales in the quarter ended March 31, 1996
as part of the restructuring, gross profit would have increased
$9,281,000 (17.1%) and would have increased as a percentage of net
sales from 34.1% to 34.6%. This percentage increase is primarily
the result of the increased sales volumes and gross margins at the
Company's oil and gas valve manufacturing facilities. This
increase from the oil and gas group was partially offset by an
unfavorable sales mix and inventory reduction programs from certain
of the Company's subsidiaries.
Selling, general and administrative expenses in the quarter
ended March 31, 1996 include $13,753,000 of restructuring related
expenses; $19,891,000 of restructuring expenses; and $63,065,000 of
impairment of long-lived assets. These charges are discussed in
the management initiative section above. Excluding the effect of
these charges, selling, general and administrative expenses
increased $3,683,000 (9.9%) to $40,983,000 and decreased as a
percentage of net sales from 23.3% to 22.2%. The increase in
spending is primarily attributable to the inclusion of the expenses
of acquired companies and increased variable selling expenses
associated with the increased net sales.
Excluding the $106,217,000 of restructuring and related
charges recorded in the quarter ended March 31, 1996, operating
earnings increased $5,598,000 (32.6%) to $22,747,000 and increased
as a percentage of net sales from 10.7% to 12.4%.
The increase in other income is primarily attributable to the
gain on the sale of certain fixed assets.
Earnings from continuing operations for the quarter ended
March 31, 1997, excluding the after-tax restructuring and related
charges of $89,632,000 recorded in the quarter ended March 31,
1996, increased $3,560,000 (38.2%) to $12,889,000.
The change in foreign exchange rates had an adverse impact on
the net earnings from continuing operations of approximately
$300,000.
The weighted average number of common shares outstanding on
March 31, 1997, decreased to 27,303,784 from 29,732,876 for primary
earnings per share. This decrease was attributable to the Company
purchasing Class A Common Stock on the open market in connection
with its previously announced share repurchase program. Primary
and fully diluted earnings per share from continuing operations
were $.47 for the three months ended March 31, 1997 compared to
earnings of $.32 per share, excluding the restructuring charges
discussed above, for the three months ended March 31, 1996.
Results of Operations
Nine Months Ended March 31, 1997 Compared to
Nine Months Ended March 31, 1996
Net sales from continuing operations increased $63,874,000
(13.6%) to $534,419,000. This increase was primarily attributable
to increased unit shipments of both oil and gas valves and plumbing
and heating valves. The increased unit shipments of oil and gas
valves is supported by a strong worldwide oil and gas market. The
increased unit shipments of plumbing and heating valves is
primarily associated with increased demand from plumbing and
heating wholesalers and increased penetration into the home repair
retail market. In addition, the inclusion of the net sales of
acquired companies accounted for $11,116,000 of the sales increase.
These acquisitions include Ames acquired in January of 1997 located
in Woodland, California; CPC acquired in September of 1996 located
in Riviera Beach, Florida; and Artec acquired in March of 1996
located in Oberhausen, Germany. Excluding the impact of these
acquisitions, sales would have increased 11.2%. The dollar
strengthened relative to the functional currency of several of the
Company's subsidiaries during the nine months ended March 31, 1997.
Had these foreign exchange rates remained constant with the foreign
exchange rates in effect during fiscal 1996, the Company would have
experienced a sales increase of 12% excluding the impact of
acquisitions. The Company intends to maintain its strategy of
seeking acquisition opportunities as well as expanding its existing
market position to achieve sales growth.
Gross profit from continuing operations increased $26,463,000
(16.8%). Excluding the $9,508,000 of inventory write-downs recorded
in cost of sales last fiscal year as part of the restructuring
charges, gross profit would have increased $16,955,000 (10.1%) to
$184,238,000 and decreased as a percentage of net sales from 35.6%
to 34.5%. The gross profit percentage was adversely affected by an
unfavorable sales mix variance on certain valves within the
plumbing and heating product line. The gross profit percentage was
also adversely affected as a result of the higher sales of oil and
gas valves whose gross margin percentage is lower than the
Company's overall gross margin percentage.
Selling, general and administrative expenses in the period
ended March 31, 1996 include $63,065,000 of impairment of long-
lived asset write-downs; $19,891,000 of restructuring costs; and
$13,753,000 within selling, general and administrative expenses
recorded as part of the overall restructuring. Selling, general
and administrative expenses from continuing operations, excluding
these charges, increased $8,736,000 (8.0%) to $118,087,000 and
decreased as a percentage of sales from 23.2% to 22.1%. The
increase in spending is primarily attributable to increased
commissions and variable selling expenses associated with the
increased sales and the inclusion of the expenses of acquired
companies.
Earnings from continuing operations, excluding the after-tax
restructuring and related charges of $89,632,000 recorded in the
quarter ended March 31, 1996, increased $5,942,000 (19.1%) to
$36,986,000. The Company's return on average stockhholder's
investment for continuing operations (excluding the gain on the
sale of the Municipal Water Group) was 15.1% for the nine months
ended March 31, 1997 compared to 10.4% for the nine months ended
March 31, 1996. This calculation excludes the restructuring
charges recorded last fiscal year.
The weighted average number of common shares outstanding on
March 31, 1997, decreased to 27,311,456 from 29,757,391 for primary
earnings per share. This decrease was attributable to the Company
purchasing Class A Common Stock on the open market in connection
with its previously announced share repurchase program. Primary
and fully diluted earnings per share from continuing operations
were $1.35 (excluding the gain of $.12 per share on the sale of the
Municipal Water Group) for the nine months ended March 31, 1997
compared to earnings per share of $1.05 (excluding restructuring
and related expenses) for the nine months ended March 31, 1996.
This is an increase of 28.6%. Earnings per share from discontinued
operations were zero for the nine months ended March 31, 1997
compared to $.08 per share for the nine months ended March 31,
1996.
Liquidity and Capital Resources
During the nine months ended March 31, 1997, the Company
received $90,581,000 of proceeds as a result of its sale of the
Municipal Water Group. These proceeds were used to reduce the
borrowings under its line of credit and to fund additional share
purchases under its existing share repurchase program.
During the nine months ended March 31, 1997, the Company spent
$21,075,000 on capital expenditures for continuing operations,
primarily manufacturing machinery and equipment, as part of its
commitment to continuously improve its manufacturing capabilities.
The Company's capital expenditure budget for fiscal 1997 is
$31,000,000.
During the nine months ended March 31, 1997, the Company
invested in two acquisitions. In September of 1996, a wholly owned
subsidiary of the Company purchased certain assets and assumed
certain liabilities of CPC of Riviera Beach, Florida. CPC is a
manufacturer of high quality control valves, manual and actuated
shutoff valves, cryogenic filters, valve manifolds, and bayonet
fittings for the cryogenic and ultra-high purity and industrial gas
market. CPC had sales of approximately $2,500,000 for the twelve
months ended May 31, 1996. In January of 1997, a wholly owned
subsidiary of the Company purchased Ames of Woodland, California.
Ames designs, manufactures, and markets UL/FM certified backflow
prevention valves for use in the fire protection market. Ames had
sales of approximately $27,000,000 for the twelve months ended
December 31, 1996. The aggregate purchase price for these two
acquisitions was $37,575,000.
Working capital at March 31, 1997 was $218,928,000 compared to
$196,468,000 at June 30, 1996. The ratio of current assets to
current liabilities was 2.6 to 1 at March 31, 1997 compared to 2.5
to 1 at June 30, 1996. Cash and short-term investments were
$3,380,000 at March 31, 1997 and zero at June 30, 1996. Debt as a
percentage of total capital employed was 29.3% at March 31, 1997
compared to 33.8% at June 30, 1996. This decreased percentage
resulted from the use of a portion of the proceeds from the sale of
the Municipal Water Group to reduce long-term debt.
The Company has available an unsecured $125,000,000 line of
credit, which expires on August 31, 1999. The Company's intent is
to utilize this credit facility to support the Company's
acquisition program, working capital requirements from
acquisitions, and for general corporate purposes. As of March 31,
1997, there was $35,000,000 borrowed under this line of credit.
The Company from time to time is involved with environmental
proceedings and incurs costs on an ongoing basis related to
environmental matters. The Company currently anticipates that it
will not incur significant expenditures in fiscal 1997 in
connection with any of these environmentally contaminated sites.
Please see Part II, Item 1. Legal Proceedings.
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.
Part II. Other Information
Item 1. Legal Proceedings
The Company, like other worldwide manufacturing companies, is
subject to a variety of potential liabilities connected with its
business operations, including potential liabilities and expenses
associated with possible product defects or failures and compliance
with environmental laws. The Company maintains product liability
and other insurance coverage which it believes to be generally in
accordance with industry practices. Nonetheless, such insurance
coverage may not be adequate to protect the Company fully against
substantial damage claims which may arise from product defects and
failures.
Leslie Controls, Inc. and Spence Engineering Company, both
subsidiaries of the Company, are involved as third-party defendants
in various civil product liability actions pending in the U.S.
District Court, Northern District of Ohio. The underlying claims
have been filed by present or former employees of various shipping
companies for personal injuries allegedly received as a result of
exposure to asbestos. The shipping companies contend that they
installed in their vessels certain valves manufactured by Leslie
Controls and/or Spence Engineering which contained asbestos. The
Company has resort to certain insurance coverage with respect to
these matters. Coverage has been disputed by certain of the
carriers and, therefore, recovery is questionable, a factor which
the Company has considered in its evaluation of these matters. The
Company has established certain reserves which it currently
believes are adequate in light of the probable and estimable
exposure of pending and threatened litigation of which it has
knowledge. Based on facts presently known to it, the Company does
not believe the outcome of these proceedings will have a material
adverse effect on its financial condition, results of operations,
or its liquidity.
Certain of the Company's operations generate solid and
hazardous wastes, which are disposed of elsewhere by arrangement
with the owners or operators of disposal sites or with transporters
of such waste. The Company's foundry and other operations are
subject to various federal, state and local laws and regulations
relating to environmental quality. Compliance with these laws and
regulations requires the Company to incur expenses and monitor its
operations on an 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. Four of these sites, the Sharkey and Combe
Landfills in New Jersey, the San Gabriel Valley/El Monte,
California water basin site, and the Cherokee Oil Resources Site in
Charlotte, North Carolina, are listed on the National Priorities
List. With respect to the Sharkey Landfill, the Company has been
allocated .75% of the remediation costs, an amount which is not
material to the Company. No allocations have been made to date with
respect to the Combe Landfill or San Gabriel Valley sites. The EPA
has formally notified several entities that they have been
identified as being potentially responsible parties with respect to
the San Gabriel Valley site. As the Company was not included in
this group, its potential involvement in this matter is uncertain
at this point given that either the PRPs named to date or the EPA
could seek to expand the list of potentially responsible parties.
With respect to the Cherokee Oil Resources Site, the Company has
elected to participate in a de minimis settlement. In addition to
the foregoing, the Solvent Recovery Service of New England site and
the Old Southington landfill site, both in Connecticut, are on the
National Priorities List but, with respect thereto, the Company has
resort to indemnification from third parties and based on currently
available information, the Company believes it will be entitled to
participate in a de minimis capacity.
With respect to the Combe Landfill, the Company is one of
approximately 30 potentially responsible parties. The Company and
all other PRP's 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. The EPA
has filed suit against certain of the PRP's, and the Company has
recently been named a third-party defendant in this litigation.
Based on facts presently known to it, the Company does not
believe that the outcome of these proceedings will have a material
adverse effect on its financial condition. The Company has
established balance sheet accruals which it currently believes are
adequate in light of the probable and estimable exposure of pending
and threatened environmental litigation and proceedings of which it
has knowledge. Given the nature and scope of the Company's
manufacturing operations, there can be no assurance that the
Company will not become subject to other environmental proceedings
and liabilities in the future which may be material to the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) The Exhibits are furnished elsewhere in this report.
(b) A report on Form 8-K was filed with the Securities and
Exchange Commission on April 11, 1997. The following
items were reported in the Form 8-K:
(1) Item 4. Changes in Registrant's Certifying
Accountant.
(2) Item 7(c). Financial Statements, Pro Forma
Financial Information and Exhibits.
Letters from Ernst & Young LLP and Deloitte & Touche
were filed as Exhibits (letter re change in
certifying accountant).
SIGNATURES
Pursuant to the requirements of 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, 1997 By: /s/ Timothy P. Horne
Timothy P. Horne
Chairman and Chief Executive Officer
Date: May 15, 1997 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 Computation of earnings per share *
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 Current 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
1997 1996 1997 1996
<CAPTION> ________________________ ________________________
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 27,035,887 29,732,876 27,159,486 29,757,391
Net effect of dilutive stock
options-based on the
treasury stock method using
average market price 267,897 0 151,970 0
________________________ ________________________
Total 27,303,784 29,732,876 27,311,456 29,757,391
==================================================
Net earnings (loss) $12,889,000 ($79,273,181)$40,273,000 ($56,361,875)
==================================================
Earnings (loss) per share $ .47 ($2.67) $ 1.47 ($1.89)
==================================================
FULLY-DILUTED
Average shares outstanding 27,035,887 29,732,882 27,159,486 29,768,696
Net effect of dilutive stock
options-based on the
treasury stock method
using the quarter-end
market price, if higher
than average market price 286,988 0 286,988 0
________________________ ________________________
Total 27,322,875 29,732,882 27,446,474 29,768,696
==================================================
Net earnings (loss) $12,889,000 ($79,273,181)$40,273,000 ($56,361,875)
==================================================
Earnings (loss) per share $ .47 ($2.67) $ 1.47 ($1.89)
==================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM MARCH 31, 1997 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-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,380
<SECURITIES> 0
<RECEIVABLES> 140,972
<ALLOWANCES> 7,855
<INVENTORY> 184,200
<CURRENT-ASSETS> 355,439
<PP&E> 275,379
<DEPRECIATION> 124,087
<TOTAL-ASSETS> 629,756
<CURRENT-LIABILITIES> 136,511
<BONDS> 135,052<F1>
<COMMON> 2,704
0
0
<OTHER-SE> 323,799
<TOTAL-LIABILITY-AND-EQUITY> 629,756
<SALES> 534,419
<TOTAL-REVENUES> 534,419
<CGS> 350,181
<TOTAL-COSTS> 468,268<F2>
<OTHER-EXPENSES> 1,139<F3>
<LOSS-PROVISION> 482
<INTEREST-EXPENSE> 7,938
<INCOME-PRETAX> 65,012
<INCOME-TAX> 24,818
<INCOME-CONTINUING> 40,194
<DISCONTINUED> 79
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,273
<EPS-PRIMARY> $1.47
<EPS-DILUTED> $1.47
<FN>
<F1> INCLUDES LONG-TERM DEBT AND CURRENT PORTION
<F2> INCLUDES ONLY COST OF GOODS SOLD AND OPERATING EXPENSES.
<F3> INCLUDES INTEREST EXPENSE AND LOSS PROVISION SHOWN BELOW.
</FN>
</TABLE>
