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 December 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 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 January 31, 1997
Class A Common, $.10 par value 15,672,660
Class B Common, $.10 par value 11,365,627
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information Page #
Item 1. Condensed Consolidated Balance Sheets at
December 31, 1996 and June 30, 1996 3
Condensed Consolidated Statements of
Earnings for the Three Months Ended
December 31, 1996 and December 31, 1995 4
Condensed Consolidated Statements of
Earnings for the Six Months Ended
December 31, 1996 and December 31, 1995 5
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended December 31,
1996 and December 31, 1995 6
Notes to Condensed Consolidated Financial
Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
Part II. Other Information
Item 1. Legal Proceedings 13-14
Item 4. Submission of Matters to a Vote of Security
Holders 14-15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
Exhibit 11 - Computation of Per Share Earnings 18
Exhibit 27 - Financial Data Schedule 19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share information)
(Unaudited)
Dec. 31, June 30,
1996 1996
_________ _________
CURRENT ASSETS
Cash and cash equivalents....................$ 4,230 $ 0
Short-term investments....................... 0 0
Trade accounts receivable, less allowance
for doubtful accounts of $8,505 and $8,822. 132,170 116,370
Inventories:
Finished goods......................... 83,629 86,922
Work in process........................ 32,811 30,994
Raw materials.......................... 67,504 64,182
_________ _________
183,944 182,098
Prepaid expenses and other assets............ 13,404 9,283
Deferred tax benefit......................... 22,514 24,662
Net assets held for sale .................... 0 78,401
_________ _________
Total Current Assets.................... 356,262 410,814
OTHER ASSETS
Intangible assets, net....................... 5,955 6,248
Goodwill, net................................ 79,420 79,489
Other........................................ 5,015 6,457
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost........ 273,166 260,328
Less allowance for depreciation............. (120,705) (112,378)
_________ _________
152,461 147,950
_________ _________
TOTAL ASSETS $ 599,113 $ 650,958
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.............................$ 45,065 $ 46,022
Accrued expenses and other liabilities....... 78,738 78,573
Accrued compensation and related items....... 7,413 7,756
Income taxes................................. 2,810 687
Current portion of long-term debt............ 2,331 2,907
_________ _________
Total Current Liabilities............... 136,357 135,945
LONG-TERM DEBT, less current portion............ 109,296 160,243
DEFERRED INCOME TAXES........................... 12,620 13,842
OTHER LIABILITIES............................... 9,633 10,291
MINORITY INTEREST............................... 11,337 11,054
STOCKHOLDERS' EQUITY
Class A Common Stock, $.10 par value;
80,000,000 shares authorized, 16,172,960
shares issued and outstanding at Dec. 31,
including shares in treasury................. 1,617 1,686
Class B Common Stock, $.10 par value;
25,000,000 shares authorized, 11,365,627
shares issued and outstanding at Dec. 31..... 1,136 1,136
Additional paid-in capital................... 55,440 67,930
Retained earnings............................ 272,944 249,415
Treasury Stock at cost - 530,200 shares
at Dec. 31................................... (10,413) 0
Equity adjustment from translation........... (854) (584)
_________ _________
Total Stockholders' Equity.............. 319,870 319,583
_________ _________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......$ 599,113 $ 650,958
========= =========
See accompanying notes to condensed consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended
Dec. 31, Dec. 31,
1996 1995
_________ _________
Net sales ......................................$ 174,220 $ 156,593
Cost of goods sold ............................. 114,068 100,680
_________ _________
GROSS PROFIT ................................ 60,152 55,913
Selling, general & administrative expenses ..... 39,014 36,705
_________ _________
OPERATING EARNINGS ......................... 21,138 19,208
Other (income) expense:
Interest income ............................. (173) (70)
Interest expense ............................ 2,469 2,579
Other - net ................................. 262 220
_________ _________
2,558 2,729
EARNINGS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES .............. 18,580 16,479
Income tax provision ........................... 6,830 6,428
_________ _________
EARNINGS FROM CONTINUING OPERATIONS .........$ 11,750 $ 10,051
EARNINGS FROM DISCONTINUED OPERATIONS ....... 0 726
_________ _________
NET EARNINGS.................................$ 11,750 $ 10,777
========= =========
Primary and fully-diluted earnings per share :
CONTINUING OPERATIONS ......................... $0.43 $0.33
DISCONTINUED OPERATIONS ....................... 0.00 0.03
_________ _________
NET EARNINGS .................................. $0.43 $0.36
========= =========
Cash dividends per share.......................... $ .0700 $ .0625
See accompanying notes to condensed consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except per share data)
(Unaudited)
Six Months Ended
Dec. 31, Dec. 31,
1996 1995
_________ _________
Net sales ......................................$ 350,228 $ 310,722
Cost of goods sold ............................. 229,720 197,888
_________ _________
GROSS PROFIT ................................ 120,508 112,834
Selling, general & administrative expenses ..... 77,104 72,051
_________ _________
OPERATING EARNINGS ......................... 43,404 40,783
Other (income) expense:
Interest income ............................. (272) (377)
Interest expense ............................ 5,223 4,987
Other - net ................................. 451 823
_________ _________
5,402 5,433
EARNINGS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES .............. 38,002 35,350
Income tax provision ........................... 13,906 13,635
_________ _________
EARNINGS FROM CONTINUING OPERATIONS .........$ 24,096 $ 21,715
EARNINGS FROM DISCONTINUED OPERATIONS ....... 79 1,196
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS . 3,208 0
_________ _________
NET EARNINGS.................................$ 27,383 $ 22,911
========= =========
Primary and fully-diluted earnings per share :
CONTINUING OPERATIONS ......................... $0.88 $0.72
DISCONTINUED OPERATIONS ....................... 0.00 0.05
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS ... 0.12 0.00
_________ _________
NET EARNINGS .................................. $1.00 $0.77
========= =========
Cash dividends per share.......................... $ .1400 $ .1250
See accompanying notes to condensed consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six Months Ended
Dec. 31, Dec. 31,
1996 1995
_________ _________
OPERATING ACTIVITIES
Earnings from continuing operations $ 24,096 $ 21,715
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 10,266 12,045
Provision (benefit) for deferred
income taxes 853 (1,189)
Loss (gain) on disposal of fixed assets (98) 32
Changes in operating assets and liabilities,
net of effects from business acquisitions and
discontinued operations:
Accounts receivable (16,213) (1,996)
Inventories (1,241) (9,171)
Prepaid expenses and other assets (2,696) (2,914)
Accounts payable and accrued expenses (9,801) 5,236
_________ _________
5,166 23,758
Net cash provided by (used in)
discontinued operations 511 (153)
_________ _________
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,677 23,605
INVESTING ACTIVITIES
Additions to property, plant and equipment (13,159) (15,636)
Proceeds from disposal of equipment 248 657
Increase in intangible assets (789) (853)
Discontinued Operations:
Additions to property, plant and equipment 0 (463)
Proceeds from sale of discontinued operations 90,581 0
Business acquisitions, net of cash acquired (862) (13,110)
Net changes in short-term investments 0 4,483
_________ _________
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 76,019 (24,922)
FINANCING ACTIVITIES
Purchase of treasury stock (10,413) 0
Purchase and retirement of common stock (12,657) 0
Proceeds from exercise of stock options 99 62
Proceeds of long-term borrowings 46,879 33,096
Payments of long-term debt (98,433) (31,223)
Cash dividends (3,855) (3,704)
_________ _________
NET CASH USED IN FINANCING ACTIVITIES (78,380) (1,769)
Effect of exchange rate changes on cash and
cash equivalents 914 (242)
_________ _________
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,230 (3,328)
Cash and cash equivalents at beginning of period 0 4,257
_________ _________
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,230 $ 929
========= =========
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 December 31, 1996, the Condensed
Consolidated Statements of Earnings for the three and six months
ended December 31, 1996 and December 31, 1995, and the Condensed
Consolidated Statements of Cash Flows for the six months ended
December 31, 1996 and December 31, 1995.
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.
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 the period July 1, 1996 through September 4, 1996 have been
reported as income from discontinued operations, net of income
taxes, and the income statement for the six months ended December
31, 1995 has been reclassified to conform with the 1996
presentation.
The following table sets
forth summary information
relating to the Municipal
Water Group:
Dollars in thousands
July 1, 1996 Six Months Ended
through December 31, 1995
September 4,
1996
Revenues $13,958 $41,533
Costs and expenses $13,830 $39,525
Income before income taxes $ 128 $2,008
Income taxes $ 49 $812
Income from Discontinued
Operations $ 79 $1,196
3. 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
$2.5 million for the 12 months ended May 31, 1996.
In January of 1997, a wholly owned subsidiary of the Company
purchased Ames Company, 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 million.
The aggregate purchase price for these acquisitions was
approximately $53,200,000.
4. On April 16, 1996 and July 17, 1996 the Board of Directors
authorized the Company to repurchase up to 2,000,000 and 1,000,000
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, in effect, generated from the sale of the
Municipal Waterworks Group.
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 and the downsizing of
Pibiviesse S.p.A. (PBVS).
The Company has decided to relocate the manufacturing
operations of Jameco Industries 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
essentially 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 streamline and downsize the operations of
its PBVS subsidiary. This has resulted in reduced headcount and a
reduction in certain fixed overhead costs.
Since the start of the restructuring, in March of 1996,
through December 31, 1996, 146 employees have been released and
$2,393,000 has been paid in severance. The total provision for
severance recorded in fiscal 1996 was $9,300,000.
Conclusion
It is expected that the restructuring plan will require more
than two years to complete with some positive effects being
realized during this fiscal year.
Results of Operations
Quarter Ended December 31, 1996 Compared to
Quarter Ended December 31, 1995
Net sales from continuing operations increased $17,627,000
(11.3%) to $174,220,000. This increase was primarily attributable
to increased unit shipments of both plumbing and heating valves and
oil and gas valves. The increased unit shipments of plumbing and
heating valves is primarily associated with increased demand from
plumbing and heating wholesalers and increased market penetration
into the do-it-yourself markets. In addition, the inclusion of the
net sales of acquired companies accounted for $1,621,000 of the
sales increase. These acquisitions include Artec, GmbH ("Artec")
acquired in March of 1996 located in Oberhausen, Germany, and
Consolidated Precision Corporation ("CPC") acquired in September of
1996 located in Riviera Beach, Florida. 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 $4,239,000
(7.6%) to $60,152,000 and decreased as a percentage of net sales
from 35.7% to 34.5%. This percentage decrease is primarily the
result of inventory reduction programs at certain of the Company's
subsidiaries which reduced the absorption of fixed overhead costs.
The Company also experienced unfavorable sales mix variances.
Selling, general and administrative expenses from continuing
operations increased $2,309,000 (6.3%) to $39,014,000. This
increase was primarily attributable to increased variable selling
expenses associated with the increased sales and the inclusion of
the expenses of acquired companies.
Earnings from continuing operations increased $1,699,000
(16.9%) to $11,750,000. The Company's return on investment was
14.3% for the quarter ended December 31, 1996 compared to 9.5% for
the quarter ended December 31, 1995.
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
December 31, 1996, decreased to 27,194,005 from 29,746,910 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 $.43 for the three months ended December 31, 1996
compared to earnings per share of $.33 for the three months ended
December 31, 1995. Earnings per share from discontinued operations
during the quarter ended December 31, 1996 were zero and were $.03
for the quarter ended December 31, 1995.
Results of Operations
Six Months Ended December 31, 1996 Compared to
Six Months Ended December 31, 1995
Net sales from continuing operations increased $39,506,000
(12.7%) to $350,228,000. This increase was primarily attributable
to unit shipments of both plumbing and heating valves and oil and
gas valves. The increased unit shipments of plumbing and heating
valves is supported by increased wholesaler demand as well as
increased penetration into the do-it-yourself markets. In
addition, the inclusion of the net sales of acquired companies
accounted for $4,905,000 of the sales increase. These acquisitions
primarily included Societe des Etablissements Rene Trubert S.A.
("Trubert") acquired in August of 1995 located in Chartres, France;
and Artec, GmbH ("Artec") acquired in March of 1996 located in
Oberhausen, Germany; and Consolidated Precision Corporation ("CPC")
acquired in September of 1996 located in Riviera Beach, Florida.
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 $7,674,000
(6.8%) to $120,508,000 and decreased as a percentage of net sales
from 36.3% to 34.4%. Gross profit was adversely affected
primarily as a result of higher sales of oil and gas valves whose
gross margin percentage is lower than the Company's overall gross
margin percentage and an unfavorable sales mix variance on certain
valves within the plumbing and heating product line. The inventory
reduction program did not adversely affect the gross margin for the
six months ended December 31, 1996.
Selling, general and administrative expenses from continuing
operations increased $5,053,000 (7.0%) to $77,104,000. The increase
in spending is primarily attributable to increased variable selling
expenses associated with the increased sales and the inclusion of
the expenses of acquired companies. These expenses decreased as a
percentage of sales from 23.2% in fiscal 1996 to 22.0% in fiscal
1997.
Earnings from continuing operations (excluding the gain on the
sale of the Municipal Waterworks Group) increased $2,381,000
(11.0%) to $24,096,000. The Company's return on investment
(excluding the gain on the sale of the Municipal Waterworks Group)
for the six months ended December 31, 1996 was 14.7% as compared to
10.2% for the six months ended December 31, 1995.
The Company recorded an after tax gain on the disposal of the
Municipal Waterworks Group of $3,208,000. This gain is subject to
potential post-closing adjustments.
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
December 31, 1996, decreased to 27,315,292 from 29,769,648 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 $.88 (excluding the gain of $.12 per share on the
sale of the Municipal Waterworks Group) for the six months ended
December 31, 1996 compared to earnings per share of $.72 for the
six months ended December 31, 1995. This is an increase of 22.2%.
Earnings per share from discontinued operations were zero for the
six months ended December 31, 1996 compared to $.05 per share for
the six months ended December 31, 1995.
Liquidity and Capital Resources
During the six months ended December 31, 1996, the Company
received $90,581,000 of proceeds as a result of its sale of the
Municipal Waterworks 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 six months ended December 31, 1996, the Company
spent $13,159,000 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.
Working capital at December 31, 1996 was $219,905,000 compared
to $196,468,000 at June 30, 1996. The ratio of current assets to
current liabilities was 2.6 to 1 at December 31, 1996 compared to
2.5 to 1 at June 30, 1996. Cash and short-term investments were
$4,230,000 at December 31, 1996 and zero at June 30, 1996. Debt as
a percentage of total capital employed was 25.9% at December 31,
1996 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 Waterworks 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 December
31, 1996, there was $10,000,000 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
recently filed suit against certain of the PRP's, however, the
Company was not named as a 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 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of the Company was
held on October 15, 1996.
(c) The results of the voting on the proposals considered at
the Annual Meeting of Stockholders are as follows:
1. Election of Directors
Timothy P. Horne, David A. Bloss, Sr., Frederic B.
Horne, Kenneth J. McAvoy, Noah T. Herndon, Wendy E. Lane, Gordon W.
Moran, and Daniel J. Murphy III were each elected as a Director of
the Company for a term expiring at the next Annual Meeting of
Stockholders. The voting results were as follows:
Mr. T. Horne: 123,043,880 votes FOR; 840,823 votes WITHHELD
Mr. Bloss: 123,045,230 votes FOR; 839,473 votes WITHHELD
Mr. F. Horne: 123,043,950 votes FOR; 840,753 votes WITHHELD
Mr. McAvoy: 123,045,630 votes FOR; 839,073 votes WITHHELD
Mr. Herndon: 123,044,854 votes FOR; 839,849 votes WITHHELD
Ms. Lane: 123,042,972 votes FOR; 841,731 votes WITHHELD
Mr. Moran: 123,045,252 votes FOR; 839,451 votes WITHHELD
Mr. Murphy: 123,045,287 votes FOR; 839,416 votes WITHHELD
2. Ratification of Independent Auditors
The selection of Ernst & Young as the independent
auditors of the Company for the current fiscal year was ratified
and voting results were as follows:
123,863,163 FOR; 11,185 AGAINST; 10,355 ABSTAINED; and 0
Broker Non-Votes
3. To approve the Watts Industries, Inc. 1996 Stock
Option Plan. The stockholders approved the adoption of the Watts
Industries, Inc. 1996 Stock Option Plan and voting results were as
follows:
116,800,215 FOR; 5,581,544 AGAINST; 185,705 ABSTAINED; and
1,317,239 Broker Non-Votes
Item 6. Exhibits and Reports on Form 8-K.
(a) The Exhibits are furnished elsewhere in this report.
(b) There were no reports filed on Form 8-K during the quarter
ended December 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.
/s/ Timothy P. Horne
Date: February 13, 1997 By:_____________________
Timothy P. Horne
President
/s/ Kenneth J. McAvoy
Date: February 13, 1997 By: ____________________
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 Six Months Ended
December 31 December 31
1996 1995 1996 1995
<CAPTION> ________________________________________________
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 27,035,972 29,636,765 27,221,285 29,631,939
Net effect of dilutive stock
options-based on the
treasury stock method using
average market price 158,033 110,145 94,007 137,709
________________________________________________
Total 27,194,005 29,746,910 27,315,292 29,769,648
================================================
Net earnings $11,750,000 $10,777,000 $27,383,000 $22,911,000
================================================
Earnings per share $ .43 $ .36 $ 1.00 $ .77
================================================
FULLY-DILUTED
Average shares outstanding 27,035,972 29,636,765 27,221,285 29,631,939
Net effect of dilutive stock
options-based on the
treasury stock method
using the quarter-end
market price, if higher
than average market price 200,325 124,779 200,325 154,664
________________________________________________
Total 27,236,297 29,761,544 27,421,610 29,786,603
================================================
Net earnings $11,750,000 $10,777,000 $27,383,000 $22,911,000
================================================
Earnings per share $ .43 $ .36 $ 1.00 $ .77
================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM DECEMBER 31, 1996 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 4,230
<SECURITIES> 0
<RECEIVABLES> 132,170
<ALLOWANCES> 8,505
<INVENTORY> 183,944
<CURRENT-ASSETS> 356,262
<PP&E> 152,461
<DEPRECIATION> 120,705
<TOTAL-ASSETS> 599,113
<CURRENT-LIABILITIES> 136,357
<BONDS> 111,627
<COMMON> 2,753
0
0
<OTHER-SE> 317,117
<TOTAL-LIABILITY-AND-EQUITY> 599,113
<SALES> 350,228
<TOTAL-REVENUES> 350,228
<CGS> 229,720
<TOTAL-COSTS> 306,824<F1>
<OTHER-EXPENSES> (1,170)<F2>
<LOSS-PROVISION> 316
<INTEREST-EXPENSE> 5,223
<INCOME-PRETAX> 44,574
<INCOME-TAX> 17,270
<INCOME-CONTINUING> 27,304
<DISCONTINUED> 79
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,383
<EPS-PRIMARY> $1.00
<EPS-DILUTED> $1.00
<FN>
<F1> INCLUDES ONLY COST OF GOODS SOLD AND OPERATING EXPENSES.
<F2> INCLUDES INTEREST EXPENSE AND LOSS PROVISION SHOWN BELOW.
</FN>
</TABLE>
