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, 2000
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, 2000
----- -------------------------------
Class A Common, $.10 par value 17,225,966
Class B Common, $.10 par value 9,236,324
<PAGE>
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information Page #
------
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2000
and December 31, 1999 3
Consolidated Statements of Income for
The Three Months Ended September 30, 2000 and 1999 4
Consolidated Statements of Income for
the Nine Months Ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
Part II. Other Information
Item 1. Legal Proceedings 18-20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index 22
Exhibit 10.1 - Amendment to Supplemental Compensation Agreement 23-28
Exhibit 27 - Financial Data Schedule 29
<PAGE>
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands, except share amounts)
<TABLE>
<CAPTION>
(Unaudited)
September 30, Dec. 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,121 $ 13,016
Trade accounts receivable, less allowance for doubtful accounts of
$6,444 at September 30, 2000 and $6,730 at December 31, 1999 97,576 94,305
Inventories, net:
Raw materials 35,038 36,429
Work in process 16,878 10,355
Finished goods 57,711 66,037
-------------- --------------
Total Inventories 109,627 112,821
Prepaid expenses and other assets 6,790 12,922
Deferred income taxes 18,930 19,774
-------------- --------------
Total Current Assets 244,044 252,838
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 230,058 226,692
Accumulated depreciation (105,419) (96,461)
-------------- --------------
Property, plant and equipment, net 124,639 130,231
-------------- --------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $13,989 at
September 30, 2000 and $11,997 at December 31, 1999 96,673 95,311
Other 8,397 8,698
-------------- --------------
TOTAL ASSETS $ 473,753 $ 487,078
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 33,316 $ 46,904
Accrued expenses and other liabilities 55,831 48,629
Accrued compensation and benefits 12,227 9,882
Current portion of long-term debt 4,655 5,683
-------------- --------------
Total Current Liabilities 106,029 111,098
-------------- --------------
LONG-TERM DEBT, NET OF CURRENT PORTION 109,832 123,991
DEFERRED INCOME TAXES 12,269 13,630
OTHER NONCURRENT LIABILITIES 9,381 11,150
MINORITY INTEREST 6,637 7,707
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: 17,191,928 shares
at September 30, 2000 and 16,888,807 shares at December 31, 1999 1,719 1,689
Class B Common Stock, $.10 par value; 25,000,000 shares authorized;
10 votes per share; issued and outstanding: shares 9,235,224
at September 30, 2000 and 9,485,247 shares at December 31, 1999 924 949
Additional paid-in capital 35,684 35,330
Retained earnings 214,853 196,733
Accumulated other comprehensive income (23,575) (15,199)
-------------- --------------
Total Stockholders' Equity 229,605 219,502
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 473,753 $ 487,078
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
September 30, September 30,
2000 1999
-------------- --------------
<S> <C> <C>
Net sales $ 124,635 $ 130,330
Cost of goods sold 79,800 83,436
-------------- --------------
GROSS PROFIT 44,835 46,894
Selling, general & administrative expenses 29,738 31,281
-------------- --------------
OPERATING INCOME 15,097 15,613
-------------- --------------
Other (income) expense:
Interest income (164) (139)
Interest expense 2,474 2,136
Other, net 568 (88)
Minority interest 49 154
-------------- --------------
2,927 2,063
-------------- --------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 12,170 13,550
Provision for income taxes 4,500 4,508
-------------- --------------
INCOME FROM CONTINUING OPERATIONS 7,670 9,042
Loss from discontinued operations, net of taxes -- (745)
-------------- --------------
NET INCOME $ 7,670 $ 8,297
============== ==============
BASIC EARNINGS PER SHARE
Continuing Operations $ .29 $ .34
Discontinued Operations -- (.03)
-------------- --------------
NET INCOME $ .29 $ .31
============== ==============
Weighted average number of shares 26,404 26,448
============== ==============
DILUTED EARNINGS PER SHARE
Continuing Operations $ .29 $ .34
Discontinued Operations -- (.03)
-------------- --------------
NET INCOME $ .29 $ .31
============== ==============
Weighted average number of shares 26,513 26,635
============== ==============
Dividends per common share $ .0600 $ .0875
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands, except per share information)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
September 30, September 30,
2000 1999
-------------- --------------
<S> <C> <C>
Net sales $ 385,689 $ 377,209
Cost of goods sold 248,032 240,521
-------------- --------------
GROSS PROFIT 137,657 136,688
Selling, general & administrative expenses 91,715 94,358
-------------- --------------
OPERATING INCOME 45,942 42,330
-------------- --------------
Other (income) expense:
Interest income (557) (649)
Interest expense 7,581 5,613
Other, net 1,593 352
Minority interest (4) 968
-------------- --------------
8,613 6,284
-------------- --------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 37,329 36,046
Provision for income taxes 13,692 12,775
-------------- --------------
INCOME FROM CONTINUING OPERATIONS 23,637 23,271
Loss from discontinued operations, net of taxes -- (2,662)
-------------- --------------
NET INCOME $ 23,637 $ 20,609
============== ==============
BASIC EARNINGS PER SHARE
Continuing Operations $ .90 $ .88
Discontinued Operations -- (.10)
-------------- --------------
NET INCOME $ .90 $ .78
============== ==============
Weighted average number of shares (thousands) 26,395 26,511
============== ==============
DILUTED EARNINGS PER SHARE
Continuing Operations $ .89 $ .88
Discontinued Operations -- (.10)
-------------- --------------
NET INCOME $ .89 $ .78
============== ==============
Weighted average number of shares 26,585 26,582
============== ==============
Dividends per common share $ .2075 $ .2625
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
September 30, September 30,
2000 1999
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations $ 23,637 $ 23,271
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operating activities:
Depreciation 12,769 11,866
Amortization 2,381 2,124
Deferred income taxes (160) (3,687)
Gain on disposal of assets (276) 3
Equity in undistributed earnings (loss) of affiliates (102) 764
Changes in operating assets and liabilities, net of effects
from acquisitions and dispositions:
Accounts receivable (7,460) (1,717)
Inventories 1,377 (12,797)
Prepaid expenses and other assets 5,945 (5,030)
Accounts payable, accrued expenses and other liabilities 558 8,210
Accrued restructuring charge (716) --
-------------- --------------
Net cash provided by continuing operations 37,953 23,007
Net cash provided by (used in) discontinued operations (2,237) 13,676
-------------- --------------
Net cash provided by operating activities 35,716 36,683
-------------- --------------
INVESTING ACTIVITIES
Additions to property, plant and equipment (11,390) (19,583)
Proceeds from sale of property, plant and equipment 1,722 2,291
Business acquisitions, net of cash acquired (9,387) (27,935)
Increase in other assets (558) (258)
Discontinued operations:
Business acquisitions, net of cash acquired -- (10,256)
Additions to property, plant and equipment -- (12,761)
-------------- --------------
Net cash used in investing activities (19,613) (68,502)
-------------- --------------
FINANCING ACTIVITIES
Proceeds from long-term borrowings 51,755 73,453
Payments of long-term debt (63,946) (50,936)
Proceeds from exercise of stock options 359 233
Dividends (5,517) (6,964)
Purchase of treasury stock -- (5,544)
Discontinued operations:
Proceeds from long-term borrowings -- 34,497
Payments of long-term debt -- (23,480)
-------------- --------------
Net cash provided by (used in) financing activities (17,349) 21,259
-------------- --------------
Effect of exchange rate changes on cash and cash equivalents (649) 985
-------------- --------------
CHANGE IN CASH AND CASH EQUIVALENTS (1,895) (9,575)
Cash and cash equivalents at beginning of period 13,016 14,613
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,121 $ 5,038
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. In the opinion of management, the accompanying unaudited, consolidated
financial statements contain all necessary adjustments, consisting only of
adjustments of a normal recurring nature, to present fairly Watts Industries,
Inc.'s Consolidated Balance Sheet as of September 30, 2000, its Consolidated
Statements of Income for the three and nine months ended September 30, 2000 and
1999, and its Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date. The accounting policies followed by the
Company are described in the December 31, 1999 financial statements which are
contained in the Company's December 31, 1999 Annual Report on Form 10-K. It is
suggested that the financial statements included in this report be read in
conjunction with the financial statements and notes included in the December 31,
1999 Annual Report on Form 10-K.
2. On December 15, 1998, the Company announced that it planned to separate its
industrial, oil and gas business from its plumbing and heating and water quality
business. To accomplish this separation, the Company has continued its existing
plumbing and heating and water quality business and has transferred the
industrial, oil and gas business to a new subsidiary, CIRCOR International, Inc.
The spin-off was effected as a tax free distribution on October 18, 1999. Owners
of Watts common stock received one share of CIRCOR for every two shares of Watts
common stock held. Accordingly, the Company is treating historical operating
results of CIRCOR as a discontinued operation.
The following table summarizes the operating results of the discontinued
operations:
Three Months Ended September 30
--------------------------------
2000 1999
---- ----
Sales, Net $ -- $ 76,957
Costs and Expenses -- 76,428
------ ---------
Income Before Income Taxes -- 529
Income Taxes -- 1,274
------ ---------
Loss from Discontinued Operations $ -- $ (745)
====== =========
Nine Months Ended September 30
-------------------------------
2000 1999
---- ----
Sales, Net $ -- $ 233,265
Costs and Expenses -- 229,705
------ ---------
Income Before Income Taxes -- 3,560
Income Taxes -- 6,222
------ ---------
Loss from Discontinued Operations $ -- $ (2,662)
====== =========
7
<PAGE>
3. On December 2, 1999, the Company announced a restructuring of its operations
in Italy to consolidate the warehousing and manufacturing operations of its
existing Italian operation into the facilities of its newly acquired Italian
subsidiary, Cazzaniga S.p.A. In connection with this restructuring, and in
accordance with EITF 94-3, the Company recorded a charge to operating expenses
of $1,460,000 in December 1999. The program, which included the termination of
29 employees (primarily manufacturing), began in December of 1999 and was
substantially completed during the quarter ended September 30, 2000. Severance
benefits and lease termination costs will continue for several quarters.
Details of the restructuring charge are as follows:
<TABLE>
<CAPTION>
Initial Utilized Utilized Balance
Provision during 1999 during 2000 -------
--------- ----------- -----------
<S> <C> <C> <C> <C>
Severance and related benefits $1,299,000 $192,000 $678,000 $429,000
Lease Termination Costs 134,000 -- 52,000 82,000
Other exit costs 27,000 -- 27,000 --
---------------------------------------------------------
Total $1,460,000 $192,000 $757,000 $511,000
=========================================================
</TABLE>
4. The following tables set forth the reconciliation of the calculation of
earnings per share:
For the Three Months Ended September 30, 2000
---------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income from Continuing Operations $7,670,000 26,404,463 $ 0.29
Income from Discontinued Operations -- --
---------- ----------
Net Income 7,670,000 0.29
Effect of Dilutive Securities
Common Stock Equivalents -- 108,567 --
---------- ---------- ----------
Diluted EPS $7,670,000 26,513,030 $ 0.29
========== ========== ==========
For the Three Months Ended September 30, 1999
---------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income from Continuing Operations $ 9,042,000 26,447,936 $ 0.34
Loss from Discontinued Operations (745,000) (0.03)
----------- -----------
Net Income 8,297,000 0.31
Effect of Dilutive Securities
Common Stock Equivalents -- 186,622 --
----------- ----------- -----------
Diluted EPS $ 8,297,000 26,634,558 $ 0.31
=========== =========== ===========
8
<PAGE>
For the Nine Months Ended September 30, 2000
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income from Continuing Operations $ 23,637,000 26,395,133 $ 0.90
Income from Discontinued Operations -- --
------------ ------------
Net Income 23,637,000 0.90
Effect of Dilutive Securities
Common Stock Equivalents -- 189,763 (0.01)
------------ ------------ ------------
Diluted EPS $ 23,637,000 26,584,896 $ 0.89
============ ============ ============
For the Nine Months Ended September 30, 1999
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income from Continuing Operations $ 23,271,000 26,511,143 $ 0.88
Loss from Discontinued Operations (2,662,000) (0.10)
------------ ------------
Net Income 20,609,000 0.78
Effect of Dilutive Securities
Common Stock Equivalents -- 70,805 --
------------ ------------ ------------
Diluted EPS $ 20,609,000 26,581,948 $ 0.78
============ ============ ============
Stock options to purchase 771,600 shares and 887,938 shares of common stock were
outstanding at September 30, 2000 and 1999, respectively, but were not included
in the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares and,
therefore, the effect would have been antidilutive.
9
<PAGE>
5. Segment Information - the following table presents certain operating segment
information:
(Thousand of dollars) North Corporate
America Europe Asia & Other Consolidated
------- ------ ---- ------- ------------
Three months ended
September 30, 2000:
Net Sales $ 97,392 $ 23,369 $ 3,874 $ -- $124,635
Operating income 12,168 3,150 182 (403) 15,097
Three months ended
September 30, 1999:
Net Sales $ 97,069 $ 27,992 $ 5,269 $ -- $130,330
Operating income 11,391 3,932 597 (307) 15,613
Nine months ended
September 30, 2000:
Net Sales $296,431 $ 78,048 $ 11,210 $ -- $385,689
Operating income 36,094 10,798 383 (1,333) 45,942
Nine months ended
September 30, 1999:
Net Sales $285,047 $ 78,527 $ 13,635 $ -- $377,209
Operating income 32,203 9,238 1,383 (494) 42,330
The above operating segments are presented on a basis consistent with the
presentation included in the Company's December 31, 1999 financial statements.
There have been no material changes in the identifiable assets of the individual
segments since December 31, 1999.
10
<PAGE>
6. Accumulated other comprehensive income in the consolidated balance sheets as
of September 30, 2000 and December 31, 1999 consists of cumulative translation
adjustments. The Company's total comprehensive income was as follows:
Three Months Ended September 30,
--------------------------------
2000 1999
---- ----
Net Income $ 7,670 $ 8,297
Foreign Currency Translation Adjustments (4,619) 2,435
------- -------
Total Comprehensive Income $ 3,051 $10,732
======= =======
Nine Months Ended September 30,
-------------------------------
2000 1999
---- ----
Net Income $ 23,637 $ 20,609
Foreign Currency Translation Adjustments (8,376) (4,897)
-------- --------
Total Comprehensive Income $ 15,261 $ 15,712
======== ========
7. Acquisitions
On August 30, 2000 a wholly owned subsidiary of the Company acquired
certain assets of Chiles Power Supply and Bask LLC, located in Springfield,
Missouri for approximately $3 million. The acquired business, now operating
under the name Watts Heatway, manufactures and distributes a complete line of
hydronic and electric radiant heating and snow melting systems. Current
annualized sales are approximately $11 million.
On May 12, 2000, a wholly owned subsidiary of the Company acquired
McCraney, Inc., located in Santa Ana, California for approximately $7 million.
McCraney, doing business as Spacemaker, manufactures a complete line of seismic
restraint straps for water heaters as well as water heater stands and
enclosures. Spacemaker's last twelve months sales were approximately $5 million.
8. 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 Company is vigorously contesting 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.
11
<PAGE>
The Company has established reserves for those cases that are probable and
estimable which it presently believes are adequate in light of probable and
estimable exposure to pending and threatened litigation of which it has
knowledge. However, resolution of any such matters during a specific reporting
period could have a material effect on the Quarterly or Annual operating results
for that period. Also see Part II, Item 1.
9. Other
In September 1998, the Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." The Company
will adopt SFAS 133, as amended by SFAS 137 and SFAS 138, on January 1, 2001.
The impact of SFAS 133 on the consolidated financial statements is still being
evaluated, but is not expected to be material.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition". An amendment in March 2000
delayed the effective date until the fourth quarter of 2000. The Company is
reviewing the requirements of this standard, but does not expect it will have
material impact on the consolidated financial statements.
In July and September 2000, the EITF reached consensuses on Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs." This Issue
addresses the income statement classification for shipping and handling fees and
costs. The Company will adopt the consensuses in the fourth quarter of 2000. The
adoption of EITF Issue No. 00-10 will not have a material impact on the
consolidated financial statements. The Company is still evaluating if additional
disclosures necessitated by the consensuses may be required.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
On December 15, 1998, the Company announced its plan to spin-off its
industrial, oil and gas business as a separately traded public company, CIRCOR
International, Inc. Under the terms of the spin-off, which was completed on
October 18, 1999, the holders of Watts common stock received one share of CIRCOR
common stock for every two shares of Watts stock held. The Company's results of
operations for all periods presented reflect CIRCOR as discontinued operations.
Results of Operations
Three Months Ended September 30, 2000 Compared to
Three Months Ended September 30, 1999
Net sales from continuing operations for the three months ended September
30, 2000 decreased $5,695,000 (4.4%) to $124,635,000 compared to the same period
in 1999. The decrease in net sales is attributable to the following:
12
<PAGE>
Internal Growth $(4,255) (3.3%)
Acquisitions 2,814 2.2%
Foreign Exchange (4,254) (3.3%)
---------------- ------- -----
Total Change $(5,695) (4.4%)
============ ======== ======
The decrease in net sales from internal growth is attributable to the soft
North American housing market resulting from an increase in interest rates. The
growth in net sales from acquired businesses is due to the inclusion of net
sales of the business acquired from Chiles Power Supply and Bask LLC of
Springfield, Missouri, now doing business as Watts Heatway, which was acquired
on August 30, 2000 and McCraney, Inc. of Santa Ana, California, doing business
as Spacemaker, which was acquired May 12, 2000. The decrease in foreign exchange
is due primarily to the Euro's devaluation compared to the same period in 1999.
Watts monitors its net sales in three geographical segments: North
America, Europe and Asia. As outlined below, North America, Europe and Asia
accounted for 78.1%, 18.8%, and 3.1% of net sales, respectively, in the three
months ended September 30, 2000 compared to 74.5%, 21.5%, and 4.0% respectively
in the three months ended September 30, 1999. The Company's net sales in these
groups for the three months ended September 30, 2000 and 1999 were as follows:
9/30/00 9/30/99 Change
-------- -------- --------
North America $ 97,392 $ 97,069 $ 323
Europe 23,369 27,992 (4,623)
Asia 3,874 5,269 (1,395)
-------- -------- --------
Total $124,635 $130,330 ($ 5,695)
======== ======== ========
The increase in North America is due to the Watts Heatway and Spacemaker
acquisitions, partially offset by decreased unit sales. The decrease in Europe
is primarily due to the Euro's devaluation. Sales in the European market on a
local currency basis were similar to the comparable prior year period. The
decrease in Asia is due to decreased unit sales in the domestic Chinese market
resulting from adverse credit conditions as well as reduced demand in the North
American export market.
Gross profit for the three months decreased $2,059,000 (4.4%), remaining
constant as a percentage of net sales at 36.0 percent. The decrease in gross
profit is primarily attributable to decreased net sales. Gross profit percentage
reductions attributable to price competition in certain markets were offset by
higher gross margins of Watts Heatway and Spacemaker.
Selling, general and administrative expenses decreased $1,543,000 (4.9%)
to $29,738,000. This decrease is attributable to decreased corporate
headquarters expenses resulting from the CIRCOR spin-off, the Euro's devaluation
and reduced variable selling expenses. This was partially offset by selling,
general and administrative expenses of Watts Heatway and Spacemaker.
Other income and expense for the three months ended September 30, 2000
increased $656,000 to $568,000. This increase is attributable to reduced cash
discounts resulting from Company's inventory reduction program and a one time
adjustment to the allowance for doubtful accounts in the Quarter ended September
30, 1999.
13
<PAGE>
Operating income for the three months ended September 30, 2000 decreased
$516,000 (3.3%) to $15,097,000 compared to the same period in 1999 due to
decreased net sales, offset in part by decreased selling, general and
administrative expenses.
The Company's operating income by segment for the three months ended
September 30, 2000 and 1999 were as follows:
9/30/00 9/30/99 Change
-------- -------- --------
North America $ 12,168 $ 11,391 $ 777
Europe 3,150 3,932 (782)
Asia 182 597 (415)
Corporate & Other (403) (307) (96)
-------- -------- --------
Total $ 15,097 $ 15,613 $ (516)
======== ======== ========
The increase in North America is due to reduced corporate headquarters expenses
and acquired companies operating at higher operating margins than other
reporting units. The decrease in Europe is primarily due to the Euro's
devaluation compared to the prior year, partially offset by reduced costs
resulting from the consolidation of manufacturing and warehouse operations in
Italy. The decrease in Asia is due to the decreased net sales.
Interest expense increased $338,000 in the quarter ended September 30,
2000, compared to the same period in 1999, primarily due to increased interest
rates on variable rate indebtedness.
The Company's effective tax rate for continuing operations increased from
33.3 percent to 37.0 percent. The increase is attributable to savings from a
one-time tax reduction opportunity in Europe during 1999 and income taxed at
higher rates as a result of the Company's legal structure following the spin-off
of CIRCOR International. Inc.
Income from continuing operations for the three months ended September 30,
2000 decreased $1,372,000 (15.2%) to $7,670,000 or $ .29 per common share
compared to $.34 per common share for the three months ended September 30, 1999
on a diluted basis. The impact of foreign exchange, primarily due to the
devaluation of the Euro, decreased income from continuing operations $.02 per
common share on a diluted basis for the period ended September 30, 2000.
Results of Operations
Nine Months Ended September 30, 2000 Compared to
Nine Months Ended September 30, 1999
Net sales from continuing operations for the nine months ended September
30, 2000 increased $8,480,000 (2.2%) to $385,689,000 compared to the same period
in 1999. The increase in net sales is attributable to the following:
Internal Growth $ 9,849 2.6%
Acquisitions 10,204 2.7%
Foreign Exchange (11,573) (3.1%)
-------------------------------------------------
Total Change $ 8,480 2.2%
=================================================
14
<PAGE>
The increase in net sales from internal growth is attributable to
increased unit shipments of North American and European plumbing and heating
valves. North American increases were offset by recent softness in the housing
market resulting from increased interest rates. The growth in net sales from
acquired businesses is due to the inclusion of Watts Heatway, Spacemaker and
Cazzaniga S.p.A of Biassono, Italy which was acquired March 9, 1999. Excluding
the acquired revenue of Cazzaniga and the impact of foreign exchange, shipments
of European plumbing and heating valves were 5.8% higher than last year. The
decrease in sales due to foreign exchange is principally due to the devaluation
of the Euro during the nine-month period ended September 30, 2000 compared to
the comparable prior year period.
Watts monitors its net sales in three geographical segments: North
America, Europe and Asia. As outlined below, North America, Europe and Asia
accounted for 76.9%, 20.2%, and 2.9% of net sales, respectively, in the nine
months ended September 30, 2000 compared to 75.6%, 20.8%, and 3.6% respectively
in the nine months ended September 30, 1999. The Company's net sales in these
groups for the nine months ended September 30, 2000 and 1999 were as follows:
9/30/00 9/30/99 Change
-------- -------- --------
North America $296,431 $285,047 $ 11,384
Europe 78,048 78,527 (479)
Asia 11,210 13,635 (2,425)
-------- -------- --------
Total $385,689 $377,209 $ 8,480
======== ======== ========
The increase in North America is primarily due to increased unit sales and to a
lesser extent from the Watts Heatway and Spacemaker acquisitions. The decrease
in Europe is due to the impact of the Euro's devaluation. This was substantially
offset by increased unit sales and the inclusion of net sales of Cazzaniga. The
decrease in Asia is due to decreased unit sales in the domestic Chinese market
due to adverse credit conditions as well as reduced demand in the North American
export market.
Gross profit for the nine months ended September 30, 2000 increased
$969,000 (0.7%), to $137,657,000 compared to the same period in 1999 and
decreased as a percentage of net sales from 36.2 percent to 35.7 percent. This
percentage reduction is primarily attributable to an unfavorable product mix and
price competition in certain markets which was partially offset by improved
gross margins in Europe resulting from the consolidation of manufacturing and
warehousing operations in Italy.
Selling, general and administrative expenses for the nine months
decreased $2,643,000 (2.8%) to $91,715,000 compared to the same period in 1999.
This decrease is attributable to decreased corporate headquarters expenses
resulting from the CIRCOR spin-off, the Euro's devaluation and reduced variable
selling expenses. This decrease was partially offset by the addition of selling,
general and administrative expenses of Cazzaniga, Watts Heatway and Spacemaker.
Other income and expense increased $1,241,000 to $1,593,000 in the nine
months ended September 30, 2000. This increase is attributable to reduced cash
discounts resulting from Company's inventory reduction program and a one time
adjustment to the allowance for doubtful accounts in the period ended September
30, 1999.
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Operating income in the nine months ended September 30, 2000 increased
$3,612,000 (8.5%) to $45,942,000 compared to the same period in 1999 due to
increased net sales and decreased selling, general and administrative expenses.
The Company's operating income by segment for the nine months ended
September 30, 2000 and 1999 were as follows:
9/30/00 9/30/99 Change
-------- -------- --------
North America $ 36,094 $ 32,203 $ 3,891
Europe 10,798 9,238 1,560
Asia 383 1,383 (1,000)
Corporate & Other (1,333) (494) (839)
-------- -------- --------
Total $ 45,942 $ 42,330 $ 3,612
======== ======== ========
The increase in North America is due to the increased net sales and
reduced corporate headquarters expenses. The increase in Europe is primarily due
to increased net sales and the Cazzaniga acquisition substantially offset by the
Euro's devaluation. The decrease in Asia is due to decreased net sales. The
change in corporate and other is due primarily to the increase in inter company
activity.
Interest expense increased $1,968,000 in the nine months ended September
30, 2000 compared to the same period in 1999, due to increased interest rates on
variable rate indebtedness.
The Company's effective tax rate for continuing operations increased from
35.4 percent to 36.7 percent in the nine months ended September 30, 2000
compared to the same period in 1999. The increase is primarily attributable to
savings from a one-time tax reduction opportunity in Europe during 1999 and
income taxed at higher rates as a result of the company's legal structure
following the spin-off of CIRCOR International, Inc.
Income from continuing operations for the nine months ended September 30,
2000 increased $366,000 (1.6%) to $23,637,000 or $ .89 per common share compared
to $.88 per common share for the nine months ended September 30, 1999 on a
diluted basis. The impact of foreign exchange, primarily due to the devaluation
of the Euro, decreased income from continuing operations $.04 per common share
on a diluted basis in the period ended September 30, 2000.
Liquidity and Capital Resources
During the nine-month period ended September 30, 2000, the Company
generated $37,953,000 in cash flow, from continuing operations, which was
principally used to purchase Heatway and Spacemaker, fund the purchase of
$11,390,000 in capital equipment, pay cash dividends to common shareholders and
pay down long term debt. 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 the twelve months ended December 31, 2000 is $17,500,000.
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The Company generated $21,046,000 in free cash flow (cash provided by
continuing operations less dividends and capital expenditures) during the nine
months ended September 30, 2000 versus negative free cash of $3,540,000 in the
comparable prior year period. The increase is attributable to an increase in
cash from operations over 1999, reduced inventories, lower capital expenditures
and a reduction in the post spin-off dividend rate to reflect the Company's
current size.
During the year ended December 31, 1999, the Company maintained a
$125,000,000 line of credit, which was amended, coincident with the spin off of
CIRCOR. The Company's amended facility in effect as of October 18, 1999 is an
unsecured $100,000,000 line of credit to support the Company's acquisition
program, working capital requirements of acquired companies, and for general
corporate purposes. At September 30, 2000, the Company had $9,000,000
outstanding on the line of credit and was in compliance with all banking
covenants related to this facility.
As of September 30, 2000, the Company maintained a syndicated credit
facility with a group of European banks in the amount of 23,600,000 Euros. This
credit facility has several tranches which provide credit to the Company through
September 2004. The purpose of this credit facility is to fund acquisitions in
Europe, support the working capital requirements of acquired companies, and for
general corporate purposes. As of September 30, 2000, 21,000,000 Euros
($18,535,000) were borrowed under this line of credit.
Working capital at September 30, 2000 was $138,015,000 compared to
$141,740,000 at December 31, 1999. The ratio of current assets to current
liabilities was 2.3 to 1 at September 30, 2000 and at December 31, 1999. Cash
and cash equivalents were $11,121,000 at September 30, 2000, compared to
$13,016,000 at December 31, 1999. Debt as a percentage of total capital employed
was 33.3% at September 30, 2000 compared to 37.1% at December 31, 1999.
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 from time to time is involved with environmental proceedings
and other legal proceedings and incurs costs on an ongoing basis related to
these matters. The Company has not incurred material expenditures in fiscal 2000
in connection with any of these matters. See Part II, Item 1, Legal Proceedings.
CONVERSION TO THE EURO
On January 1, 1999, 11 of the 15 member countries of the European Union
adopted the Euro as their common legal currency and established fixed conversion
rates between their existing sovereign currencies and the Euro. The Euro trades
on currency exchanges and is 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
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costs will be incurred due to the introduction and conversion to the Euro. The
Company is currently able to make and receive payments in Euros and will convert
financial and information technology systems to be able to use the Euro as its
base currency in relevant markets prior to January 1, 2002.
OTHER
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 markets; changes in global demand for the Company's
products; changes in distribution of the Company's products; interest rates;
foreign exchange fluctuations; cyclically 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.
The Company has a significant presence in many distinct geographical
markets and is subject to risks in the translation of results from local
currencies to the United States dollar. Exchange rates between the United States
dollar, in which the Company's results are reported, and the local currency in
the countries in which the Company has sales, may fluctuate from quarter to
quarter. Since the Company reports its interim and annual results in United
States dollars, it is subject to the risk of currency fluctuations effecting
quarter-to-quarter comparative results
PART II
Item 1. Legal Proceedings
Environmental and Other Litigation Matters
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.
James Jones Litigation
On September 25, 1997, Nora Armenta sued James Jones Company, Mueller Co.,
and Tyco International (U.S.) Inc., the parent companies of James Jones and
Watts Industries, Inc. which formerly owned James Jones, in the California
Superior Court for Los Angeles County with a complaint that sought tens of
millions of dollars in damages. By this complaint and an amended complaint filed
on November 4, 1998 ("First Amended Complaint"), Armenta, a former employee of
James Jones, sued on behalf of 34 municipalities as a qui tam plaintiff under
the California False
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Claims Act. Late in 1998, the Los Angeles Department of Water and Power ("DWP")
intervened. Of the remaining 33 named municipalities, four (Burbank, Pomona,
Santa Monica and South Gate) chose to intervene shortly before the Court-imposed
deadline of July 15, 1999. The municipality of South Gate withdrew its
intervention and will participate as a non-intervening city. The case will now
go forward with the municipalities that have intervened.
The First Amended Complaint alleges that the Company's former subsidiary
(James Jones Company) sold products that did not meet contractually specified
standards used by the named municipalities for their water systems and falsely
certified that such standards had been met. Armenta claims that these
municipalities were damaged by their purchase of these products, and seeks
treble damages, legal costs, attorneys' fees and civil penalties under the
California False Claims Act.
The DWP's intervention filed on December 9, 1998 adopted the First Amended
Complaint and added claims for breach of contract, fraud and deceit, negligent
misrepresentation, and unjust enrichment. The DWP seeks past and future
reimbursement costs, punitive damages, contract difference in value damages,
treble damages, civil penalties under the False Claims Act and costs of the
suit.
One of the First Amended Complaint's allegations is the suggestion that
because some of the purchased James Jones products are out of specification and
contain more lead than the '85 bronze specified, a risk to public health might
exist. This contention is predicated on the average difference of about 2% lead
content in '81 bronze (6% to 8% lead) and '85 bronze (4% to 6% lead) alloys and
the assumption that this would mean increased consumable lead in public drinking
water. The evidence and discovery available to date indicate that this is not
the case.
In addition, bronze that does not contain more than 8% lead, like '81
bronze, is approved for home plumbing fixtures by the City of Los Angeles, and
the Federal Environmental Protection Agency defines metal for pipe fittings with
no more than 8% lead as "lead free" under Section 1417 of the Federal Safe
Drinking Water Act.
On October 3, 2000, the Court granted the Company's request to dismiss the
City of Pomona's complaint for failure to state a claim under the California
False Claims Act, and granted Pomona permission to resubmit a complaint that
does state such a claim. Oakland (East Bay M.U.D.) and the City of San Francisco
have sought to intervene in this case after having declined to intervene some
time ago. The Relator has filed a motion to add additional cities, which would
bring the total to 161. A stipulation was filed by the DWP and signed by the
Court, which stayed this case only for the DWP until December 1, 2000 while
approval is sought for a settlement between the DWP and all the defendants.
The Company is contesting this matter vigorously, and discovery is
currently under way. Presently, the Company cannot determine whether any loss
will result from this litigation. See Note 8 of the Notes to the Consolidated
Financial Statements.
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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 in various
administrative or legal proceedings under federal, state or local environmental
laws or regulations involving a number of sites. During the quarter ending March
31, 1998, the Company received an administrative order from the New Hampshire
Department of Environmental Services (the "NHDES") with respect to management
and storage of process wastes and various record keeping and permit renewal
rules at its Franklin, New Hampshire operation. The NHDES has acknowledged
compliance with its administrative order and has proposed in a consent order
filed on May 1, 2000 a monetary assessment of $215,126 and a supplemental
environmental project of at least $350,000. On June 19, 2000, this consent order
was signed and on July 14, 2000, the assessment of $215,126 was paid.
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.
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.
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 September
30, 2000.
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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 10, 2000 By: /s/ Timothy P. Horne
----------------- --------------------
Timothy P. Horne
Chairman and Chief Executive Officer
Date: November 10, 2000 By: /s/ William C. McCartney
----------------- ------------------------
William C. McCartney
Chief Financial Officer and Treasure
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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, as amended May 11, 1999 (2)
10.1 Amendment No.1 to Supplemental Compensation Agreement between
Timothy P. Horne and registrant dated July 25, 2000*
11 Computation of Earnings per Share (3)
27 Financial Data Schedule September 30, 2000*
(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 10-Q for the Quarter ended March 31, 1999.
(3) Incorporated by reference to the Notes to Consolidated Financial
Statements, Note 4, of this Report.
*Filed herewith.
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