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 September 30, 1998
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: (978) 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 October 31, 1998
Class A Common, $.10 par value 16,568,807
Class B Common, $.10 par value 10,285,247
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information Page #
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 1998 and June 30, 1998 3
Condensed Consolidated Statements of Income for
the Three Months Ended September 30, 1998 and
September 30, 1997 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended September 30, 1998 and
September 30, 1997 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
Part II. Other Information
Item 1. Legal Proceedings 13-15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
Exhibit 27 - Financial Data Schedule 18
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
----------------------
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited) (Audited)
Sept. 30, June 30,
1998 1998
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,368 $ 10,124
Short-term investments 611 590
Trade accounts receivable, less allowance
for doubtful accounts of $9,952 at September 30, 1998
and $8,913 at June 30, 1998 150,111 130,890
Inventories:
Raw materials 78,477 66,931
Work in process 31,192 32,099
Finished goods 96,215 94,957
--------- ---------
Total Inventories 205,884 193,987
Prepaid expenses and other assets 11,104 10,445
Deferred income taxes 27,800 23,582
Net assets held for sale 2,046 2,046
--------- ---------
Total Current Assets 408,924 371,664
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 329,950 307,931
Accumulated depreciation (153,227) (146,461)
--------- ---------
Property, plant and equipment, net 176,723 161,470
--------- ---------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $17,831 at
September 30, 1998 and $16,689 at June 30, 1998 182,154 119,009
Other 15,777 13,677
--------- ---------
TOTAL ASSETS $ 783,578 $ 665,820
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 52,195 $ 56,672
Accrued expenses and other liabilities 67,169 52,337
Accrued compensation and benefits 16,518 16,250
Income taxes payable 13,899 7,337
Current portion of long-term debt 6,008 1,695
--------- ---------
Total Current Liabilities 155,789 134,291
--------- ---------
LONG-TERM DEBT, NET OF CURRENT PORTION 191,214 115,381
DEFERRED INCOME TAXES 20,125 18,856
OTHER NONCURRENT LIABILITIES 18,864 11,367
MINORITY INTEREST 12,051 11,910
STOCKHOLDERS' EQUITY:
Preferred Stock,$.10 par value; 5,000,000 shares
authorized; no shares issued or outstanding - -
Class A Common Stock, $.10 par value; 80,000,000 shares
authorized; 1 vote per share; issued and outstanding:
16,871,807 shares at September 30, 1998 and 16,859,027
shares at June 30, 1998 1,687 1,686
Class B Common Stock, $.10 par value; 25,000,000 shares
authorized; 10 votes per share; issued and outstanding:
10,285,247 at September 30, 1998 and 10,296,827
shares at June 30, 1998 1,029 1,030
Additional paid-in capital 47,706 47,647
Retained earnings 347,565 337,565
Treasury stock, at cost, 300,000 shares at
September 30, 1998 and 100,000 shares at June 30, 1998 (6,184) (2,583)
Accumulated other comprehensive income (6,268) (11,330)
--------- ---------
Total Stockholders' Equity 385,535 374,015
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 783,578 $ 665,820
========= =========
See accompanying notes to condensed consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share information)
(Unaudited)
Three Months Ended
--------------------
Sept.30, Sept.30,
1998 1997
--------- ---------
Net sales $ 193,925 $ 179,460
Cost of goods sold 127,098 115,553
--------- ---------
GROSS PROFIT 66,827 63,907
Selling, general & administrative expenses 43,939 40,032
--------- ---------
OPERATING INCOME 22,888 23,875
--------- ---------
Other (income) expense:
Interest income (272) (273)
Interest expense 3,545 2,542
Other, net 160 698
--------- ---------
3,433 2,967
--------- ---------
INCOME BEFORE INCOME TAXES 19,455 20,908
Provision for income taxes 7,067 7,288
--------- ---------
NET INCOME $ 12,388 $ 13,620
========= =========
Earnings per common share :
Basic $ 0.46 $ 0.50
========= =========
Diluted $ 0.46 $ 0.50
========= =========
Dividends per common share $ 0.0875 $ 0.0775
========= =========
See accompanying notes to condensed consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
--------------------
Sept.30, Sept.30,
1998 1997
--------- ---------
OPERATING ACTIVITIES
Net income $ 12,388 $ 13,620
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring payments - (732)
Depreciation 5,647 4,492
Amortization 1,328 1,014
Deferred income taxes 298 179
Gain on disposal of assets - (12)
Equity in undistributed earnings of affiliates (86) (59)
Changes in operating assets and liabilities, net of effects
from acquisitions and dispositions:
Accounts receivable (6,996) (10,602)
Inventories 6,378 (1,785)
Prepaid expenses and other assets 521 (178)
Accounts payable, accrued expenses and
other liabilities (5,096) 2,151
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,382 8,088
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment (5,161) (6,610)
Proceeds from sale of assets 1,019 67
Increase(decrease) in other assets 562 (617)
Business acquisitions, net of cash acquired (64,596) (686)
Repayment of debt of acquired business (2,672) -
Net changes in short-term investments (21) (11,123)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (70,869) (18,969)
--------- ---------
FINANCING ACTIVITIES
Proceeds from long-term borrowings 84,000 16,000
Payments of long-term debt (21,977) (13,698)
Proceeds from exercise of stock options 20 494
Dividends (2,363) (2,096)
Purchase of treasury stock (3,601) -
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 56,079 700
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents 1,652 941
--------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS 1,244 (9,240)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,124 13,904
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,368 $ 4,664
========= =========
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 September 30,
1998, its Condensed Consolidated Statements of Income for the three months
ended September 30, 1998 and 1997, and its Condensed Consolidated Statements
of Cash Flows for the three months ended September 30, 1998 and 1997.
The balance sheet at June 30, 1998 has been derived from the audited
financial statements at that date. Certain amounts have been reclassified to
conform with the fiscal 1999 presentation. The accounting policies followed by
the Company are described in the June 30, 1998 financial statements which are
contained in the Company's 1998 Annual Report. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes included in the 1998 Annual Report to Stockholders.
2. On July 22, 1998, a wholly owned subsidiary of the Company purchased Hoke,
Inc. ("Hoke"), headquartered in Cresskill, New Jersey. Hoke is a manufacturer
and distributor of industrial valves and fittings consisting of miniaturized
pressure regulators, needle valves, metering valves, ball valves, plug valves
and also its well known line of GyrolokO tube fittings for instrumentation
applications. Hoke, whose sales for the twelve months ended December 31, 1997
were approximately $70,000,000, sells its products primarily to the chemical
and petrochemical, oil and gas, industrial, OEM, and analytical instrumentation
markets. Sales are conducted through owned and independent stocking
distributors worldwide with nearly one-half of its sales outside of North
America.
During March 1998, a wholly owned subsidiary of the Company purchased
Telford Valve & Specialties, Inc. ("Telford") of Edmonton, Canada. Telford
manufactures check valves, pipeline closures, and specialty gate valves that
are used in industrial and oil and gas applications. Telford is also a
distributor and authorized repair facility for a number of other independent
manufacturers of oilfield products. Annualized sales at the time of the
acquisition were approximately $15,000,000.
During March 1998, a wholly owned subsidiary of the Company purchased the
solenoid valve business of Atkomatic Valve Company ("Atkomatic"). The
Atkomatic product line consists of heavy duty process solenoid valves for
clean air, gases, liquids, steam and corrosive and cryogenic fluids. Sales
for the twelve months ended September 30, 1997 were $4,500,000.
During December 1997, a wholly owned subsidiary of the Company purchased
the pneumatic valve and motion switch business of Aerodyne Controls Corporation
("Aerodyne"). The Aerodyne product line consists of high quality valve
components for medical, analytical, military and aerospace applications. Sales
for the twelve months ended October 1997 were approximately $7,000,000.
During September 1997, a wholly owned subsidiary of the Company purchased
the Orion Fittings Division of Kelstan Plastic Products, Ltd. The Orion
Fittings Division has manufactured corrosion resistant polyolefin piping
systems for laboratory drainage and high purity process installations since
1963. The product line includes pipe, fittings, sinks, neutralizing tanks,
pH alarm and monitoring systems and sediment interceptors. Sales have been
concentrated in the Canadian market and were approximately $584,000 for the
twelve months ended August 31, 1997.
The aggregate purchase price for these acquisitions was approximately
$109,000,000.
3. The following tables set forth the reconciliation of the calculation per
SFAS 128:
For the Three Months Ended September 30, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS
Net Income $12,388,000 27,018,108 $.46
Effect of Dilutive Securities
- - primarily
stock options - 159,172
Diluted EPS $12,388,000 27,177,280 $.46
Options to purchase 838,700 shares of common stock at prices ranging from
$22.13 to $25.38 were outstanding during the three-month period ended September
30, 1998 and were not included in the related computations of diluted EPS since
the exercise price of the options was greater than the average market price of
the common shares during the period.
For the Three Months Ended September 30, 1997
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS
Net Income $13,620,000 27,024,146 $.50
Effect of Dilutive Securities
- - primarily
stock options - 286,243
Diluted EPS $13,620,000 27,310,389 $.50
Options to purchase 302,500 shares of common stock at prices ranging from
$24.75 to $26.13 were outstanding during the three-month period ended September
30, 1997 and were not included in the related computations of diluted EPS since
the exercise price of the options was greater than the average market price of
the common shares during the period.
4. During December 1997, the Company sold a small Italian valve manufacturing
division which was not part of the Company's core business. The division's
sales for the three-month and six-month periods ended September 30, 1997 and
December 31, 1997 were $1,312,000 and $3,386,000, respectively.
5. The Company uses foreign currency forward exchange contracts to reduce the
impact of currency fluctuations on certain anticipated purchase transactions
that are expected to occur within the fiscal year and other known currency
exposures. The notional amount of such contracts and the related realized and
unrealized gains and losses as of September 30, 1998 are not material.
6. Effective July 1, 1998, the Company was required to adopt Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting and presentation of
comprehensive income and its components in financial statements. Accumulated
other comprehensive income in the consolidated balance sheets as of September
30, 1998 and June 30, 1998 consists of cumulative translation adjustments. The
Company's total comprehensive income was as follows:
Three Months Ended September 30
1998 1997
Net Income $12,388 $13,620
Foreign Currency Translation Adjustments 5,062 52
Total Comprehensive Income $17,450 $13,672
7. Contingencies and Environmental Remediation
Contingencies
In April 1998, the Company became aware of a complaint that was filed
under seal in the State of California alleging violations of the California
False Claims Act. The complaint alleges that a former subsidiary of the
Company sold products utilized in municipal water systems which failed to meet
contractually specified standards and falsely certified that such standards had
been met. The complaint further alleges that the municipal entities have
suffered tens of millions of dollars in damages as a result of defective
products and seeks treble damages, reimbursement of legal costs and penalties.
The complaint was amended on November 3, 1998 to include two additional
municipal water utilities and 31 cities in the State of California. The
amended complaint alleges that the additional municipal entities have also
suffered damages and also seeks treble damages, legal costs, attorneys' fees
and penalties. The Company intends to vigorously contest this matter but
cannot presently determine whether any loss will result from it.
Other lawsuits and proceedings or claims, arising from the ordinary course
of operations, are also pending or threatened against the Company and its
subsidiaries. With respect to these other litigation matters, the Company has
established reserves which it presently believes are adequate in light of
probable and estimable exposure to pending and threatened litigation of which
it has knowledge. Also see Part II, Item 1.
Environmental Remediation
The Company has been named a potentially responsible party with respect to
identified contaminated sites. The level of contamination varies significantly
from site to site as do the related levels of remediation efforts.
Environmental liabilities are recorded based on the most probable cost, if
known, or on the estimated minimum cost of remediation. The Company's accrued
estimated environmental liabilities are based on assumptions which are subject
to a number of factors and uncertainties. Circumstances which can affect the
reliability and precision of these estimates include identification of
additional sites, environmental regulations, level of cleanup required,
technologies available, number and financial condition of other contributors to
remediation and the time period over which remediation may occur. The Company
recognizes changes in estimates as new remediation requirements are defined or
as new information becomes available. The Company estimates that its accrued
environmental remediation liabilities will likely be paid over the next five to
ten years. Also see Part II, Item 1.
Item 2. WATTS INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended September 30, 1998 Compared to
Three Months Ended September 30, 1997
Net sales increased $14,465,000 (8.1%) to $193,925,000. An analysis of
this change in net sales is as follows:
Acquisitions $19,638,000 10.9%
Base Sales (4,381,000) (2.4%)
Product Line Divestitures (1,312,000) (0.7%)
Foreign Exchange Rate Effect 520,000 0.3%
Total Increase $14,465,000 8.1%
The increase in net sales from acquisitions is primarily associated with
the acquisitions of Hoke acquired in July 1998, Telford acquired in March 1998,
and Aerodyne acquired in December 1997. The decrease in base sales is
primarily attributable to decreased unit shipments of domestic oil and gas
valves. This decrease is the result of low energy prices and weakness in
orders in the domestic distribution network. This decrease was partially
offset by increased unit shipments of international oil and gas valves which
are not as immediately impacted by the decrease in energy prices as well as
increased unit shipments of North American plumbing and heating valves.
Shipments of European plumbing and heating valves were consistent with last
year.
During December 1997, the Company sold a small Italian valve manufacturing
division which was not part of the Company's core business. The division's
sales for the three-month period ended September 30, 1997 were $1,312,000.
Gross profit increased $2,920,000 (4.6%) but decreased as a percentage of
net sales from 35.6% to 34.5%. The gross margin percentage declined due to a
decrease in gross margins for North American plumbing and heating valves and
domestic oil and gas valves. The gross margin on North American plumbing and
heating valves declined due to an inventory reduction program which reduced the
absorption of fixed expenses in the quarter. The gross margin on domestic oil
and gas valves decreased due to increased pricing pressures. The reduced cost
of oil has diminished the demand for valves. Competing valve manufacturers
have reduced selling prices to capture the remaining business. These
decreases were partially offset by improved gross margins of the Company's
Jameco product line associated with improved manufacturing efficiencies.
Selling, general and administrative expenses increased $3,907,000 (9.8%)
to $43,939,000. This increase is attributable to the inclusion of the expenses
of acquired companies. These expenses were partially offset by spending
reductions at several of the Company's subsidiaries.
Interest expense increased $1,003,000 (39.5%) to $3,545,000. This
increase is attributable to increased borrowings associated with the Company's
acquisition program.
Net income decreased $1,232,000 (9.0%) to $12,388,000.
The changes in foreign exchange rates had an immaterial effect on net
income for the quarter.
Liquidity and Capital Resources
During the three-month period ended September 30, 1998, the Company
generated $14,382,000 in cash flow from operations, which was principally used
to fund capital expenditures of $5,161,000 and pay down debt. These capital
expenditures were primarily for manufacturing machinery and equipment as part
of the Company's commitment to continuously improve its manufacturing
capabilities. The Company's capital expenditure budget for fiscal 1999 is
$29,000,000.
During the three months ended September 30, 1998, the Company purchased
200,000 shares of its Class A Common Stock in open market purchases, as part of
its previously announced stock buy-back program. Total funds used to purchase
these shares were $3,601,000.
On July 22, 1998, a wholly owned subsidiary of the Company purchased Hoke,
headquartered in Cresskill, New Jersey. Hoke is a manufacturer and distributor
of industrial valves and fittings consisting of miniaturized pressure
regulators, needle valves, metering valves, ball valves, plug valves and also
its well known line of GyrolokO tube fittings for instrumentation
applications. Hoke, whose sales for the twelve months ended December 31, 1997
were approximately $70,000,000, sells its products primarily to the chemical
and petrochemical, oil and gas, industrial, OEM, and analytical instrumentation
markets. Sales are conducted through owned and independent stocking
distributors worldwide with nearly one-half of its sales outside of North
America. The purchase price including the assumption of debt was approximately
$85,000,000 subject to certain post-closing adjustments and was funded using
the Company's line of credit facility.
The Company has available an unsecured $125,000,000 line of credit which
expires on March 27, 2003. The Company's intent is to utilize this credit
facility to support the Company's acquisition program, working capital
requirements of acquired companies and for general corporate purposes. As of
June 30, 1998, $19,000,000 was borrowed under this line of credit. As of
September 30, 1998, $83,000,000 was borrowed under this line of credit. The
change in the outstanding borrowing is primarily attributable to the Company's
acquisition program.
The ratio of current assets to current liabilities was 2.6 to 1 at
September 30, 1998 compared to 2.8 to 1 at June 30, 1998. Cash and short-term
investments were $11,979,000 at September 30, 1998 compared to $10,714,000 at
June 30, 1998. Debt as a percentage of total capital employed was 33.8% at
September 30, 1998 compared to 23.8% at June 30, 1998. At September 30, 1998,
the Company was in compliance with all covenants related to its existing debt.
The Company from time to time is involved with product liability,
environmental proceedings and other litigation proceedings and incurs costs on
an ongoing basis related to these matters. The Company did not incur material
expenditures in the first quarter of fiscal 1999 in connection with any of
these matters. 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.
The Company has developed a comprehensive global plan to assess and
address in a timely manner its information systems including customer service,
production, distribution and financial systems in conjunction with the year
2000. A significant portion of the Company's year 2000 issues are being
addressed as part of its program to upgrade its information systems which the
Company had committed to regardless of the year 2000 issue. This program
commenced in fiscal 1997 and should be substantially complete by the end of
fiscal 1999. The Company has spent approximately $8,300,000 on computer
hardware and software for this information systems upgrade program and expects
to spend approximately $1,500,000 on additional similar costs to complete the
upgrade. If it becomes necessary to dedicate additional financial and other
resources to complete the Company's information systems upgrade program by the
end of fiscal year 1999, or shortly thereafter, the Company will do so.
The Company is also communicating with its suppliers, distributors and
others with whom it conducts business to coordinate year 2000 compliance and to
identify alternative sources of supply for its materials. The implementation
of these plans is not expected to have a material adverse effect on the
results of operations or the financial condition of the Company. The Company
presently believes alternative sources of supply will be available in the
event of unforeseen year 2000 compliance issues that affect suppliers'
abilities to fulfill requirements. If production and other plans need to be
modified because of unforeseen year 2000 issues at distributors and others
with whom the Company conducts business, the Company will do so when the
need for such modification becomes apparent.
If the Company or its suppliers, distributors or others with whom it
conducts business are unable to identify and address the system issues related
to year 2000 risk on a timely basis, there could be a material adverse effect
on its results of operations and financial condition.
On January 1, 1999, 11 of the 15 member countries of the European Union are
scheduled to adopt the Euro as their common legal currency and to establish
fixed conversion rates between their existing sovereign currencies and the
Euro. The Euro will then trade on currency exchanges and be available for
non-cash transactions. The introduction of the Euro will affect the Company
as the Company has manufacturing and distribution facilities in several of
the member countries and trades extensively across Europe. The long-term
competitive implications of the conversion are currently being assessed by
the Company, however, the Company will experience an immediate reduction in
the risks associated with foreign exchange. At this time, the Company is
not anticipating that any significant costs will be incurred due to the
introduction and conversion to the Euro.
The Company uses foreign currency forward exchange contracts to reduce the
impact of currency fluctuations on certain intercompany purchase transactions
that will occur within the fiscal year and other known foreign currency
exposures. The notional amount of such contracts and the related realized and
unrealized gains and losses as of September 30, 1998 are not material.
Certain statements contained herein are forward looking. Many factors
could cause actual results to differ from these statements, including loss of
market share through competition; introduction of competing products by other
companies; pressure on prices from competitors, suppliers, and/or customers;
regulatory obstacles; lack of acceptance of new products; changes in the
plumbing and heating and oil and gas markets; changes in global demand for the
Company's products; changes in distribution of the Company's products; interest
rates; foreign exchange fluctuations; cyclicality of industries in which the
Company markets certain of its products and general and economic factors in
markets where the Company's products are sold, manufactured or marketed; and
other factors discussed in the Company's reports filed with the Securities and
Exchange Commission.
Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures
about Segments of an Enterprise and Related Information, and SFAS No. 132,
Employers Disclosures About Pensions and Other Post-Retirement Benefits, become
effective during fiscal year 1999 and will be adopted accordingly. Since these
new standards require only additional disclosure, adoption will have no effect
on the Company's results of operation or financial condition.
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, becomes effective in fiscal year 2000. This new standard will
require the Company to recognize all derivative instruments as either assets or
liabilities at fair value in its consolidated balance sheet. The Company is
currently evaluating the effect of this new standard.
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 and other litigation
matters.
Product Liability
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. Leslie Controls is also a
defendant in two similar matters pending in Superior Court of California, San
Francisco County. 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. Coverage with respect to these matters
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. 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 or results of operations.
Environmental
Certain of the Company's operations generate solid and hazardous wastes,
which are disposed of elsewhere by arrangement with the owners or operators of
disposal sites or with transporters of such waste. The Company's foundry and
other operations are subject to various federal, state and local laws and
regulations relating to environmental quality. Compliance with these laws and
regulations requires the Company to incur expenses and monitor its operations
on an ongoing basis. The Company cannot predict the effect of future
requirements on its capital expenditures, earnings or competitive position
due to any changes in federal, state or local environmental laws, regulations
or ordinances.
The Company is currently a party to or otherwise involved 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 ("PRPs"). Three of these sites,
the Sharkey and Combe Landfills in New Jersey, and the San Gabriel Valley/El
Monte, California water basin site, 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 PRPs 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 PRPs, including the Company, are currently
negotiating with the state. The Company and certain of the remaining PRPs have
recently entered into a Consent Order with the U.S. Environmental Protection
Agency to settle the federal exposure for this site in return for a non-
material payment.
During the quarter ending March 31, 1998, the Company received an
administrative order from the New Hampshire Department of Environmental
Services with respect to certain regulatory issues concerning its Franklin,
New Hampshire operation. The Company has appealed this administrative order.
The state agency has not as of yet issued any fines or penalties in
connection with this matter.
Based on facts presently known to it, the Company does not believe that
the outcome of these environmental proceedings will have a material adverse
effect on its financial condition or results of operations. Given the nature
and scope of the Company's manufacturing operations, there can be no assurance
that the Company will not become subject to other environmental proceedings and
liabilities in the future which may be material to the Company. See Note 7 of
the Notes to the Condensed Consolidated Financial Statements.
James Jones Litigation
On June 25, 1997, Nora Armenta, as a relator for the State of California,
filed a civil action in the Superior Court of California for the County of Los
Angeles against the Company and three other defendants. The complaint, which
was filed under seal, was brought pursuant to the qui tam provision of the
California False Claims Act, Cal. Govt. Code 12650 et seq ("False Claims
Act"). The Company became aware of the complaint in April 1998, after the seal
was lifted. The relator is a former employee of a former subsidiary of the
Company.
The complaint alleged that a former subsidiary of the Company sold
products utilized in municipal water systems which failed to meet contractually
specified standards and falsely certified that such standards had been met.
The only municipal water system specifically identified in the original
complaint was the Los Angeles Department of Water and Power ("LADWP"). The
relator alleged that municipal entities have suffered tens of millions of
dollars in damages as a result of their purchase of these products. The
relator also sought treble damages, legal costs, attorneys' fees, and
penalties under the False Claims Act. In May 1998, the Company and the other
defendants filed a demurrer to the complaint. On July 21, 1998, the Court
sustained the demurrer and gave the relator forty five (45) days to file an
amended complaint. This deadline was subsequently extended to November 4, 1998.
On November 3, 1998, the relator filed an amended complaint under the
False Claims Act. In the amended complaint, the relator brings her action on
behalf of the LADWP as well as additional municipal entities, consisting of the
East Bay Municipal Utility District, the San Gabriel Valley Municipal Water
District, and 31 cities in the State of California. The relator alleges that
the Company's former subsidiary sold products which did not meet contractually
specified standards were used by each of these entities in their water
systems. In addition to the damages alleged to have been suffered by the
LADWP, the relator claims that the additional municipal entities have also
suffered damages as a result of their purchase of these products. The
relator also seeks treble damages, legal costs, attorneys' fees, and
penalties under the False Claims Act.
On November 6, 1998, the LADWP filed a motion to intervene in this action
and alleged additional causes of action. The Company has opposed the motion,
and the Court has indicated that the motion will likely be heard in early
December 1998. To date, no other entity has indicated that it intends to
intervene in this action. The Company intends to vigorously contest this
matter, and discovery is currently under way. Presently, the Company cannot
determine whether any loss will result from this action. See Note 7 of the
Notes to the Condensed Consolidated Financial Statements.
Other Litigation
Other lawsuits and proceedings or claims, arising from the ordinary course
of operations, are also pending or threatened against the Company and its
subsidiaries. Based on the facts currently known to it, the Company does not
believe that the ultimate outcome of these other litigation matters will have a
material adverse effect on its financial condition or results of operation.
See Note 7 of the Notes to the Condensed Consolidated Financial Statements.
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 with the Securities and Exchange
Commission for the quarter ended September 30, 1998.
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: November 11, 1998 By: /s/ Timothy P. Horne
Timothy P. Horne
Chairman and Chief Executive
Officer
Date: November 11, 1998 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 (3)
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.
(3) Incorporated by reference to the Notes to Condensed Consolidated Financial
Statements, Note 3, of this Report.
*Filed herewith.
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM SEPTEMBER 30, 1998 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] JUN-30-1999
[PERIOD-END] SEP-30-1998
[CASH] 11,368
[SECURITIES] 611
[RECEIVABLES] 160,063
[ALLOWANCES] 9,952
[INVENTORY] 205,884
[CURRENT-ASSETS] 408,924
[PP&E] 329,950
[DEPRECIATION] 153,227
[TOTAL-ASSETS] 783,578
[CURRENT-LIABILITIES] 155,789
[BONDS] 197,222<F1>
[COMMON] 2,716
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 382,819
[TOTAL-LIABILITY-AND-EQUITY] 783,578
[SALES] 193,925
[TOTAL-REVENUES] 193,925
[CGS] 127,098
[TOTAL-COSTS] 171,037<F2>
[OTHER-EXPENSES] 3,433<F3>
<LOSS-PROVISION > 363
[INTEREST-EXPENSE] 3,545
[INCOME-PRETAX] 19,455
[INCOME-TAX] 7,067
[INCOME-CONTINUING] 12,388
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 12,388
[EPS-PRIMARY] $.46
[EPS-DILUTED] $.46
</TABLE>
[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>
