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 December 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:
(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 January 31, 1998
Class A Common, $.10 par value 16,398,527
Class B Common, $.10 par value 10,703,427
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information Page #
Item 1. Condensed Consolidated Balance Sheets
at December 31, 1997 and June 30, 1997 3
Condensed Consolidated Statements of
Operations for the Three Months Ended
December 31, 1997 and December 31, 1996 4
Condensed Consolidated Statements of
Operations for the Six Months Ended
December 31, 1997 and December 31, 1996 5
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended
December 31, 1997 and December 31, 1996 6
Notes to Condensed Consolidated Financial 7-10
Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
Part II. Other Information
Item 1. Legal Proceedings 14-15
Item 4. Submission of Matters to a Vote of Security Holders 15-16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
Exhibit 27 - Financial Data Schedule 19
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
----------------------
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited) (Audited)
Dec. 31, June 30,
1997 1997
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,540 $ 13,904
Short-term investments 1,700 518
Trade accounts receivable, less allowance
for doubtful accounts of $8,762 at December 31, 1997
and $7,945 at June 30, 1997 131,303 121,349
Inventories:
Raw materials 72,304 64,261
Work in process 30,980 26,030
Finished goods 78,286 80,926
--------- ---------
Total Inventories 181,570 171,217
Prepaid expenses and other assets 16,385 13,087
Deferred income taxes 22,250 22,480
Net assets held for sale 2,046 3,037
--------- ---------
Total Current Assets 367,794 345,592
OTHER ASSETS:
Goodwill, net of accumulated amortization of $14,939 at
December 31, 1997 and $13,484 at June 30, 1997 116,273 110,928
Other 13,116 12,869
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 292,037 281,231
Accumulated depreciation (137,282) (128,537)
--------- ---------
Property, plant and equipment, net 154,755 152,694
--------- ---------
TOTAL ASSETS $ 651,938 $ 622,083
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 50,558 $ 48,896
Accrued expenses and other liabilities 59,261 53,738
Accrued compensation and benefits 12,215 15,834
Current portion of long-term debt 2,128 2,422
--------- ---------
Total Current Liabilities 124,162 120,890
LONG-TERM DEBT, NET OF CURRENT PORTION 131,082 125,937
DEFERRED INCOME TAXES 16,641 16,675
OTHER NONCURRENT LIABILITIES 12,587 13,796
MINORITY INTEREST 11,738 11,146
STOCKHOLDERS' EQUITY:
Preferred Stock,$.10 par value; 5,000,000 shares authorized;
no shares issued or outstanding - -
Class A Common Stock, $.10 par value; 1 vote per share;
80,000,000 shares authorized; issued and outstanding:
16,009,627 shares at December 31, 1997 and 15,797,460
shares at June 30, 1997 1,601 1,580
Class B Common Stock, $.10 par value; 10 votes per share;
25,000,000 shares authorized; issued and outstanding:
11,059,127 at December 31, 1997 and 11,215,627
shares at June 30, 1997 1,106 1,121
Additional paid-in capital 45,780 44,643
Retained earnings 316,206 293,170
Cumulative translation adjustment (8,965) (6,875)
--------- ---------
Total Stockholders' Equity 355,728 333,639
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 651,938 $ 622,083
========= =========
See accompanying notes to condensed consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share information)
(Unaudited)
Three Months Ended
--------------------
Dec. 31, Dec. 31,
1997 1996
--------- ---------
Net sales $ 179,198 $ 174,220
Cost of goods sold 115,490 114,068
--------- ---------
GROSS PROFIT 63,708 60,152
Selling, general & administrative expenses 40,708 39,014
--------- ---------
OPERATING INCOME 23,000 21,138
--------- ---------
Other (income) expense:
Interest income (311) (173)
Interest expense 2,434 2,469
Other, net 263 262
--------- ---------
2,386 2,558
--------- ---------
INCOME BEFORE INCOME TAXES 20,614 18,580
Provision for income taxes 7,005 6,830
--------- ---------
NET INCOME $ 13,609 $ 11,750
========= =========
Income per common share :
Basic $ 0.50 $ 0.43
========= =========
Diluted $ 0.50 $ 0.43
========= =========
Dividends per common share $ 0.0775 $ 0.0700
========= =========
See accompanying notes to condensed consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share information)
(Unaudited)
Six Months Ended
--------------------
Dec. 31, Dec. 31,
1997 1996
--------- ---------
Net sales $ 358,658 $ 350,228
Cost of goods sold 231,043 229,720
--------- ---------
GROSS PROFIT 127,615 120,508
Selling, general & administrative expenses 80,740 77,104
--------- ---------
OPERATING INCOME 46,875 43,404
--------- ---------
Other (income) expense:
Interest income (584) (272)
Interest expense 4,976 5,223
Other, net 961 451
--------- ---------
5,353 5,402
--------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 41,522 38,002
Provision for income taxes 14,293 13,906
--------- ---------
INCOME FROM CONTINUING OPERATIONS 27,229 24,096
Income from discontinued operations, net of taxes - 79
Gain on disposal of discontinued operations,
net of taxes - 3,208
--------- ---------
NET INCOME $ 27,229 $ 27,383
========= =========
Income per common share :
Basic
Continuing operations $ 1.01 $ 0.88
Discontinued operations - -
Gain on disposal of discontinued operations - 0.12
--------- ---------
NET INCOME $ 1.01 $ 1.00
========= =========
Diluted
Continuing operations $ 1.00 $ 0.88
Discontinued operations - -
Gain on disposal of discontinued operations - 0.12
--------- ---------
NET INCOME $ 1.00 $ 1.00
========= =========
Dividends per common share $ 0.1550 $ 0.1400
========= =========
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
--------------------
Dec. 31, Dec. 31,
1997 1996
--------- ---------
OPERATING ACTIVITIES
Income from continuing operations $ 27,229 $ 24,096
Adjustments to reconcile net income from continuing operations
to net cash provided by continuing operating activities:
Restructuring payments (1,091) (1,830)
Depreciation and amortization 11,417 10,266
Deferred income taxes 201 853
Gain on disposal of assets (593) (98)
Equity in undistributed earnings of affiliates (53) -
Changes in operating assets and liabilities, net of effects
from acquisitions and dispositions:
Accounts receivable (11,837) (16,213)
Inventories (12,375) (1,241)
Prepaid expenses and other assets (3,311) (2,696)
Accounts payable, accrued expenses and
other liabilities 6,527 (7,971)
--------- ---------
Net cash provided by continuing operations 16,114 5,166
Net cash provided by discontinued operations - 653
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,114 5,819
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment (15,692) (13,159)
Proceeds from sale of assets 6,196 248
Increase in other assets (962) (789)
Discontinued Operations:
Additions to property, plant and equipment - (142)
Proceeds from disposal of discontinued operations - 90,581
Business acquisitions, net of cash acquired (7,848) (862)
Net changes in short-term investments (1,213) -
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (19,519) 75,877
--------- ---------
FINANCING ACTIVITIES
Proceeds from long-term borrowings 51,064 46,879
Payments of long-term debt (46,116) (98,433)
Proceeds from exercise of stock options 1,143 99
Dividends paid (4,193) (3,855)
Purchase of treasury stock - (10,413)
Purchase and retirement of common stock - (12,657)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,898 (78,380)
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents 143 914
--------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS (1,364) 4,230
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,904 -
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,540 $ 4,230
========= =========
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, 1997, its Condensed Consolidated Statements of
Operations for the three and six months ended December
31, 1997 and 1996, and its condensed Consolidated
Statements of Cash Flows for the six months ended
December 31, 1997 and 1996.
The balance sheet at June 30, 1997 has been
derived from the audited financial statements at that
date. The accounting policies followed by the Company
are described in the June 30, 1997 financial
statements which are contained in the Company's 1997
Annual Report. It is suggested that these financial
statements be read in conjunction with the financial
statements and notes included in the 1997 Annual
Report to stockholders.
2. 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 12 months ended August
31, 1997.
During December 1997, a wholly owned subsidiary
of the Company purchased the pneumatic valve and
motion switch business of Aerodyne Controls
Corporation. 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.
The aggregate purchase price for these
acquisitions was $7,848,000.
3. During fiscal year ended June 30, 1996, the
Company decided to undertake certain restructuring
initiatives aimed at improving the efficiency of
certain of its continuing operations. The two most
significant of those initiatives were the
consolidation and downsizing of Pibiviesse S.p.A. and
the relocation of Jameco Industries, Inc. from
Wyandanch, New York to the Company's existing
Spindale, North Carolina manufacturing facility. In
connection with this restructuring plan and during the
year ended June 30, 1996, the Company recorded a
$25,415,000 restructuring charge for related severance
costs, plant closure costs and asset write-downs.
Cash payments for accrued employee severance and
other plant closure costs were $1,091,000 during the
six months ended December 31, 1997 and the Company's
remaining accrued restructuring liability was
$2,757,000 at December 31, 1997. It is expected that
the restructuring initiatives will be substantially
complete by June 30, 1998.
Since commencement of the restructuring plan,
there has been a related net reduction of 218
employees. As of December 31, 1997, there are
approximately 80 additional restructuring related
terminations that are expected to occur.
4. On September 4, 1996, the Company sold its
Municipal Water Group of businesses. Sales revenue
from these businesses amounted to $14,027,000 during
the period between July 1, 1996 and September 4, 1996.
This revenue, net of all related expense including
income taxes, has been classified as income from
discontinued operations in the accompanying statement
of operations for the six months ended December 31,
1996.
5. During the quarter ended December 31, 1997,
the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128 Earnings per Share. SFAS
128 required the Company to change the method formerly
used to compute earnings per share and to restate all
prior periods presented. The requirements for
calculating basic earnings per share excludes the
dilutive effect of securities. Diluted earnings per
share assumes the conversion of all dilutive
securities. The following table sets forth the
reconciliation of the calculation per SFAS 128:
For the Three Months Ended December 31, 1997
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS
Net Income $13,609,000 27,059,430 $.50
Effect of Dilutive
Securities - primarily
stock options - 363,787
Diluted EPS $13,609,000 27,423,217 $.50
For the Six Months Ended December 31, 1997
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS
Net Income $27,229,000 27,041,929 $1.01
Effect of Dilutive
Securities - primarily
stock options - 319,289
Diluted EPS $27,229,000 27,361,218 $1.00
At December 31, 1997, there were no outstanding
options to purchase shares of common stock with
exercise prices greater than the average market price
of the common shares during the three and six month
period then ended.
For the Three Months Ended December 31, 1996
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS
Net Income $11,750,000 27,044,872 $.43
Effect of Dilutive
Securities - primarily
stock options - 168,324
Diluted EPS $11,750,000 27,213,196 $.43
For the Six Months Ended December 31, 1996
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS
Income from
Continuing
Operations $24,096,000 27,318,592 $.88
Income from
Discontinued
Operations* 79,000 -
Gain on Disposal
of Discontinued
Operations* 3,208,000 .12
Net Income $27,383,000 $1.00
Effect of Dilutive
Securities - primarily
stock options - 117,298
Diluted EPS $27,383,000 27,435,890 $1.00
* Net of Income Taxes
Options to purchase 582,470 shares and 623,896 shares
of common stock at prices ranging from $19.80 to
$26.13 were outstanding during the three and six month
periods ended December 31, 1996, respectively. These
options 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 those respective periods.
6. During June 1997, the Company entered into a
joint venture agreement with the sales agent who
markets imported vitreous china and faucets into the
do-it-yourself ("DIY") market. Prior to the July 1997
commencement of operations by the joint venture, the
related sales were recorded as part of the Company's
Jameco business. The Company now has a 49% minority
interest in the new joint venture and reports
activities on the equity basis, thus excluding these
sales from the Company's consolidated revenues.
Revenues in fiscal 1997 were $13,415,000 for this
business.
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 and six month periods ended
December 31, 1997 were $2,074,000 and $3,386,000,
respectively.
7. Information in "Note (12) Contingencies and
Environmental Remediation" set forth in the
Registrant's Form 10-K is incorporated herein by
reference. 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 December 31, 1997 Compared to
Three Months Ended December 31, 1996
Net sales increased $4,978,000 (2.9%) to
$179,198,000. An analysis of this change in net sales
is as follows:
Internal Growth $ 4,836,000 2.8%
Acquisitions/New Joint Ventures 8,505,000 4.9%
Jameco Sales now through Joint Venture (2,427,000) (1.4%)
Foreign Exchange Rate Effect (5,936,000) (3.4%)
Total Increase $ 4,978,000 2.9%
The increase in net sales from internal growth is
primarily attributable to increased unit shipments in
North America of oil and gas valves and increased unit
shipments in Europe of plumbing and heating valves.
The increased sales due to acquisitions is primarily
attributable to the January 1997 acquisition of Ames
Co., Inc. ("Ames") located in Woodland, California.
Last year's sales included $2,427,000 for a segment of
the Jameco business for imported vitreous china and
faucets in which the Company now has a 49% minority
interest, thereby eliminating these sales from current
year results. The unfavorable effect that changes in
foreign exchange rates had on sales was primarily
attributable to the Company's European operations.
The Company intends to maintain its strategy of
seeking acquisition opportunities as well as expanding
its existing market position to achieve sales growth.
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 and six month periods ended December 31, 1997
were $2,074,000 and $3,386,000, respectively.
Gross profit increased $3,556,000 (5.9%) and increased
as a percentage of net sales from 34.5% to 35.6%.
This percentage increase is primarily attributable to
improved gross margins for domestic plumbing and
heating valves and improved gross margins for oil and
gas valves. The gross margin on domestic plumbing and
heating valves improved primarily due to the inclusion
of Ames. The gross margin on oil and gas valves
improved due to increased sales volumes and factory
efficiencies. These improvements were partially
offset by manufacturing inefficiencies associated with
the relocation of the Jameco product line into a Watts
Regulator factory in Spindale, North Carolina.
Selling, general and administrative expenses
increased $1,694,000 (4.3%) to $40,708,000. This
increase is primarily attributable to the inclusion of
the expenses of Ames and increased variable selling
expenses from certain divisions. This increase was
partially offset by the impact of foreign exchange
rate changes.
Other nonoperating expense increased by $1,000
(.4%) to $263,000 for the three months ended December
31, 1997. Minority interest expense charges,
resulting from the improved operating results of the
two Chinese joint ventures, and higher foreign
exchange settlement expenses were recognized during
the period. Increased charges were offset by gains
recognized on the sale of a Canadian manufacturing
facility and a small Italian valve manufacturing
division.
The decrease in the effective tax rate from
36.76% to 33.98% was primarily attributable to the
implementation of tax planning strategies intended to
reduce income tax expense.
Net income increased $1,859,000 (15.8%) to
$13,609,000.
The Company's consolidated results of operations
are impacted by the effect that changes in foreign
currency exchange rates have on its international
subsidiaries' operating results. Changes in foreign
exchange rates had an adverse effect on net income for
the quarter ended of approximately $500,000.
The weighted average number of common shares
outstanding for the quarter ended December 31, 1997 for
basic and diluted earnings per share was 27,059,430 and 27,423,217
respectively, compared to 27,044,872 and 27,213,196
respectively for the quarter ended December 31, 1996.
Basic and diluted earnings per share from continuing
operations were $.50 for the quarter ended December
31, 1997 compared to $.43 per share for the quarter
ended December 31, 1996.
During the quarter ended December 31, 1997, the
company adopted Statement of Financial Accounting
Standards (SFAS) No. 128 Earnings per Share. SFAS
128 required the Company to change the method formerly
used to compute earnings per share and to restate all
prior periods presented. The impact of the
implementation of the new requirements is immaterial.
Results of Operations
Six Months Ended December 31, 1997 Compared to
Six Months Ended December 31, 1996
Net sales from continuing operations increased
$8,430,000 (2.4%) to $358,658,000. An analysis of this
change in net sales is as follows:
Internal Growth $ 7,885,000 2.2%
Acquisitions/New Joint Ventures 18,849,000 5.4%
Jameco Sales now through Joint Venture (6,261,000) (1.8%)
Foreign Exchange Rate Effect (12,043,000) (3.4%)
Total Increase $ 8,430,000 2.4%
The increase in net sales from internal growth is
primarily attributable to increased unit shipments in
North America of oil and gas valves and increased unit
shipments in Europe of plumbing and heating valves.
The increased sales due to acquisitions is primarily
attributable to the inclusion of the sales of Ames.
Last year's sales included $6,261,000 for a segment of
the Jameco business for imported vitreous china and
faucets in which the Company now has a 49% minority
interest, thereby eliminating these sales from current
year results. The unfavorable effect that changes in
foreign exchange rates had on sales was primarily
attributable to the Company's European operations.
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
$7,107,000 (5.9%) and increased as a percentage of net
sales from 34.4% to 35.6%. This percentage increase
is primarily attributable to improved gross margins
for oil and gas valves due to increased sales volume
and factory efficiencies as well as the inclusion of
Ames. These improvements were partially offset by
manufacturing inefficiencies associated with the
relocation of the Jameco product line into a Watts
Regulator factory in Spindale, North Carolina.
Selling, general and administrative expenses
increased $3,636,000 (4.7%) to $80,740,000. This
increase is primarily attributable to the inclusion of
the expenses of Ames and increased variable selling
expenses from certain divisions. This increase was
partially offset by the impact of foreign exchange
rate changes.
Other nonoperating expense increased by $510,000
(113%) to $961,000 for the six months ended December
31, 1997. Minority interest expense charges, resulting
from the improved operating results of the two Chinese
joint ventures, and higher foreign exchange settlement
expenses were recognized during this period.
Increased charges were offset by gains recognized on
the sale of a Canadian manufacturing facility and a
small Italian valve manufacturing division.
The effective tax rate for continuing operations
decreased from 36.59% to 34.42% primarily due to the
implementation of tax planning strategies intended to
reduce income tax expense.
Income from continuing operations increased $3,133,000
(13.0%) to $27,229,000.
The Company's consolidated results of operations are
impacted by the effect that changes in foreign
currency exchange rates have on its international
subsidiaries' operating results. Changes in foreign
exchange rates had an adverse effect on income from
continuing operations of approximately $1,000,000.
The weighted average number of common shares
outstanding for the six months ended December 31, 1997
for basic and diluted earnings per share was
27,041,929 and 27,361,218, respectively, compared to
27,318,592 and 27,435,890, respectively, for the six
months ended December 31, 1996. Basic and diluted
earnings per share from continuing operations were
$1.01 and $1.00 respectively for the six months ended
December 31, 1997 compared to $.88 per share for the
six months ended December 31, 1996.
In the quarter ended September 30, 1996 the Company
sold its Municipal Water Group of companies. This
divestiture resulted in an after-tax gain of
$3,208,000, or $.12 per share on both a basic and
diluted basis, for the periods ended September 30,
1996 and December 31, 1996.
Liquidity and Capital Resources
During the six-month period ended December 31,
1997, the Company generated $16,114,000 in cash flow
from operations, which was principally used to fund
capital expenditures of $15,692,000. 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 1998 is $29,500,000.
During the quarter ended December 31, 1997 the
Company sold one of its facilities in Canada,
consolidating the operations into another existing
Canadian plant. Additionally, the Company sold a small
Italian valve manufacturing division (ISI) which was
not part of the Company's core business. The proceeds
for these two transactions totaled $6,050,000.
On December 18, 1997, the Company acquired
Aerodyne Controls Corporation ("Aerodyne") located in
Ronkonkoma, New York. Aerodyne is a manufacturer of
pneumatic valve and motion switches. Aerodyne's sales
for the twelve months ended October 1997 were
approximately $7,000,000. Customers are primarily in
the medical, analytical, military and aerospace
markets. The aggregate purchase price was
approximately $7,162,000.
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 of acquired companies and for
general corporate purposes. As of December 31, 1997,
$35,000,000 was borrowed under this line of credit.
Working capital was $243,632,000 at December 31, 1997
compared to $224,702,000 at June 30, 1997.
The ratio of current assets to current liabilities was
3.0 to 1 at December 31, 1997 compared to 2.9 to 1 at
June 30, 1997. Cash and short-term investments were
$14,240,000 at December 31, 1997 compared to
$14,422,000 at June 30, 1997. Debt as a percentage of
total capital employed was 27.2% at December 31, 1997
compared to 27.8% at June 30, 1997. At December 31,
1997, the Company was in compliance with all covenants
related to its existing debt.
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 1998 in connection
with any of these environmentally contaminated sites.
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. Leslie Controls is also a
defendant in two similar matters pending in Superior
Court of California, San Francisco County. 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 ("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 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 PRPs, and
the Company has 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 4. Submission of Matters to a Vote of Security
Holders
(a) The Annual Meeting of Stockholders of the Company
was held on October 21, 1997.
(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., Kenneth J.
McAvoy, Noah T. Herndon, Wendy E. Lane, Gordon W.
Moran and Daniel J. Murphy 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 125,067,594 votes FOR 54,850 votes WITHHELD
Mr. D. Bloss 125,067,989 votes FOR 54,455 votes WITHHELD
Mr. K. McAvoy 125,067,789 votes FOR 54,655 votes WITHHELD
Mr. N. Herndon 125,065,287 votes FOR 57,157 votes WITHHELD
Ms. W. Lane 125,065,524 votes FOR 56,920 votes WITHHELD
Mr. G. Moran 125,066,864 votes FOR 55,580 votes WITHHELD
Mr. D. Murphy 125,066,864 votes FOR 55,580 votes WITHHELD
2. Ratification of Independent Auditors
The selection of KPMG Peat Marwick LLP as the new and
sole independent auditors of the Company for the
current fiscal year was ratified and the voting
results were as follows:
125,104,050 votes FOR 4,472 votes WITHHELD 13,922 votes ABSTAINED
and 0 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 for the
quarter ended December 31, 1997.
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: February 6, 1998 By: /s/ Timothy P. Horne
Timothy P. Horne
Chairman and
Chief Executive Officer
Date: February 6, 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 5,
of this Report.
*Filed herewith.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM DECEMBER 31, 1997 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-30-1998
<PERIOD-END> DEC-31-1997
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<ALLOWANCES> 8,762
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<CURRENT-ASSETS> 367,794
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0
0
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<INCOME-PRETAX> 41,522
<INCOME-TAX> 14,293
<INCOME-CONTINUING> 27,229
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<EPS-DILUTED> $1.00
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<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.
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