UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 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 April 28, 2000
----- -----------------------------
Class A Common, $.10 par value 16,903,484
Class B Common, $.10 par value 9,485,247
<PAGE>
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information Page #
--------------------- ------
Item 1. Financial Statements
Consolidated Balance Sheets at
March 31, 2000 and December 31, 1999 3
Consolidated Statements of Income for
the Three Months Ended March 31, 2000 and
March 31, 1999 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2000 and
March 31, 1999 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
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 - March 31, 2000 18
<PAGE>
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands, except share amounts)
<TABLE>
<CAPTION>
(Unaudited)
Mar. 31, Dec. 31,
2000 1999
---------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,534 $ 13,016
Trade accounts receivable, less allowance for doubtful accounts of
$6,800 at Mar. 31, 2000 and $6,730 at Dec. 31, 1999 96,556 94,305
Inventories, net:
Raw materials 35,772 36,429
Work in process 14,577 10,355
Finished goods 64,691 66,037
--------- ---------
Total Inventories 115,040 112,821
Prepaid expenses and other assets 9,819 12,922
Deferred income taxes 20,027 19,774
--------- ---------
Total Current Assets 247,976 252,838
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 228,182 226,692
Accumulated depreciation (99,832) (96,461)
--------- ---------
Property, plant and equipment, net 128,350 130,231
--------- ---------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $12,655 at
Mar. 31, 2000 and $11,997 at Dec. 31, 1999 93,439 95,311
Other 8,489 8,698
--------- ---------
TOTAL ASSETS $ 478,254 $ 487,078
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 41,725 $ 46,904
Accrued expenses and other liabilities 48,056 48,629
Accrued compensation and benefits 10,108 9,882
Current portion of long-term debt 5,638 5,683
--------- ---------
Total Current Liabilities 105,527 111,098
--------- ---------
LONG-TERM DEBT, NET OF CURRENT PORTION 118,447 123,991
DEFERRED INCOME TAXES 13,837 13,630
OTHER NONCURRENT LIABILITIES 10,724 11,150
MINORITY INTEREST 7,395 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: 16,888,507 shares
at Mar. 31, 2000 and 16,888,807 shares at Dec. 31, 1999 1,689 1,689
Class B Common Stock, $.10 par value; 25,000,000 shares authorized;
10 votes per share; issued and outstanding: shares 9,485,247
at Mar. 31, 2000 and 9,485,247 shares at Dec. 31, 1999 949 949
Additional paid-in capital 35,623 35,330
Retained earnings 202,360 196,733
Accumulated other comprehensive income (18,297) (15,199)
--------- ---------
Total Stockholders' Equity 222,324 219,502
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 478,254 $ 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)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
----------------------
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Net sales $ 130,770 $ 116,972
Cost of goods sold 84,277 75,084
--------- ---------
GROSS PROFIT 46,493 41,888
Selling, general & administrative expenses 31,180 30,035
--------- ---------
OPERATING INCOME 15,313 11,853
--------- ---------
Other (income) expense:
Interest income (178) (169)
Interest expense 2,591 1,409
Other, net 473 180
--------- ---------
2,886 1,420
--------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 12,427 10,433
Provision for income taxes 4,487 3,528
--------- ---------
INCOME FROM CONTINUING OPERATIONS 7,940 6,905
Income from discontinued operations, net of taxes -- --
--------- ---------
NET INCOME $ 7,940 $ 6,905
========= =========
BASIC EARNINGS PER SHARE
Continuing Operations $ .30 $ .26
Discontinued Operations -- --
--------- ---------
NET INCOME $ .30 $ .26
========= =========
Weighted average number of shares 26,474 26,649
========= =========
DILUTED EARNINGS PER SHARE
Continuing Operations $ .30 $ .26
Discontinued Operations -- --
--------- ---------
NET INCOME $ .30 $ .26
========= =========
Weighted average number of shares 26,786 26,671
========= =========
Dividends per common share $ .0875 $ .0875
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
--------------------
March 31, March 31,
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income from continuing operations $ 7,940 $ 6,905
Adjustments to reconcile net income from continuing operations
to net cash provided by continuing operating activities:
Depreciation 4,304 3,612
Amortization 791 637
Deferred income taxes 61 (391)
Gain on disposal of assets (35) (3)
Equity in undistributed earnings of affiliates (18) (12)
Changes in operating assets and liabilities, net of effects
from acquisitions and dispositions:
Accounts receivable (4,091) 3,166
Inventories (3,434) (328)
Prepaid expenses and other assets 3,053 (2,123)
Accounts payable, accrued expenses and other liabilities (2,890) 4,397
-------- --------
Net cash provided by continuing operations 5,681 15,860
Net cash provided by (used in) discontinued operations (1,088) 10,976
-------- --------
Net cash provided by operating activities 4,593 26,836
-------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment (4,226) (6,128)
Proceeds from sale of assets held for sale 56 2,073
Business acquisitions, net of cash acquired -- (28,488)
Increase in other assets (138) (33)
Discontinued operations:
Business acquisitions, net of cash acquired -- (677)
Additions to property, plant and equipment -- (4,073)
-------- --------
Net cash used in investing activities (4,308) (37,326)
-------- --------
FINANCING ACTIVITIES
Proceeds from long-term borrowings 12,000 29,179
Payments of long-term debt (16,381) (5,977)
Proceeds from exercise of stock options 293 --
Dividends (2,313) (2,314)
Purchase of treasury stock -- (5,544)
Discontinued operations:
Proceeds from long-term borrowings -- 2,227
Payments of long-term debt -- (2,313)
-------- --------
Net cash provided by (used in) financing activities (6,401) 15,258
-------- --------
Effect of exchange rate changes on cash and cash equivalents (366) (2,370)
-------- --------
CHANGE IN CASH AND CASH EQUIVALENTS (6,482) 2,398
Cash and cash equivalents at beginning of period 13,016 14,613
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,534 $ 17,011
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<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 March 31, 2000, its Consolidated
Statements of Income for the three months ended March 31, 2000 and 1999, and its
Consolidated Statements of Cash Flows for the three months ended March 31, 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 these financial statements be read in conjunction with the
financial statements and notes included in the December 31, 1999 Annual Report
on Form 10-K.
2. On October 18, 1999 the Company spun off its industrial, oil and gas
businesses as a separate publicly traded company, CIRCOR International, Inc.
("CIRCOR"). The spin-off was effected as a tax free distribution whereby 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 March 31
---------------------------
2000 1999
---- ----
Sales, Net $ -- $78,893
Costs and Expenses -- 76,106
------ -------
Income Before Income Taxes -- 2,787
Income Taxes -- 2,787
------ -------
Income from Discontinued Operations $ -- $ --
====== =======
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 Italian subsidiary,
Cazzaniga S.p.A, of Biassono, Italy, which was acquired March 9, 1999. In
connection with this restructuring, and in accordance with EITF 94-3, the
Company recorded a charge to operating expenses of $1,460,000. The program which
will include the termination of 29 employees (primarily manufacturing), began in
December of 1999 and is expected to be fully completed by June of 2000. As of
March 31, 2000 13 employees have been terminated.
6
<PAGE>
Details of the restructuring charge are as follows:
<TABLE>
<CAPTION>
Initial Utilized Utilized
Provision during 1999 during 2000 Balance
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Severance and related benefits $1,299,000 $ 192,000 $ 112,000 $ 995,000
Lease termination cost 134,000 -- 20,000 114,000
Other exit costs 27,000 -- -- 27,000
---------- ---------- ---------- ----------
Total $1,460,000 $ 192,000 $ 132,000 $1,136,000
========== ========== ========== ==========
</TABLE>
4. The following tables set forth the reconciliation of the calculation of
earnings per share per SFAS 128:
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 2000
------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------
<S> <C> <C> <C>
Basic EPS
- ---------
Income from Continuing Operations $7,940,000 26,473,754 $0.30
Income from Discontinued Operations -- --
---------- -----
Net Income $7,940,000 $0.30
Effect of Dilutive Securities
- -----------------------------
Common Stock Equivalents -- 312,220 --
---------- ---------- -----
Diluted EPS $7,940,000 26,785,974 $0.30
========== ========== =====
</TABLE>
Additional options to purchase 928,174 shares of common stock at prices ranging
from $14.30 to $16.40 were outstanding during the three-month period ended March
31, 2000. 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 the period.
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1999
------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------
<S> <C> <C> <C>
Basic EPS
- ---------
Income from Continuing Operations $6,905,000 26,648,827 $.26
Income from Discontinued Operations -- --
---------- ----
Net Income $6,905,000 $.26
Effect of Dilutive Securities
- -----------------------------
Common Stock Equivalents -- 22,160 --
---------- ---------- ----
Diluted EPS $6,905,000 26,670,987 $.26
========== ========== ====
</TABLE>
7
<PAGE>
Additional options to purchase 1,581,553 shares of common stock at prices
ranging from $18.00 to $25.38 were outstanding during the three-month period
ended March 31, 1999. 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 the period
5. Segment Information - the following table presents certain operating
segment information:
<TABLE>
<CAPTION>
North Corporate
(Thousand of dollars) America Europe Asia Expenses & Other Consolidated
-------- -------- -------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Three months ended March 31, 2000:
Net Sales $ 98,460 $ 28,786 $ 3,524 $ -- $130,770
Operating income 14,294 4,117 19 (3,117) 15,313
Three months ended March 31, 1999:
Net Sales $ 91,095 $ 22,106 $ 3,771 $ -- $116,972
Operating income 13,184 2,177 179 (3,687) 11,853
</TABLE>
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.
6. The Company uses foreign currency forward exchange contracts from time to
time 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. Related gains and losses are recognized when the
contracts expire, which is generally in the same period as the underlying
foreign currency denominated transaction. These contracts do not subject the
Company to significant market risk from exchange movement because they offset
gains and losses on the related foreign currency denomination transactions. At
March 31, 2000 the Company had outstanding forward contracts to buy foreign
currencies with a notional value of $4.0 million and an immaterial unrealized
loss.
7. Accumulated other comprehensive income in the consolidated balance sheets
as of March 31, 2000 and December 31, 1999 consists of cumulative translation
adjustments. The Company's total comprehensive income during the three-month
periods were as follows:
8
<PAGE>
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
Income from Continuing Operations $ 7,940 $ 6,905
Income from Discontinued Operations -- --
Foreign Currency Translation Adjustments (3,098) (4,389)
-----------------------
Total Comprehensive Income $ 4,842 $ 2,516
=======================
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 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.
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. However, resolution of any such matters
during a specific period could have a material effect on quarterly or annual
operating results for that period. 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
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 the period ended March 31, 1999 have been restated to reflect
CIRCOR as discontinued operations.
9
<PAGE>
Results of Operations
Three Months Ended March 31, 2000 Compared to
Three Months Ended March 31, 1999
Net sales for continuing operations increased $13,798,000 (11.8%) to
$130,770,000. The increase in net sales is attributable to the following:
Internal Growth $ 10,508,000 9.0%
Acquisitions $ 6,731,000 5.7%
Foreign Exchange ($ 3,441,000) (2.9%)
---------------------------------------------------
Total Change $ 13,798,000 11.8%
==================================================
This increase in net sales from internal growth is attributable to
increased unit shipments of North American and European plumbing and heating
valves. The growth in net sales from acquired companies is due to the inclusion
of Cazzaniga. Excluding the acquired revenue of Cazzaniga and the impact of
foreign exchange, shipments of European plumbing and heating valves were 16.9%
higher than last year. The decrease in foreign exchange is principally due to
the devaluation of the Euro during the three month period ended March 31, 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 75.3%, 22.0%, and 2.7% of net sales, respectively, in the three
months ended March 31, 2000 compared to 77.9%, 18.9%, and 3.2% respectively in
the three months ended March 31, 1999. The Company's net sales in these groups
for the three months ended March 31, 2000 and 1999 were as follows:
3/31/00 3/31/99 Change
------------- ------------ ------------
North America $98,460,000 $91,095,000 $7,365,000
Europe 28,786,000 22,106,000 6,680,000
Asia 3,524,000 3,771,000 (247,000)
------------- ------------ ------------
Total $130,770,000 $116,972,000 $13,798,000
============= ============ ============
The increase in North America is due to increased unit sales. The increase
in Europe is due to the Cazzaniga acquisition and increased unit sales, which
were partially offset by the devaluation of the Euro.
Gross profit increased $4,605,000 (11.0%), but decreased as a percentage
of net sales from 35.8% to 35.6%. This percentage reduction is attributable to
costs associated with relocating certain manufacturing equipment and increased
freight expenses, partially offset by increased gross margins on net sales in
Europe.
Selling, general and administrative expenses increased $1,145,000 (3.8%)
to $31,180,000 and decreased as a percentage of sales from 25.7% to 23.8%. This
increase is attributable to the inclusion of selling, general and administrative
expenses of Cazzaniga and increased variable selling
10
<PAGE>
expenses. These were partially offset by the Euro's devaluation and reductions
in corporate headquarters expenses.
Operating income in the three months ended March 31, 2000 increased
$3,460,000 (29.2%) to $15,313,000 due to the increased gross profit and
decreased selling, general and administrative expenses on a percentage of sales
basis.
The Company's operating income by segment for the three months ended March
31, 2000 and 1999 were as follows:
3/31/00 3/31/99 Change
------------ ------------ ------------
North America $ 14,294,000 $ 13,184,000 1,110,000
Europe 4,117,000 2,177,000 1,940,000
Asia 19,000 179,000 (160,000)
Corporate Expenses
and All Other (3,117,000) (3,687,000) 570,000
------------ ------------ ------------
Total $ 15,313,000 $ 11,853,000 $ 3,460,000
============ ============ ============
The increase in North America is due to increased gross profit. The
increase in Europe is primarily due to increased net sales and the Cazzaniga
acquisition.
Interest expense increased $1,182,000 in the quarter ended March 31, 2000,
primarily due to the increased effective rate of borrowing and increased
borrowings to finance the Cazzaniga acquisition.
The Company's effective tax rate for continuing operations increased from
33.8% to 36.1%. The increase is primarily attributable to acquired companies
operating in higher tax rate jurisdictions than the rest of the Company, tax
planning strategies favorably impacting prior periods and a revised tax
structure required to execute the spin-off of the industrial, oil and gas
businesses.
Net income for the three months ended March 31, 2000 increased $1,035,000
(15.0%) to $7,940,000 or $ .30 per common share on a diluted basis compared to
$.26 per common share for the three months ended March 31, 1999 on a diluted
basis. The impact of foreign exchange, primarily due to the devaluation of the
Euro, decreased net income $.01 per common share on a diluted basis in the
period ended March 31, 2000.
Liquidity and Capital Resources
During the three-month period ended March 31, 2000, the Company generated
$5,681,000 in cash flow, from continuing operations, which was used to fund the
purchase of $4,226,000 in capital equipment and pay cash dividends to common
shareholders. 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. The Company also reduced
long term debt through the use of existing cash balances.
11
<PAGE>
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 March 31, 2000 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 March 31, 2000, the Company had $20,000,000 outstanding
on the line of credit and was in compliance with all banking covenants related
to this facility.
As of March 31, 2000, the Company maintained a syndicated credit facility
with a group of European banks in the amount of 40,000,000 Euros. This credit
facility has several tranches which provide credit to the Company for a period
up to five (5) years. 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 March 31, 2000, 20,142,000
Euros ($19,284,000) were borrowed under this line of credit.
Working capital at March 31, 2000 was $142,449,000 compared to
$141,740,000 at December 31, 1999. The ratio of current assets to current
liabilities was 2.4 to 1 at March 31, 2000 and 2.3 to 1 at December 31, 1999.
Cash and cash equivalents were $6,534,000 at March 31, 2000, compared to
$13,016,000 at December 31, 1999. Debt as a percentage of total capital employed
was 35.8% at March 31, 2000 compared to 37.4% 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 litigation 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.
YEAR 2000 COMPLIANCE
The Company's comprehensive program to address potential exposures to the
Year 2000 issues is complete. Since January 1, 2000 the Company has had no
business interruptions due to the Year 2000 issues. The Company is not aware of
any incidents or events caused by the Year 2000 issue that have had or could
have a material adverse effect on the results of operations or financial
condition.
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
12
<PAGE>
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 is in the process of
implementing systems to receive and make payments in Euros. The Company
anticipates these systems will be in place by 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 and water quality markets; changes in global demand for the
Company's products; changes in distribution of the Company's products; interest
rates; foreign exchange fluctuations; cyclical nature 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.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company will
adopt SFAS 133 on January 1, 2001. Its impact on the combined 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 second 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.
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.
13
<PAGE>
James Jones Litigation
On June 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 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 has
withdrawn 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 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.
The Company intends to contest 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.
14
<PAGE>
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 recordkeeping and permit renewal rules
at its Franklin, New Hampshire operation. The NHDES has acknowledged compliance
with its administrative order and has agreed by a proposed consent order filed
on May 1, 2000 to a monetary assessment of $215,126.00 and a supplemental
environmental project of at least $350,000.00.
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 8 of
the Notes to the 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 8 of the Notes to the 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 during the quarter ended March 31,
2000.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WATTS INDUSTRIES, INC.
Date: May 10, 2000 By:/s/ Timothy P. Horne
------------ ----------------
Timothy P. Horne
Chairman and Chief Executive Officer
Date: May 10, 2000 By:/s/ William C. McCartney
------------ --------------------
William C. McCartney
Chief Financial Officer and Treasurer
March -10Q
16
<PAGE>
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)
11 Computation of Earnings per Share (3)
27 Financial Data Schedule - March 31, 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 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.
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
2000 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,159
<SECURITIES> 375
<RECEIVABLES> 103,356
<ALLOWANCES> 6,800
<INVENTORY> 115,040
<CURRENT-ASSETS> 247,976
<PP&E> 228,182
<DEPRECIATION> 99,832
<TOTAL-ASSETS> 478,254
<CURRENT-LIABILITIES> 105,527
<BONDS> 124,085 <F1>
<COMMON> 2,638
0
0
<OTHER-SE> 219,686
<TOTAL-LIABILITY-AND-EQUITY> 478,254
<SALES> 130,770
<TOTAL-REVENUES> 130,770
<CGS> 84,277
<TOTAL-COSTS> 115,457 <F2>
<OTHER-EXPENSES> 2,886 <F3>
<LOSS-PROVISION> 320
<INTEREST-EXPENSE> 2,591
<INCOME-PRETAX> 12,427
<INCOME-TAX> 4,487
<INCOME-CONTINUING> 7,940
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,940
<EPS-BASIC> $.30
<EPS-DILUTED> $.30
<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.
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</TABLE>
