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 June 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 July 31, 2000
----- ----------------------------
Class A Common, $.10 par value 17,159,537
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 June 30, 2000 and
December 31, 1999 3
Consolidated Statements of Income for
the Three Months Ended June 30, 2000 and
June 30, 1999 4
Consolidated Statements of Income for
the Six Months Ended June 30, 2000 and
June 30, 1999 5
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000 and
June 30, 1999 6
Notes to Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
Part II. Other Information
Item 1. Legal Proceedings 17-19
Item 4. Submission of Matters to a Vote of Security Holders 19-20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index 22
Exhibit 27 - Financial Data Schedule 23
<PAGE>
Item 1. Financial Statements
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands, except share amounts)
<TABLE>
<CAPTION>
(Unaudited)
June 30, Dec. 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,720 $ 13,016
Trade accounts receivable, less allowance for doubtful accounts of
$6,429 at June 30, 2000 and $6,730 at December 31, 1999 99,658 94,305
Inventories:
Raw materials 33,596 36,429
Work in process 14,526 10,355
Finished goods 62,599 66,037
--------- ---------
Total Inventories 110,721 112,821
Prepaid expenses and other assets 6,724 12,922
Deferred income taxes 20,468 19,774
--------- ---------
Total Current Assets 248,291 252,838
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 230,425 226,692
Accumulated depreciation (103,911) (96,461)
--------- ---------
Property, plant and equipment, net 126,514 130,231
--------- ---------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $13,308 at
June 30, 2000 and $11,997 at December 31, 1999 98,447 95,311
Other 8,253 8,698
--------- ---------
TOTAL ASSETS $ 481,505 $ 487,078
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 36,926 $ 46,904
Accrued expenses and other liabilities 47,918 48,629
Accrued compensation and benefits 11,767 9,882
Current portion of long-term debt 6,189 5,683
--------- ---------
Total Current Liabilities 102,800 111,098
--------- ---------
LONG-TERM DEBT, NET OF CURRENT PORTION 118,192 123,991
DEFERRED INCOME TAXES 14,626 13,630
OTHER NONCURRENT LIABILITIES 10,180 11,150
MINORITY INTEREST 7,433 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: 17,144,671 shares
at June 30, 2000 and 16,888,807 shares at December 31, 1999 1,714 1,689
Class B Common Stock, $.10 par value; 25,000,000 shares authorized;
10 votes per share; issued and outstanding: shares 9,236,324
at June 30, 2000 and 9,485,247 shares at December 31, 1999 924 949
Additional paid-in capital 35,791 35,330
Retained earnings 208,801 196,733
Accumulated other comprehensive income (18,956) (15,199)
--------- ---------
Total Stockholders' Equity 228,274 219,502
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 481,505 $ 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
-------------------------------
June 30, June 30,
2000 1999
--------- ---------
<S> <C> <C>
Net sales $ 130,284 $ 129,907
Cost of goods sold 83,955 82,001
--------- ---------
GROSS PROFIT 46,329 47,906
Selling, general & administrative expenses 30,797 33,042
--------- ---------
OPERATING INCOME 15,532 14,864
--------- ---------
Other (income) expense:
Interest income (215) (341)
Interest expense 2,516 2,068
Other, net 546 314
Minority interest (47) 760
--------- ---------
2,800 2,801
--------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 12,732 12,063
Provision for income taxes 4,705 4,739
--------- ---------
INCOME FROM CONTINUING OPERATIONS 8,027 7,324
Loss from discontinued operations, net of taxes -- (1,917)
--------- ---------
NET INCOME $ 8,027 $ 5,407
========= =========
BASIC EARNINGS PER SHARE
Continuing Operations $ .30 $ .27
Discontinued Operations -- (.07)
--------- ---------
NET INCOME $ .30 $ .20
========= =========
Weighted average number of shares 26,393 26,444
========= =========
DILUTED EARNINGS PER SHARE
Continuing Operations $ .30 $ .27
Discontinued Operations -- (.07)
--------- ---------
NET INCOME $ .30 $ .20
========= =========
Weighted average number of shares 26,551 26,489
========= =========
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
(Amounts in thousands, except per share information)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
June 30, June 30,
2000 1999
--------- ---------
<S> <C> <C>
Net sales $ 261,054 $ 246,879
Cost of goods sold 168,232 157,085
--------- ---------
GROSS PROFIT 92,822 89,794
Selling, general & administrative expenses 61,977 63,077
--------- ---------
OPERATING INCOME 30,845 26,717
--------- ---------
Other (income) expense:
Interest income (393) (510)
Interest expense 5,107 3,477
Other, net 1,025 439
Minority interest (53) 815
--------- ---------
5,686 4,221
--------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 25,159 22,496
Provision for income taxes 9,192 8,267
--------- ---------
INCOME FROM CONTINUING OPERATIONS 15,967 14,229
Loss from discontinued operations, net of taxes -- (1,917)
--------- ---------
NET INCOME $ 15,967 $ 12,312
========= =========
BASIC EARNINGS PER SHARE
Continuing Operations $ .61 $ .53
Discontinued Operations -- (.07)
--------- ---------
NET INCOME $ .61 $ .46
========= =========
Weighted average number of shares (thousands) 26,391 26,543
========= =========
DILUTED EARNINGS PER SHARE
Continuing Operations $ .60 $ .53
Discontinued Operations -- (.07)
--------- ---------
NET INCOME $ .60 $ .46
========= =========
Weighted average number of shares (thousands) 26,627 26,574
========= =========
Dividends per common share $ .1475 $ .1750
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------
June 30, June 30,
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations $ 15,967 $ 14,229
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operating activities:
Depreciation 8,618 7,626
Amortization 1,519 1,345
Deferred income taxes 523 (3,137)
Gain on disposal of assets (108) (5)
Equity in undistributed earnings of affiliates (102) 825
Changes in operating assets and liabilities, net of effects
from acquisitions and dispositions:
Accounts receivable (6,992) 3,540
Inventories 902 (10,759)
Prepaid expenses and other assets 6,355 (2,022)
Accounts payable, accrued expenses and other liabilities (6,766) 1,549
--------- ---------
Net cash provided by continuing operations 19,916 13,191
Net cash provided by (used in) discontinued operations (1,480) 21,235
--------- ---------
Net cash provided by operating activities 18,436 34,426
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment (6,843) (13,990)
Proceeds from sale of assets held for sale 120 2,291
Business acquisitions, net of cash acquired (6,006) (27,935)
Increase in other assets (250) 245
Discontinued operations:
Business acquisitions, net of cash acquired -- (10,301)
Additions to property, plant and equipment -- (9,499)
--------- ---------
Net cash used in investing activities (12,979) (59,189)
--------- ---------
FINANCING ACTIVITIES
Proceeds from long-term borrowings 36,709 53,364
Payments of long-term debt (40,649) (27,866)
Proceeds from exercise of stock options 461 --
Dividends (3,899) (4,645)
Purchase of treasury stock -- (5,544)
Discontinued operations:
Proceeds from long-term borrowings -- 12,539
Payments of long-term debt -- (6,059)
--------- ---------
Net cash provided by (used in) financing activities (7,378) 21,789
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (375) 1,135
--------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS (2,296) (1,839)
Cash and cash equivalents at beginning of period 13,016 14,613
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,720 $ 12,774
========= =========
</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 June 30, 2000, its Consolidated
Statements of Income for the three and six months ended June 30, 2000 and 1999,
and its Consolidated Statements of Cash Flows for the six months ended June 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. 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 to Stockholders.
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 June 30
---------------------------
2000 1999
---- ----
Sales, Net $ -- $ 77,415
Costs and Expenses -- 77,171
--------- ---------
Income Before Income Taxes -- 244
Income Taxes -- 2,161
--------- ---------
Loss from Discontinued Operations $ -- $ (1,917)
========= =========
Six Months Ended June 30
-------------------------
2000 1999
---- ----
Sales, Net $ -- $ 156,308
Costs and Expenses -- 153,277
--------- ---------
Income Before Income Taxes -- 3,031
Income Taxes -- 4,948
--------- ---------
Loss from Discontinued Operations $ -- $ (1,917)
========= =========
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 will include the termination
of 29 employees (primarily manufacturing), began in December of 1999 and is
expected to be fully completed during 2000. As of June 30, 2000, 27 employees
have been terminated with severance benefits continuing through the remainder of
the year.
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 $353,000 $754,000
Lease termination cost 134,000 -- 52,000 82,000
Other exit costs 27,000 -- 27,000 --
---------- -------- -------- --------
Total $1,460,000 $192,000 $432,000 $836,000
========== ======== ======== ========
</TABLE>
4. The following tables set forth the reconciliation of the calculation of
earnings per share:
For the Three Months Ended June 30, 2000
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income from Continuing Operations $8,027,000 26,393,258 $ 0.30
Income from Discontinued Operations -- --
---------- ----------
Net Income 8,027,000 0.30
Effect of Dilutive Securities
Common Stock Equivalents -- 157,649 --
---------- ---------- ----------
Diluted EPS $8,027,000 26,550,907 $ 0.30
========== ========== ==========
Options to purchase 1,196,831 shares of common stock at prices ranging from
$14.30 to $16.88 were outstanding during the three-month period ended June 30,
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.
8
<PAGE>
For the Three Months Ended June 30, 1999
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income from Continuing Operations $ 7,324,000 26,444,054 $ 0.27
Loss from Discontinued Operations (1,917,000) (0.07)
----------- -----------
Net Income 5,407,000 0.20
Effect of Dilutive Securities
Common Stock Equivalents -- 44,614 --
----------- ----------- -----------
Diluted EPS $ 5,407,000 26,488,668 $ 0.20
=========== =========== ===========
Options to purchase 1,171,053 shares of common stock at prices ranging from
$18.00 to $25.38 were outstanding during the three-month period ended June 30,
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.
For the Six Months Ended June 30, 2000
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income from Continuing Operations $15,967,000 26,390,505 $ 0.61
Income from Discontinued Operations -- --
----------- -----------
Net Income 15,967,000 0.61
Effect of Dilutive Securities
Common Stock Equivalents -- 236,263 <.01>
----------- ----------- -----------
Diluted EPS $15,967,000 26,626,768 $ 0.60
=========== =========== ===========
Options to purchase 887,938 shares of common stock at prices ranging from $14.30
to $16.88 were outstanding during the six-month period ended June 30, 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.
For the Six Months Ended June 30, 1999
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ------
Basic EPS
Income from Continuing Operations $ 14,229,000 26,543,241 $ 0.53
Loss from Discontinued Operations (1,917,000) (.07)
------------ ------------
Net Income 12,312,000 0.46
Effect of Dilutive Securities
Common Stock Equivalents -- 31,197 --
------------ ---------- ------------
Diluted EPS $ 12,312,000 26,574,438 $ 0.46
============ ========== ============
9
<PAGE>
Options to purchase 1,089,053 shares of common stock at prices ranging from
$18.00 to $25.38 were outstanding during the six-month period ended June 30,
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 Adjustments Consolidated
------- ------ ---- ----------- ------------
<S> <C> <C> <C> <C> <C>
Three months ended
June 30, 2000:
Net Sales $100,579 $ 25,893 $ 3,812 $ -- $130,284
Operating income 12,183 3,531 182 (364) 15,532
Three months ended
June 30, 1999:
Net Sales $ 96,883 $ 28,429 $ 4,595 $ -- $129,907
Operating income 11,316 3,130 608 (190) 14,864
Six months ended
June 30, 2000:
Net Sales $199,039 $ 54,679 $ 7,336 $ -- $261,054
Operating income 23,177 7,648 201 (181) 30,845
Six months ended
June 30, 1999:
Net Sales $187,978 $ 50,535 $ 8,366 $ -- $246,879
Operating income 20,972 5,307 787 (349) 26,717
</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. Accumulated other comprehensive income in the consolidated balance sheets as
of June 30, 2000 and December 31, 1999 consists of cumulative translation
adjustments. The Company's total comprehensive income was as follows:
10
<PAGE>
Three Months Ended June 30,
---------------------------
2000 1999
---- ----
Income from Continuing Operations $ 8,027 $ 7,324
Loss from Discontinued Operations -- (1,917)
Foreign Currency Translation Adjustments (658) (2,943)
--------------------------
Total Comprehensive Income $ 7,369 $ 2,464
==========================
Six Months Ended June 30,
-------------------------
2000 1999
---- ----
Income from Continuing Operations $ 15,967 $ 14,229
Loss from Discontinued Operations -- (1,917)
Foreign Currency Translation Adjustments (3,757) (7,332)
--------------------------
Total Comprehensive Income $ 12,210 $ 4,980
==========================
7. Acquisitions
On May 12, 2000, a wholly owned subsidiary of the Company acquired
McCraney, Inc., located in Santa Ana, California for approximately $6 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 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.
11
<PAGE>
9. Other
In June 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. It's
impact 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.
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 June 30, 2000 Compared to
Three Months Ended June 30, 1999
Net sales from continuing operations for the three months ended June 30,
2000 increased $377,000 (0.3%) to $130,284,000 compared to the same period in
1999. The increase in net sales is attributable to the following:
Internal Growth $ 3,232 2.5%
Acquisitions $ 659 0.5%
Foreign Exchange $ (3,514) (2.7%)
------------------------------------------------
Total Change $ 377 0.3%
================================================
The 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 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. Excluding foreign
exchange, shipments of European plumbing and heating valves for the three months
ended June 30, 2000 were 3.2% higher than 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 77.2%, 19.9%, and 2.9%
12
<PAGE>
of net sales, respectively, in the three months ended June 30, 2000 compared to
74.6%, 21.9%, and 3.5% respectively in the three months ended June 30, 1999. The
Company's net sales in these groups for the three months ended June 30, 2000 and
1999 were as follows:
6/30/00 6/30/99 Change
----------- ------------- ------------
North America $100,579 $96,883 $3,696
Europe 25,893 28,429 (2,536)
Asia 3,812 4,595 (783)
----------- ------------- ------------
Total $130,284 $129,907 $377
=========== ============= ============
The increase in North America is due to increased unit sales and the
Spacemaker acquisition. The decrease in Europe is due to the Euro's devaluation,
partially offset by the increased unit sales. The decrease in Asia is due
primarily to decreased unit sales into the domestic Chinese market.
The Company currently expects net sales for the quarter ended September
30, 2000 will be less than reported during the quarters ended March 31 and June
30, 2000 due to the impact of higher interest rates on housing and construction
activity.
Gross profit for the three months decreased $1,577,000 (3.3%), and
decreased as a percentage of net sales from 36.9 percent to 35.6 percent. This
percentage reduction is attributable to an unfavorable product mix and price
competition in certain markets. This was partially offset by improved gross
margins in Europe resulting from consolidating manufacturing and warehouse
operations in Italy.
Selling, general and administrative expenses decreased $2,245,000 (6.8%)
to $30,797,000. This decrease is primarily attributable to decreased corporate
headquarters expenses resulting from the CIRCOR spinoff.
Operating income for the three months ended June 30, 2000 increased
$668,000 (4.5%) to $15,532,000 compared to the same period in 1999 due to the
decreased selling, general and administrative expenses.
The Company's operating income by segment for the three months ended June
30, 2000 and 1999 were as follows:
6/30/00 6/30/99 Change
------------- ----------- -----------
North America $12,183 $11,316 867
Europe 3,531 3,130 401
Asia 182 608 (426)
Corporate Adjustments (364) (190) (174)
------------- ----------- -----------
Total $15,532 $14,864 $668
============= =========== ===========
The increase in North America is due to increased net sales and reduced
corporate headquarters expenses. The increase in Europe is primarily due to
increased net sales and reduced costs resulting
13
<PAGE>
from consolidating manufacturing and warehouse operations in Italy. The decrease
in Asia is due to the decreased net sales.
Interest expense increased $448,000 in the quarter ended June 30, 2000,
compared to the same period in 1999, primarily due to increased interest rates.
The Company's effective tax rate for continuing operations decreased from
39.3% to 37.0%. The decrease is primarily attributable to tax planning
strategies in Europe and the tax effect of dividends received from the Company's
joint venture in China.
Income from continuing operations for the three months ended June 30, 2000
increased $703,000 (9.6%) to $8,027,000 or $ .30 per common share compared to
$.27 per common share for the three months ended June 30, 1999 on a diluted
basis. The impact of foreign exchange, primarily due to the devaluation of the
Euro, decreased income from continuing operations $.01 per common share on a
diluted basis for the period ended June 30, 2000.
Results of Operations
Six Months Ended June 30, 2000 Compared to
Six Months Ended June 30, 1999
Net sales from continuing operations for the six months ended June 30,
2000 increased $14,175,000 (5.7%) to $261,054,000 compared to the same period in
1999. The increase in net sales is attributable to the following:
Internal Growth $ 13,740 5.5%
Acquisitions $ 7,390 3.0%
Foreign Exchange $ (6,955) (2.8%)
----------------------------------------------
Total Change $ 14,175 5.7%
==============================================
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 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 9.0% higher
than last year. The decrease in sales due to foreign exchange is principally due
to the devaluation of the Euro during the six month period ended June 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 76.2%, 21.0%, and 2.8% of net sales, respectively, in the six
months ended June 30, 2000 compared to 76.1%, 20.5%, and 3.4% respectively in
the six months ended June 30, 1999. The Company's net sales in these groups for
the six months ended June 30, 2000 and 1999 were as follows:
14
<PAGE>
6/30/00 6/30/99 Change
----------- ------------- ------------
North America $199,039 $187,978 $11,061
Europe 54,679 50,535 4,144
Asia 7,336 8,366 (1,030)
----------- ------------- ------------
Total $261,054 $246,879 $14,175
=========== ============= ============
The increase in North America is primarily due to increased unit sales and to a
lesser extent from the Spacemaker acquisition. The increase in Europe is due to
the increased unit sales and the inclusion of Cazzaniga. This was partially
offset by the impact of the Euro's devaluation. The decrease in Asia is due to
decreased unit sales into the domestic Chinese market.
Gross profit for the six months ended June 30, 2000 increased $3,028,000
(3.4%), to $92,822,000 compared to the same period in 1999 and decreased as a
percentage of net sales from 36.4 percent to 35.6 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 consolidating manufacturing and warehousing
operations in Italy.
Selling, general and administrative expenses for the six months decreased
$1,100,000 (1.7%) to $61,977,000 compared to the same period in 1999. This
decrease is primarily attributable to decreased corporate headquarters expenses
resulting from the CIRCOR spinoff.
Operating income in the six months ended June 30, 2000 increased
$4,128,000 (15.5%) to $30,845,000 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 six months ended June
30, 2000 and 1999 were as follows:
6/30/00 6/30/99 Change
------------- ----------- ----------
North America $23,177 $20,972 2,205
Europe 7,648 5,307 2,341
Asia 201 787 (586)
Corporate Adjustments (181) (349) 168
------------- ----------- ----------
Total $30,845 $26,717 $4,128
============= =========== ==========
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. The decrease in Asia is
due to decreased net sales.
Interest expense increased $1,630,000 in the six months ended June 30,
2000 compared to the same period in 1999, primarily due to increased interest
rates and increased acquisition financing.
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Income from continuing operations for the six months ended June 30, 2000
increased $1,738,000 (12.2%) to $15,967,000 or $ .60 per common share compared
to $.53 per common share for the six months ended June 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 in the period ended June 30, 2000.
Liquidity and Capital Resources
During the six-month period ended June 30, 2000, the Company generated
$19,916,000 in cash flow, from continuing operations, which was principally used
to purchase Spacemaker, fund the purchase of $6,843,000 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.
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 June 30, 2000, the Company had $17,000,000 outstanding on
the line of credit and was in compliance with all banking covenants related to
this facility.
As of June 30, 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 June 30, 2000, 22,050,000
Euros ($20,980,000) were borrowed under this line of credit.
Working capital at June 30, 2000 was $145,491,000 compared to $141,740,000
at December 31, 1999. The ratio of current assets to current liabilities was 2.4
to 1 at June 30, 2000 and 2.3 to 1 at December 31, 1999. Cash and cash
equivalents were $10,720,000 at June 30, 2000, compared to $13,016,000 at
December 31, 1999. Debt as a percentage of total capital employed was 35.3% at
June 30, 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.
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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
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 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.
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 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
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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 recently 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 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.
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
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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 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.
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 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of the Company was held on April 26,
2000.
(c) The results of the voting on the proposals considered at the Annual
Meeting of Stockholders were as follows:
1. Election of Directors
Timothy P. Horne, Kenneth J. McAvoy, Gordon W. Moran, Roger A. Young and
Daniel J. Murphy, III were each elected as a Director of the Company for a
term expiring at the next Annual Meeting of Stockholders.
The voting results were as follows:
Mr. T. Horne 104,007,749 votes FOR 2,320,421 votes WITHHELD
Mr. K. McAvoy 104,007,949 votes FOR 2,320,221 votes WITHHELD
Mr. R. Young 104,008,149 votes FOR 2,320,021 votes WITHHELD
Mr. G. Moran 104,008,149 votes FOR 2,320,021 votes WITHHELD
Mr. D. Murphy 104,008,149 votes FOR 2,320,021 votes WITHHELD
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2. Ratification of Independent Auditors
The selection of KPMG LLP as the independent auditors of the Company for
the current fiscal year was ratified and the voting results were as
follows:
104,052,194 votes FOR 2,270,779 votes WITHHELD 5,197 votes ABSTAINED
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 during the Quarter ended June 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: August 11, 2000 By: /s/ Timothy P. Horne
--------------------
Timothy P. Horne
Chairman and Chief Executive Officer
Date: August 11, 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)
11 Computation of Earnings per Share (3)
27 Financial Data Schedule June 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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