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, 2002
-------------
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 1-11499
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 26, 2002
----- ----------------------------
Class A Common, $.10 par value 18,115,113
Class B Common, $.10 par value 8,585,224
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
---------------------------------------
INDEX
-----
Part I. Financial Information Page #
--------------------- ------
Item 1. Financial Statements
--------------------
Consolidated Balance Sheets at June 30, 2002
(unaudited) and December 31, 2001 3
Consolidated Statements of Income for the Three
Months Ended June 30, 2002 and 2001 (unaudited) 4
Consolidated Statements of Income for the Six Months
Ended June 30, 2002 and 2001 (unaudited) 5
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2002 and 2001 (unaudited) 6
Notes to Consolidated Financial Statements 7-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-24
Part II. Other Information
-----------------
Item 1. Legal Proceedings 25-26
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Exhibit Index 29
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands, except share amounts)
(Unaudited)
June 30, Dec. 31,
2002 2001
--------- ---------
ASSET
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 10,274 $ 11,997
Trade accounts receivable, less allowance for
doubtful accounts of $6,645 at June 30, 2002
and $6,070 at December 31, 2001 .............................. 119,738 95,498
Inventories:
Raw materials ................................................ 36,366 34,276
Work in process .............................................. 15,680 13,032
Finished goods ............................................... 73,214 68,556
--------- ---------
Total Inventories .......................................... 125,260 115,864
Prepaid expenses and other assets .............................. 9,482 7,436
Deferred income taxes .......................................... 26,425 25,329
--------- ---------
Total Current Assets ......................................... 291,179 256,124
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost ......................... 242,223 218,235
Accumulated depreciation ....................................... (103,944) (89,629)
--------- ---------
Property, plant and equipment, net ........................... 138,279 128,606
--------- ---------
OTHER ASSETS:
Goodwill, net of accumulated amortization of
$17,885 at June 30, 2002 and at December 31, 2001 ............ 148,579 124,544
Other .......................................................... 27,870 11,196
--------- ---------
TOTAL ASSETS ....................................................... $ 605,907 $ 520,470
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................... $ 52,046 $ 42,873
Accrued expenses and other liabilities ......................... 48,859 55,930
Accrued compensation and benefits .............................. 12,974 11,033
Current portion of long-term debt .............................. 8,614 3,693
--------- ---------
Total Current Liabilities .................................... 122,493 113,529
--------- ---------
LONG-TERM DEBT, NET OF CURRENT PORTION ............................. 163,318 123,212
DEFERRED INCOME TAXES .............................................. 20,727 15,692
OTHER NONCURRENT LIABILITIES ....................................... 12,855 11,414
MINORITY INTEREST .................................................. 10,384 7,309
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: 18,115,113 shares at June 30, 2002
and 17,776,509 shares at December 31, 2001 ................... 1,812 1,778
Class B Common Stock, $.10 par value; 25,000,000
shares authorized; 10 votes per share; issued and
outstanding: 8,585,224 shares at June 30, 2002 and
8,735,224 shares at December 31, 2001 ........................ 859 874
Additional paid-in capital ..................................... 39,698 37,182
Retained earnings .............................................. 247,245 233,761
Accumulated other comprehensive income/(loss) .................. (13,484) (24,281)
--------- ---------
Total Stockholders' Equity ................................... 276,130 249,314
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................... $ 605,907 $ 520,470
========= =========
See accompanying notes to consolidated financial statements.
3
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands, except per share amounts)
(Unaudited)
Three Months Ended
----------------------
June 30, June 30,
2002 2001
--------- ---------
Net sales ............................................ $ 151,505 $ 135,562
Cost of goods sold ................................... 99,273 89,213
--------- ---------
GROSS PROFIT ..................................... 52,232 46,349
Selling, general & administrative expenses ........... 37,138 33,277
--------- ---------
OPERATING INCOME ................................. 15,094 13,072
--------- ---------
Other (income) expense:
Interest income .................................. (370) (114)
Interest expense ................................. 2,299 2,391
Other, net ....................................... (200) (45)
Minority interest ................................ 71 64
--------- ---------
1,800 2,296
--------- ---------
INCOME BEFORE INCOME TAXES ....................... 13,294 10,776
Provision for income taxes ........................... 4,661 3,741
--------- ---------
NET INCOME ....................................... $ 8,633 $ 7,035
========= =========
BASIC EARNINGS PER SHARE
NET INCOME ....................................... $ .32 $ .27
========= =========
Weighted average number of shares .................... 26,637 26,500
========= =========
DILUTED EARNINGS PER SHARE
NET INCOME ....................................... $ .32 $ .26
========= =========
Weighted average number of shares .................... 27,172 26,941
========= =========
Dividends per common share ....................... $ .06 $ .06
========= =========
See accompanying notes to consolidated financial statements.
4
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands, except per share amounts)
(Unaudited)
Six Months Ended
----------------------
June 30, June 30,
2002 2001
--------- ---------
Net sales ............................................ $ 294,825 $ 271,487
Cost of goods sold ................................... 193,114 178,474
--------- ---------
GROSS PROFIT ..................................... 101,711 93,013
Selling, general & administrative expenses ........... 72,365 66,122
Restructuring ........................................ 10 --
--------- ---------
OPERATING INCOME ................................. 29,336 26,891
--------- ---------
Other (income) expense:
Interest income .................................. (456) (254)
Interest expense ................................. 4,129 4,808
Other, net ....................................... (125) 156
Minority interest ................................ 106 117
--------- ---------
3,654 4,827
--------- ---------
INCOME BEFORE INCOME TAXES ....................... 25,682 22,064
Provision for income taxes ........................... 8,993 7,756
--------- ---------
NET INCOME ....................................... $ 16,689 $ 14,308
========= =========
BASIC EARNINGS PER SHARE
NET INCOME ....................................... $ .63 $ .54
========= =========
Weighted average number of shares .................... 26,586 26,482
========= =========
DILUTED EARNINGS PER SHARE
NET INCOME ....................................... $ .62 $ .53
========= =========
Weighted average number of shares .................... 27,048 26,873
========= =========
Dividends per common share ....................... $ .12 $ .12
========= =========
See accompanying notes to consolidated financial statements.
5
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Six Months Ended
--------------------
June 30, June 30,
2002 2001
-------- --------
OPERATING ACTIVITIES
Net income ................................................. $ 16,689 $ 14,308
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .............................................. 11,395 9,877
Amortization .............................................. 191 1,740
Deferred income taxes (benefit) ........................... 78 (570)
Loss/(gain) on disposal of assets ......................... (98) 9
Equity in undistributed earnings (loss) of affiliates ..... (23) (3)
Changes in operating assets and liabilities, net of effects
from acquisitions and dispositions:
Accounts receivable ...................................... (19,866) (609)
Inventories .............................................. (2,216) (1,556)
Prepaid expenses and other assets ....................... (2,677) (2,400)
Accounts payable, accrued expenses and other liabilities . (1,273) (3,131)
-------- --------
Net cash provided by operating activities .................. 2,200 17,665
-------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment ................. (12,205) (8,937)
Proceeds from sale of property, plant and equipment ........ 245 85
Business acquisitions, net of cash acquired ................ (15,127) (30,178)
Decrease/(increase) in other assets ........................ 42 (125)
-------- --------
Net cash used in investing activities ...................... (27,045) (39,155)
-------- --------
FINANCING ACTIVITIES
Proceeds from long-term borrowings ......................... 67,253 69,037
Payments of long-term debt ................................. (41,166) (48,719)
Proceeds from exercise of stock options .................... 2,535 1,075
Dividends .................................................. (3,205) (3,201)
-------- --------
Net cash provided by financing activities .................. 25,417 18,192
-------- --------
Effect of exchange rate changes on cash and cash equivalents ... 735 131
Net cash used in discontinued operations ....................... (3,030) (1,209)
-------- --------
CHANGE IN CASH AND CASH EQUIVALENTS ............................ (1,723) (4,376)
Cash and cash equivalents at beginning of period ............... 11,997 15,235
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................... $ 10,274 $ 10,859
======== ========
NON CASH INVESTING AND FINANCING ACTIVITIES
Acquisitions of businesses:
Fair value of assets acquired ........................... $ 40,800 $ 47,776
Cash Paid ............................................... 15,127 30,178
-------- --------
Liabilities Assumed ..................................... $ 25,673 $ 17,598
======== ========
See accompanying notes to consolidated financial statements.
6
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
- ---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
- ------------------------------------------------------
1. Basis of Presentation
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, 2002 (unaudited), its
Consolidated Statements of Income for the three months and six months ended June
30, 2002 and 2001 (unaudited), and its Consolidated Statements of Cash Flows for
the six months ended June 30, 2002 and 2001 (unaudited).
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date. The accounting policies followed by the
Company are described in the December 31, 2001 financial statements which are
contained in the Company's December 31, 2001 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,
2001 Annual Report on Form 10-K.
2. Accounting Policies
The Company's shipping costs included in selling general and
administrative expense amounted to $5,155,000 and $5,195,000 for the three
months ended June 30, 2002 and 2001, respectively, and $10,175,000 and
$10,721,000 for the six months ended June 30, 2002 and 2001, respectively.
The Company adopted Financial Accounting Standards Board Statement No.
141, "Business Combinations" ("FAS 141") in fiscal 2001 and Financial Accounting
Standards Board Statement No. 142, "Goodwill and Other Intangible Assets" ("FAS
142") on January 1, 2002. FAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
FAS 141 also specifies the criteria that intangible assets acquired in a
purchase method business combination must meet in order to be recognized and
reported apart from goodwill. FAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment, at least annually, in accordance with the provisions of
FAS 142. FAS 142 also requires that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values and reviewed for impairment in accordance with Financial
Accounting Standards Board Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets"("FAS 144").
FAS 142 requires the Company to perform an assessment of whether there is
an indication that the remaining recorded goodwill is impaired as of the date of
adoption. This assessment involves a two-step transitional impairment test. To
accomplish this, the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of January 1, 2002. To the extent that a reporting unit's carrying amount
exceeds its fair value, an indication exists that the reporting unit's goodwill
may be impaired and the Company must perform the second step of the transitional
impairment test. Any transitional impairment loss will be recognized as a
cumulative effect of a change in accounting principle. In connection with the
adoption of SFAS No. 142, the Company has completed the first step of the
transitional goodwill impairment test, which requires the Company to compare the
fair value of its reporting units to the carrying value of the net assets of the
respective reporting units as of January 1, 2002. Based on this analysis, the
Company has concluded that no impairment existed at the time of adoption, and
accordingly, the Company has not recognized any transitional impairment loss.
7
The pro forma effect of the adoption of the standard on prior period
earnings excluding goodwill amortization expense, net of tax, is as follows:
Three Months Ended
June 30,
-------------------
2002 2001
---- ----
(in thousands except per
share information)
Net income ....................................... $8,633 $7,035
Add back: goodwill amortization, net of tax ...... -- 767
---------------------
Adjusted net income .............................. $8,633 $7,802
=====================
Basic earnings per share:
Net income ....................................... $.32 $.27
Goodwill amortization ............................ -- .03
---------------------
Adjusted net income .............................. $.32 $.30
=====================
Diluted earnings per share:
Net income ....................................... $.32 $.26
Goodwill amortization ............................ -- .03
---------------------
Adjusted net income .............................. $.32 $.29
=====================
Six Months Ended
June 30,
-------------------
2002 2001
---- ----
(in thousands except per
share information)
Net income ....................................... $16,689 $14,308
Add back: goodwill amortization, net of tax ...... -- 1,525
---------------------
Adjusted net income .............................. $16,689 $15,833
=====================
Basic earnings per share:
Net income ....................................... $.63 $.54
Goodwill amortization ............................ -- .06
---------------------
Adjusted net income .............................. $.63 $.60
=====================
Diluted earnings per share:
Net income ....................................... $.62 $.53
Goodwill amortization ............................ -- .06
---------------------
Adjusted net income .............................. $.62 $.59
=====================
8
The changes in the carrying amount of goodwill for the six months ended
June 30, 2002 are as follows:
(in thousands)
Carrying amount as of December 31, 2001................... $124,544
Goodwill acquired during the year......................... 19,374
Effect of change in rates used for translation............ 4,661
---------
Carrying amount as of June 30, 2002....................... $148,579
=========
Amortized Intangible Assets (a):
As of June 30, 2002
-------------------
Gross Carrying Accumulated
Amount Amortization
------ ------------
(in thousands)
Patents .................................. $6,581 $(3,234)
Other .................................... 15,380 (842)
-----------------------
Total ................................ $21,961 $(4,076)
=======================
(a) as recognized in "Other Assets: "Other", in the consolidated balance
sheet
Aggregate amortization expense for amortized other intangible assets for
the six months ended June 30, 2002 is $191,000. Additionally, future
amortization expense on other intangible assets approximates $557,000 for the
remainder of fiscal 2002, $965,000 for fiscal 2003, and $908,000 for fiscal
2004, 2005 and 2006.
Effective January 1, 2002, the Company also adopted FAS 144 which
addresses the accounting and reporting for the impairment or disposal of
long-lived assets. FAS 144 supercedes Financial Accounting Standards Board
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("FAS 121") but retains many of the
fundamental provisions of FAS 121. FAS 144 also supercedes the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30") for the disposal of a segment of a business. However,
FAS 144 retains the requirements of APB 30 to report discontinued operations
separately and extends that reporting requirement to components of an entity
that has either been disposed of or is classified as held for sale. FAS 144
excludes goodwill and other intangibles that are not amortized from its scope.
For assets to be held and used, FAS 144 addresses the recoverability of an asset
or group of assets, clarifies how an impairment loss should be allocated, and
creates a requirement to use a fair value if market prices are not available and
uncertainties exist about the timing and amount of cash flows. For long-lived
assets to be disposed of by sale, FAS 144 establishes the criteria to be met to
qualify for this classification, defines the timing of when the related sale
must be consummated, eliminates the net realizable value measurement approach
for segments of a business and certain acquired assets in a business
combination, and defines costs to sell the asset. FAS 144 was effective for
fiscal years beginning after December 15, 2001 and was not material to our
consolidated financial statements.
3. Sales Incentives and Other
During 2000, the Financial Accounting Standards Board's Emerging Issues
Task Force (EITF) added to its agenda various revenue recognition issues that
could impact the income statement classification of certain promotional
payments. In May 2000, the EITF reached a consensus on Issue 00-14, "Accounting
for Certain Sales Incentives". EITF 00-14 addresses the recognition and income
statement classification of various sales incentives. The consensus became
effective in the first quarter of 2002 and was not material to our consolidated
financial statements.
In April 2001, the EITF reached a consensus on Issue 00-25, "Vendor Income
Statement Characterization of
9
Consideration to a Purchaser of the Vendor's Products or Services". EITF 00-25
addresses the income statement classification of consideration, other than that
directly addressed in Issue 00-14, from a vendor to a reseller, or another party
that purchases the vendor's products. The consensus became effective in the
first quarter of 2002 and was not material to our consolidated financial
statements.
4. Derivative Instruments
Certain forecasted transactions, primarily intercompany sales between the
United States and Canada, and assets are exposed to foreign currency risk. The
Company monitors its foreign currency exposures on an ongoing basis to maximize
the overall effectiveness of its foreign currency hedge positions. During the
six months ended June 30, 2002, the Company used foreign currency forward
contracts as a means of hedging exposure to foreign currency risks. The
Company's foreign currency forwards have been designated and qualify as cash
flow hedges under the criteria of FAS 133. FAS 133 requires that changes in fair
value of derivatives that qualify as cash flow hedges be recognized in other
comprehensive income while the ineffective portion of the derivative's change in
fair value be recognized immediately in earnings. The net gain on these
contracts recorded in other comprehensive income during the quarter ended June
30, 2002 was $68,000 and the six months ended June 30, 2002 was $100,000. There
were no ineffective amounts for the three and six-month periods ended June 30,
2002.
The Company uses interest rate swaps as an economic hedge on forecasted
interest costs. During the quarter ended September 30, 2001, the Company entered
into an interest rate swap for its $75,000,000 notes. The Company swapped the
fixed interest rate of 8 3/8% to floating LIBOR plus 3.74%. The term of the swap
matches the maturity date of the notes (December 2003). The fair value of this
swap at June 30, 2002 was approximately $1,628,000. This swap qualifies for
hedge accounting treatment. For the three and six months ended June 30, 2002,
the swap reduced interest expense by $475,000 and $991,000, respectively.
The Company also utilizes, on a limited basis, certain commodity
derivatives, primarily on copper used in its manufacturing process, to hedge the
cost of its anticipated production requirements. The Company did not utilize any
commodity derivatives for the three and six-month periods ended June 30, 2002.
5. Restructuring
The Company is implementing a plan to consolidate several of its
manufacturing plants both in North America and Europe. At the same time it is
expanding its manufacturing capacity in China. The implementation of this
manufacturing restructuring plan began during the fourth quarter of fiscal 2001
and is expected to be completed during fiscal 2002 to insure the quality of its
products and minimize any interruption in its delivery of those products to its
customers. The Company recorded pre-tax manufacturing restructuring plan costs
of $5,831,000 in the fourth quarter of fiscal 2001, $771,000 in the second
quarter of 2002 and $1,680,000 in the six months ended June 30, 2002. The
Company anticipates recording up to an additional $3,000,000 pre-tax in 2002 as
it continues to implement the program. The manufacturing restructuring plan
costs recorded in 2001 and the six months in 2002 consist primarily of severance
costs, asset write-downs and accelerated depreciation. The severance costs,
which have been recorded as restructuring, are for 39 employees in manufacturing
and administration groups, 38 of whom have been terminated as of June 30, 2002.
Asset write-downs consist primarily of write-offs of inventory related to
product lines that the Company has discontinued as part of this restructuring
plan and have been recorded in cost of goods sold. Accelerated depreciation is
based on shorter estimated useful lives of certain fixed assets and have been
recorded in cost of goods sold. The tax benefits of the costs and asset
write-downs are expected to slightly exceed cash outlays to implement this
program, which would allow the Company to complete the restructuring without any
net consumption of cash. The Company estimates an annual pre-tax savings of
approximately $4,000,000 following the completion of the plan.
10
Details of our manufacturing restructuring plan as of June 30, 2002 are as
follows:
Initial Utilized Balance Additional Utilized Remaining
Provision During 2001 2001 Provisions During 2002 Balance
--------- ----------- ---- ---------- ----------- -------
(in thousands)
Restructuring/Other . $1,454 $692 $762 $10 $467 $305
Asset Write-downs ... 4,300 4,300 -- 1,218 1,218 --
Other costs ......... 77 77 -- 452 452 --
-------------------------------------------------------------------
Total ............... $5,831 $5,069 $762 $1,680 $2,137 $305
===================================================================
6. Earnings per Share
The following tables set forth the reconciliation of the calculation of
earnings per share:
For the Three Months Ended June 30, 2002
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Net Income .................... $8,633,000 26,636,659 $0.32
Effect of Dilutive Securities
Common Stock Equivalents ...... -- 535,515 --
--------------------------------------
Diluted EPS ......................... $8,633,000 27,172,174 $0.32
======================================
For the Three Months Ended June 30, 2001
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Net Income ................... $7,035,000 26,499,670 $0.27
Effect of Dilutive Securities
Common Stock Equivalents ..... -- 441,108 (0.01)
--------------------------------------
Diluted EPS ......................... $7,035,000 26,940,778 $0.26
======================================
Stock options to purchase 179,475 shares of common stock were outstanding
at June 30, 2001, 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.
For the Six Months Ended June 30, 2002
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Net Income ................... $16,689,000 26,585,899 $0.63
Effect of Dilutive Securities
Common Stock Equivalents ..... -- 461,857 (0.01)
--------------------------------------
Diluted EPS ......................... $16,689,000 27,047,756 $0.62
======================================
11
For the Six Months Ended June 30, 2001
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Net Income ................... $14,308,000 26,482,006 $0.54
Effect of Dilutive Securities
Common Stock Equivalent ...... -- 391,233 (0.01)
--------------------------------------
Diluted EPS ......................... $14,308,000 26,873,239 $0.53
======================================
Stock options to purchase 179,475 shares of common stock were outstanding at
June 30, 2001, 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.
7. Segment Information
The following table presents certain operating segment information:
(in thousands)
Three months ended North
June 30, 2002: America Europe Asia Corporate Consolidated
- -------------- ------- ------ ---- --------- ------------
Net Sales ............................. $113,677 $31,844 $5,984 $-- $151,505
Operating income ...................... 15,182 3,066 175 (3,329) 15,094
Capital Expenditures .................. 1,353 2,378 2,937 -- 6,668
Depreciation and Amortization ......... 3,903 1,584 289 -- 5,776
Three months ended
June 30, 2001:
- --------------
Net Sales ............................. $105,038 $27,235 $3,289 $-- $135,562
Operating income ...................... 12,464 2,719 227 (2,338) 13,072
Capital Expenditures .................. 3,769 694 1,033 -- 5,496
Depreciation and Amortization ......... 4,030 1,483 175 -- 5,688
Six months ended
June 30, 2002:
- --------------
Net Sales ............................. $223,558 $63,215 $8,052 $-- $294,825
Operating income ...................... 29,013 6,398 213 (6,288) 29,336
Capital Expenditures .................. 3,413 3,334 5,458 -- 12,205
Depreciation and Amortization ......... 7,803 3,288 495 -- 11,586
Identifiable Assets ................... 385,026 177,901 42,980 -- 605,907
Six months ended
June 30, 2001:
- --------------
Net Sales ............................. $207,238 $57,775 $6,474 $-- $271,487
Operating income ...................... 25,404 5,771 297 (4,581) 26,891
Capital Expenditures .................. 6,605 1,079 1,253 -- 8,937
Depreciation and Amortization ......... 8,074 3,184 359 -- 11,617
Identifiable Assets ................... 337,932 150,613 24,775 -- 513,320
The above operating segments are presented on a basis consistent with the
presentation included in the Company's December 31, 2001 financial statements.
There have been no material changes in the identifiable assets of
12
the individual segments since December 31, 2001.
Corporate consists primarily of compensation expense for corporate
headquarters' staff, professional fees, including legal and audit, and product
liability and general liability insurances.
8. Other Comprehensive Income
The accumulated balances for the components of the Other Comprehensive
Income/(Loss) are:
Accumulated
Foreign Other
Currency Cash Flow Comprehensive
Translation Hedges Income/(loss)
----------- ------ -------------
(in thousands)
Balance December 31, 2000 ............... $(19,728) -- $(19,728)
Change in period ........................ (5,034) 160 (4,874)
---------------------------------------
Balance March 31, 2001 .................. (24,762) 160 (24,602)
Change in period ........................ (1,969) (134) (2,103)
---------------------------------------
Balance June 30, 2001 ................... $(26,731) 26 $(26,705)
=======================================
Balance December 31, 2001 ............... $(24,281) -- $(24,281)
Change in period ........................ (1,761) 32 (1,729)
---------------------------------------
Balance March 31, 2002 .................. (26,042) 32 (26,010)
Change in period ........................ 12,458 68 12,526
---------------------------------------
Balance June 30, 2002 ................... $(13,584) 100 $(13,484)
=======================================
Accumulated other comprehensive income/(loss) in the Consolidated Balance
Sheets as of June 30, 2002 and December 31, 2001 consists of cumulative
translation adjustments and as of June 30, 2002 changes in the fair value of
certain financial instruments which qualify for hedge accounting as required by
FAS 133. The Company's total comprehensive income was as follows:
Three Months Ended June 30,
---------------------------
2002 2001
---- ----
(in thousands)
Net Income ................................................. $8,633 $7,035
Unrealized Gains/(Loss) Derivative Instruments, Net of Tax . 68 (134)
Foreign Currency Translation Adjustments ................... 12,458 (1,969)
------------------------
Total Comprehensive Income ................................. $21,159 $4,932
========================
Six Months Ended June 30,
-------------------------
2002 2001
---- ----
(in thousands)
Net Income ................................................. $16,689 $14,308
Unrealized Gains Derivative Instruments, Net of Tax ........ 100 26
Foreign Currency Translation Adjustments ................... 10,697 (7,003)
------------------------
Total Comprehensive Income ................................. $27,486 $7,331
========================
13
9. Acquisitions
On July 29, 2002 a wholly-owned subsidiary of the Company acquired F&R
Foerster and Rothmann GmbH located in Neuenburg am Rhein, Germany, for
approximately 2.3 million euro in cash. F&R manufactures and distributes a line
of gauges predominately to the French and German OEM markets. F&R's annual
revenue, prior to the acquisition, was approximately 4 million euro.
On July 15, 2002, a wholly-owned subsidiary of the Company acquired ADEV
Electronic SA located in Rosieres, France and its closely affiliated
distributor, E.K. Eminent A.B. located in Gothenburg, Sweden for approximately
12.9 million euro in cash. ADEV manufactures and distributes electronic systems
predominantly to the OEM market. Their product lines include thermostats and
controls for heating, ventilation and air conditioning, control systems for
hydronic and electric floor warming systems, and controls for other residential
applications. Eminent distributes electronic controls, mechanical thermostats
and other electric control related products throughout the European Nordic
countries. The two companies' combined annual revenue preceding the acquisition
was approximately 30 million euro.
On May 9, 2002, a wholly-owned subsidiary of the Company acquired Hunter
Innovations of Sacramento, California for $25 million, of which approximately
$10 million was paid in cash at the closing and the balance in interest bearing
notes, payable in equal installments over the next four years. Hunter
Innovations was founded in 1995 as a technology development company and has
developed a line of large backflow prevention devices that represent a
significant advance in technology. The improved product features that are
important to the backflow prevention markets include lighter weight, more
compact design, better flow characteristics, improved serviceability and
multiple end-connection and shutoff valve options. Hunter Innovations' sales
during the twelve months preceding the acquisition were approximately $1.5
million. Unlike most of our acquisitions, Hunter did not have significant
historical revenues or earnings. Nonetheless, the purchase price was based on
projected revenues and earnings as utilized in other acquisitions. Our June 30,
2002 Consolidated Balance Sheet contains a preliminary purchase price
allocation, consistent with the guidelines in FAS 141. The preliminary
allocation for goodwill was approximately $17 million and approximately $13
million was for other amortizable intangibles, which are classified in "Other
Assets: Other" in the Company's Consolidated Balance Sheet as of June 30, 2002.
The Company is in the process of obtaining a third party valuation; thus the
allocation of the purchase price is subject to change.
On March 5, 2002, the Company entered into a joint venture with the Yuhuan
County Cheng Guan Metal Hose Factory ("Cheng Guan") located in Taizhou, Zhejiang
Province of the Peoples Republic of China. Cheng Guan, with annual sales prior
to the transaction of approximately $15 million, is a manufacturer of a variety
of plumbing products sold both into the Chinese domestic market and export
markets. Their product lines were contributed to the joint venture and include
hose, hose connectors, multi-layer tubing and stainless steel braided hose. The
joint venture is owned 60% by Watts and 40% by our Chinese partner. The Company
has invested $7.8 million to obtain this 60% interest. The June 30, 2002
Consolidated Balance Sheet of the Company contains a preliminary purchase price
allocation of the joint venture. The preliminary allocation for goodwill was
approximately $3 million and approximately $2 million was for other amortizable
intangibles, which are classified in "Other Assets: Other" in the Company's
Consolidated Balance Sheet as of June 30, 2002.
On September 28, 2001, a wholly-owned subsidiary of the Company acquired
the assets of the Powers Process Controls Division of Mark Controls Corporation,
a subsidiary of Crane Co. located in Skokie, Illinois and Mississauga, Ontario,
Canada for approximately $13 million in cash. Powers designs and manufactures
thermostatic mixing valves for personal safety and process control applications
in commercial and institutional facilities. It also manufactures control valves
and commercial plumbing brass products including shower valves and lavatory
faucets. Powers annualized sales prior to the acquisition were approximately $20
million.
On June 13, 2001, a wholly-owned subsidiary of the Company acquired
Premier Manufactured Systems, Inc., located in Phoenix, Arizona for
approximately $5 million in cash. Premier manufactures water filtration systems
for both residential and commercial applications and other filtration products
including under-the-counter ultraviolet filtration as well as a variety of
sediment and carbon filters. Premier's annualized sales prior to the acquisition
were approximately $10 million.
14
On June 1, 2001, a wholly-owned subsidiary of the Company acquired Fimet
S.r.l. (Fabbrica Italiana Manometri e Terometri) located in Milan, Italy and its
wholly-owned subsidiary, MTB AD, which is located in Bulgaria for approximately
$6 million in cash. The acquired business manufactures pressure and temperature
gauges for use in the HVAC market. Fimet's annualized sales prior to the
acquisition were approximately $9 million.
10. Debt Issuance
On February 28, 2002, the Company entered into a new revolving credit
facility with a syndicate of banks (the "Revolving Credit Facility"), which
replaced the Company's $100 million (U.S.) facility and its 39,350,000 euro
facility. The Revolving Credit Facility provides for borrowings of up to $150
million (U.S.), which includes a $100 million tranche for U.S. dollar borrowings
and a $50 million tranche for euro based borrowings and matures in February
2005. Approximately $46 million of borrowings under the Revolving Credit
Facility were used to repay amounts outstanding under the prior facilities. The
Revolving Credit Facility will be used to support the Company's acquisition
program, working capital requirements and for general corporate purposes.
Outstanding indebtedness under the Revolving Credit Facility bears
interest at one of three customary rates plus a margin of 100 basis points,
depending on the applicable base rate and the Company's bond rating. The average
interest rate for borrowings under the Revolving Credit Facility was
approximately 3.6% at June 30, 2002. The Revolving Credit Facility includes
operational and financial covenants customary for facilities of this type,
including, among others, restrictions on additional indebtedness, liens and
investments and maintenance of certain leverage ratios. As of June 30, 2002, the
Company was in compliance with all covenants related to the Revolving Credit
Facility.
11. 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 "James Jones case"). The complaint alleges that a former
subsidiary of the Company sold products utilized in municipal water systems that
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 original complaint has been amended, and the total number of
named plaintiffs is 161, 14 of which have intervened to date. In June 2001, the
Company and the other defendants reached a proposed settlement with the Los
Angeles Department of Water and Power ("LADWP"), one of the plaintiffs in the
James Jones case, which was approved by the California Superior Court on October
31, 2001 and by the Los Angeles City Council on December 14, 2001. The other
plaintiffs remain, and the Company is vigorously contesting this matter.
The Company established initial reserves with respect to the James Jones
case in the amount of $10,100,000 after tax, which amount was approximately
$3,400,000 after tax as of June 30, 2002, and is classified under the item
"Accrued expenses and other liabilities" in the Company's Consolidated Balance
Sheet as of June 30, 2002. The Company presently believes, on the basis of all
available information, that these reserves are adequate to cover the Company's
probable and reasonably estimable losses resulting from the James Jones case.
However, litigation is inherently uncertain and the Company believes that there
exists a reasonable possibility that it may ultimately incur losses in the James
Jones case in excess of the amount accrued for that matter. The Company is
currently unable to make an estimate of the range of any additional losses. See
Part II, Item 1, Legal Proceedings.
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 presently 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 liquidity, financial condition or results of
operations.
15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
Recent Developments
- -------------------
On June 20, 2002 the Company announced that Mr. Timothy P. Horne, Chairman
and Chief Executive Officer, is planning to retire by the end of this fiscal
year ending December 31, 2002. The Board of Directors of the Company commenced a
search for Mr. Horne's successor and on August 7, 2002 the Company announced the
appointment of its new Chief Executive Officer, Patrick S. O'Keefe, effective
immediately. Mr. Horne is also retiring as Chairman of the Board but will remain
as a Director. The Board has nominated and elected Mr. Gordon W. Moran as its
non-executive Chairman. Mr. Moran has served on the Board since 1990. Mr.
O'Keefe has also been elected to the Board.
On July 29, 2002 a wholly-owned subsidiary of the Company acquired F&R
Foerster and Rothmann GmbH located in Neuenburg am Rhein, Germany, for
approximately 2.3 million euro in cash. F&R manufactures and distributes a line
of gauges predominately to the French and German OEM markets. F&R's annual
revenue, prior to the acquisition, was approximately 4 million euro.
On July 15, 2002, a wholly-owned subsidiary of the Company acquired ADEV
Electronic SA located in Rosieres, France and its closely affiliated
distributor, E.K. Eminent A.B. located in Gothenburg, Sweden for approximately
12.9 million euro in cash. ADEV manufactures and distributes electronic systems
predominantly to the OEM market. Their product lines include thermostats and
controls for heating, ventilation and air conditioning, control systems for
hydronic and electric floor warming systems, and controls for other residential
applications. Eminent distributes electronic controls, mechanical thermostats
and other electric control related products throughout the European Nordic
countries. The two companies' combined annual revenue preceding the acquisition
was approximately 30 million euro.
On May 9, 2002, a wholly-owned subsidiary of the Company acquired Hunter
Innovations of Sacramento, California for $25 million, of which approximately
$10 million was paid in cash at the closing and the balance in interest bearing
notes, payable in equal installments over the next four years. Hunter
Innovations was founded in 1995 as a technology development company and has
developed a line of large backflow prevention devices that represent a
significant advance in technology. The improved product features that are
important to the backflow prevention markets include lighter weight, more
compact design, better flow characteristics, improved serviceability and
multiple end-connection and shutoff valve options. Hunter Innovations' sales
during the twelve months preceding the acquisition were approximately $1.5
million. Unlike most of our acquisitions, Hunter did not have significant
historical revenues or earnings. Nonetheless, the purchase price was based on
projected revenues and earnings as utilized in other acquisitions. Our June 30,
2002 Consolidated Balance Sheet contains a preliminary purchase price
allocation, consistent with the guidelines in FAS 141. The preliminary
allocation for goodwill was approximately $17 million and approximately $13
million was for other amortizable intangibles, which are classified in "Other
Assets: Other" in the Company's Consolidated Balance Sheet as of June 30, 2002.
The Company is in the process of obtaining a third party valuation; thus the
allocation of the purchase price is subject to change.
On March 5, 2002, the Company entered into a joint venture with the Yuhuan
County Cheng Guan Metal Hose Factory ("Cheng Guan") located in Taizhou, Zhejiang
Province of the Peoples Republic of China. Cheng Guan, with annual sales prior
to the transaction of approximately $15 million, is a manufacturer of a variety
of plumbing products sold both into the Chinese domestic market and export
markets. Its product lines were contributed to the joint venture and include
hose, hose connectors, multi-layer tubing and stainless steel braided hose. The
joint venture is owned 60% by us and 40% by our Chinese partner. We have
invested $7.8 million to obtain this 60% interest. Our June 30, 2002
Consolidated Balance Sheet contains a preliminary purchase price allocation of
the joint venture. The preliminary allocation for goodwill was approximately $3
million and approximately $2 million was for other amortizable intangibles,
which are classified in "Other Assets: Other" in the Company's Consolidated
Balance Sheet as of June 30, 2002.
16
As part of our $18.7 million capital expenditure budget for fiscal 2002,
we expect to invest approximately $9.0 million to establish a 100% controlled
bronze and brass manufacturing plant in Tianjin, China. We anticipate the plant
will be completed at the end of fiscal 2002. As of June 30, 2002, we have spent
approximately $3.4 million.
We are implementing a plan to consolidate several of our manufacturing
plants in both North America and Europe. At the same time we are expanding our
manufacturing capacity in China. The implementation of this manufacturing
restructuring plan began during the fourth quarter of fiscal 2001 and is
expected to be completed during fiscal 2002 to insure the quality of our
products and minimize any interruption in our delivery of those products to our
customers. We recorded pre-tax manufacturing restructuring plan costs of $5.8
million in the fourth quarter of fiscal 2001, $0.8 million in the second quarter
of fiscal 2002 and $1.7 million for the six months ended June 30, 2002. We
anticipate recording up to an additional $3.0 million pre-tax in 2002 as we
continue to implement the program. The manufacturing restructuring plan costs
recorded in 2001 and in the first six months of 2002 consist primarily of
severance costs, asset write-downs and accelerated depreciation. The severance
costs, which have been recorded as restructuring, are for 39 employees in
manufacturing and administration groups, 38 of whom have been terminated as of
June 30, 2002. Asset write-downs consist primarily of write-offs of inventory
related to product lines that we have discontinued as part of this restructuring
plan and have recorded in cost of goods sold. Accelerated depreciation is based
on the shorter estimated useful lives of certain fixed assets and have been
recorded in cost of goods sold. Tax benefits of the costs and asset write-downs
are expected to slightly exceed cash outlays to implement this program, which
would allow us to complete the restructuring without any net consumption of
cash. We currently estimate an annual pre-tax savings of approximately $4.0
million following the completion of the plan.
Results of Operations
- ---------------------
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
- -----------------------------------------------------------------------------
Net Sales. Net sales for the three months ended June 30, 2002 increased
$15,943,000 (11.8%) to $151,505,000 compared to $135,562,000 for the same period
in 2001. The increase in net sales is attributable to the following:
(in thousands)
Internal Growth ................................... $1,166 0.9%
Acquisitions ...................................... 11,955 8.8%
Foreign Exchange .................................. 2,822 2.1%
--------------------
Total Change ...................................... $15,943 11.8%
====================
The increase in internal growth of net sales is due to increased unit
shipments into the North American do-it-yourself market, partially offset by
decreased unit shipments to North American plumbing and heating wholesalers. The
growth in net sales from acquired businesses is due to the inclusion of the net
sales of Powers Process Controls, acquired on September 28, 2001, Premier
Manufactured Systems, acquired on June 13, 2001, Fimet S.r.l., acquired on June
1, 2001 and Cheng Guan, our joint venture, which we established on March 5,
2002. The increase in foreign exchange is due primarily to the euro appreciating
against the U.S. dollar compared to the same period in 2001.
17
We monitor our net sales in three geographical segments: North America,
Europe and Asia. As outlined below, North America, Europe and Asia accounted for
75.0%, 21.0% and 4.0% of net sales, respectively, in the three months ended June
30, 2002, compared to 77.5%, 20.1% and 2.4% of net sales, respectively, in the
three months ended June 30, 2001:
June 30, 2002 June 30, 2001 Change
------------- ------------- ------
(in thousands)
North America ................ $113,677 $105,038 $8,639
Europe ....................... 31,844 27,235 4,609
Asia ......................... 5,984 3,289 2,695
---------------------------------------
Total ........................ $151,505 $135,562 $15,943
=======================================
The increase in North America's net sales is due to the Powers Process
Controls and Premier acquisitions and increased unit shipments. The increase in
Europe's net sales is due to the euro appreciating against the U.S. dollar and
by the Fimet acquisition. Sales in the European market on a local currency basis
were 6.6% above the comparable prior year period. The increase in Asia's net
sales is due to the inclusion of our Cheng Guan joint venture, partially offset
by decreased demand in the North American export market.
Gross Profit. Gross profit for the three months ended June 30, 2002 increased
$5,883,000 (12.7%) to $52,232,000 from $46,349,000 for the comparable quarter
last year and increased as a percentage of net sales to 34.5% from 34.2%. We
charged $714,000 of costs associated with our manufacturing restructuring plan
to cost of sales. Excluding the manufacturing restructuring plan costs, our
gross profit would have increased $6,597,000 and would have increased as a
percent of sales to 34.9% from 34.2%. The gross profit increase is primarily
attributable to inclusion of the acquired companies. The gross profit percentage
increase is primarily due to reduced spending in manufacturing fixed overhead as
well as improved efficiencies in manufacturing compared to the comparable
quarter last year.
Selling, General and Administrative Expense. Selling, general and administrative
expenses for the three months ended June 30, 2002 increased $3,861,000 (11.6%)
to $37,138,000 compared to $33,277,000 for the same period in 2001. This
increase is attributable to the inclusion of selling, general and administrative
expenses of acquired companies, an increase in the cost of product and general
liability insurance, the euro appreciating against the U.S. dollar compared to
the prior period and start-up costs associated with our regional distribution
centers. We adopted FAS 142 "Goodwill and Other Intangible Assets" on January 1,
2002, and accordingly did not record goodwill amortization for the quarter ended
June 30, 2002. We recorded goodwill amortization of $772,000 as part of our
selling, general and administrative expenses in the quarter ended June 30, 2001.
Operating Income. Operating income for the three months ended June 30, 2002,
increased $2,022,000 (15.5%) to $15,094,000 compared to $13,072,000 for the same
period in 2001 due to increased gross profit and the cessation of goodwill
amortization, partially offset by increased selling, general and administrative
expenses. The manufacturing restructuring plan costs reduced operating income by
$714,000.
Our operating income by segment for the three months ended June 30, 2002,
and 2001 was as follows:
June 30, 2002 June 30, 2001 Change
------------- ------------- ------
(in thousands)
North America ............ $15,182 $12,464 $2,718
Europe ................... 3,066 2,719 347
Asia ..................... 175 227 (52)
Corporate ................ (3,329) (2,338) (991)
-----------------------------------------
Total .................... $15,094 $13,072 $2,022
=========================================
18
The increase in North America is due to increased gross profit, primarily
due to the inclusion of operating earnings of acquired companies. The increase
in Europe is due to the inclusion of the operating earnings of Fimet, which was
acquired in June 2001, and by the euro appreciating against the U.S. dollar
compared to the prior period. Corporate expenses are primarily for compensation
expense, professional fees, including legal and audit expenses, product
liability and general liability insurances. The increase in corporate expenses
is primarily due to increased premiums for product liability and general
liability insurance.
Interest Expense. Interest expense decreased $92,000 in the quarter ended June
30, 2002 to $2,299,000 compared to $2,391,000 for the same period in 2001,
primarily due to lower interest rates on variable rate indebtedness partially
offset by increased indebtedness incurred to fund acquisitions. On September 1,
2001, we entered into an interest rate swap on our $75,000,000 8 3/8% notes. The
swap converted the interest from fixed to floating and reduced our interest
expense by $475,000 in the quarter ended June 30, 2002.
Income Taxes. Our effective tax rate for continuing operations increased to
35.1% from 34.7% for the three months ended June 30, 2002 and 2001,
respectively. The increase is primarily attributable to the increased earnings
in the North American segment, which has a higher tax rate than our other
segments, partially offset by the elimination of goodwill which was not tax
deductible.
Net Income From Continuing Operations. Net income for the three months ended
June 30, 2002 increased $1,598,000 (22.7%) to $8,633,000, or $0.32 per common
share, compared to $7,035,000, or $0.26 per common share, for the three months
ended June 30, 2001 on a diluted basis.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
- -------------------------------------------------------------------------
Net Sales. Net sales for the six months ended June 30, 2002 increased
$23,338,000 (8.6%) to $294,825,000 compared to $271,487,000 for the same period
in 2001. The increase in net sales is attributable to the following:
(in thousands)
Internal Growth ............................. $592 0.2%
Acquisitions ................................ 21,261 7.8%
Foreign Exchange ............................ 1,485 0.6%
---------------------
Total Change ................................ $23,338 8.6%
=====================
The growth in net sales from acquired businesses is due to the inclusion
of the net sales of Powers Process Controls, acquired on September 28, 2001,
Premier Manufactured Systems, acquired on June 13, 2001, Fimet S.r.l., acquired
on June 1, 2001 and Cheng Guan, our joint venture, which we established on March
5, 2002. The increase in foreign exchange is due primarily to the euro
appreciating against the U.S. dollar compared to the same period in 2001.
We monitor our net sales in three geographical segments: North America,
Europe and Asia. As outlined below, North America, Europe and Asia accounted for
75.8%, 21.5% and 2.7% of net sales, respectively, in the six months ended June
30, 2002, compared to 76.3%, 21.3% and 2.4% of net sales, respectively, in the
six months ended June 30, 2001:
June 30, 2002 June 30, 2001 Change
------------- ------------- ------
(in thousands)
North America ............ $223,558 $207,238 $16,320
Europe ................... 63,215 57,775 5,440
Asia ..................... 8,052 6,474 1,578
---------------------------------------------
Total .................... $294,825 $271,487 $23,338
=============================================
19
The increase in North America's net sales is due to the Powers Process
Controls and Premier acquisitions. The increase in Europe's net sales is due to
the Fimet acquisition and the euro appreciating against the U.S. dollar. Sales
in the European market on a local currency basis were 6.2% above the comparable
prior year period. The increase in Asia's net sales is due to the inclusion of
our Cheng Guan joint venture partially offset by reduced demand in the North
American export market.
Gross Profit. Gross profit for the six months ended June 30, 2002 increased
$8,698,000 (9.4%) to $101,711,000 from $93,013,000 for the comparable period
last year and increased as a percentage of net sales to 34.5% from 34.3%. We
charged $1,561,000 of costs associated with our manufacturing restructuring plan
to cost of sales. Excluding the manufacturing restructuring plan costs, our
gross profit would have increased $10,259,000 and would have increased as a
percent of sales to 35.0% from 34.3%. The gross profit increase is primarily
attributable to the inclusion of acquired companies. The gross profit percentage
increase is primarily attributable to reduced spending in manufacturing fixed
overhead as well as improved efficiencies in manufacturing compared to the
comparable period last year.
Selling, General and Administrative Expense. Selling, general and administrative
expenses for the six months ended June 30, 2002 increased $6,243,000 (9.4%) to
$72,365,000 compared to $66,122,000 for the same period in 2001. This increase
is attributable to the inclusion of selling, general and administrative expenses
of acquired companies, an increase in the cost of product and general liability
insurance and start-up costs associated with our regional distribution centers.
We adopted FAS 142 "Goodwill and Other Intangible Assets" on January 1, 2002 and
accordingly did not record goodwill amortization for the first six months of
2002. We recorded goodwill amortization of $1,535,000 as part of our selling,
general and administrative expenses for the six months ended June 30, 2001.
Operating Income. Operating income for the six months ended June 30, 2002,
increased $2,445,000 (9.1%) to $29,336,000 compared to $26,891,000 for the same
period in 2001 due to increased gross profit and the cessation of goodwill
amortization, partially offset by increased selling, general and administrative
expenses. The manufacturing restructuring plan costs reduced operating income by
$1,571,000.
Our operating income by segment for the six months ended June 30, 2002,
and 2001, were as follows:
June 30, 2002 June 30, 2001 Change
------------- ------------- ------
(in thousands)
North America .................. $29,013 $25,404 $3,609
Europe ......................... 6,398 5,771 627
Asia ........................... 213 297 (84)
Corporate ...................... (6,288) (4,581) (1,707)
---------------------------------------
Total .......................... $29,336 $26,891 $2,445
=======================================
The increase in North America is due to increased gross profit, primarily
due to the inclusion of operating earnings of acquired companies. The increase
in Europe is due to the inclusion of the operating earnings of Fimet, which was
acquired in June 2001 and by the euro appreciating against the U.S. dollar
compared to the prior year. Corporate expenses are primarily for compensation
expense, professional fees, including legal and audit expenses, product
liability and general liability insurances. The increase in corporate expenses
is primarily due to increased premiums for product liability and general
liability insurance.
Interest Expense. Interest expense decreased $679,000 in the six months ended
June 30, 2002 to $4,129,000 compared to $4,808,000 for the same period in 2001,
primarily due to lower interest rates on variable rate indebtedness, partially
offset by increased indebtedness incurred to fund acquisitions. On September 1,
2001, we entered into an interest rate swap on our $75,000,000 8 3/8% notes. The
swap converted the interest from fixed to floating and reduced our interest
expense by $991,000 for the six months ended June 30, 2002.
20
Income Taxes. Our effective tax rate for continuing operations decreased to
35.0% from 35.2% for the six months ended June 30, 2002 and 2001, respectively.
The decrease is primarily attributable to the elimination of goodwill
amortization which was not tax deductible, partially offset by the increased
earnings in the North American segment, which has a higher tax rate than our
other segments.
Net Income From Continuing Operations. Net income for the six months ended June
30, 2002 increased $2,381,000 (16.6%) to $16,689,000, or $0.62 per common share,
compared to $14,308,000, or $0.53 per common share, for the six months ended
June 30, 2001 on a diluted basis.
Liquidity and Capital Resources
- -------------------------------
During the six month period ended June 30, 2002, we provided $2,200,000 of
cash flow from continuing operations. We spent $12,205,000 on capital equipment
for the six months ended June 30, 2002. Capital expenditures were primarily for
manufacturing machinery and equipment as part of our commitment to continuously
improve our manufacturing capabilities. Our net capital expenditure budget for
the twelve months ending December 31, 2002 is $18,700,000 which includes the
proceeds from the sale of two of our facilities that were closed as part of our
manufacturing restructuring plan. The largest component of this budget is the
establishment of a 100% controlled bronze and brass manufacturing plant in
Tianjin, China, for an estimated cost of $9,000,000, of which approximately
$3,400,000 was invested in the six months period ended June 30, 2002. In
addition, during the six months period ended June 30, 2002 we invested
approximately $5,000,000 to establish our joint venture in China and $10,000,000
to acquire Hunter Innovations.
We had negative free cash flow of $13,210,000 (defined as net cash
provided by continuing operations minus capital expenditures and dividends)
during the six months ended June 30, 2002 versus positive free cash flow of
$5,527,000 in the comparable prior year period. The decrease in free cash flow
is attributable to a decrease in cash provided by operations and increased
capital spending compared to the first half of fiscal 2001. The decrease in cash
provided from operations is primarily due to an increase in accounts receivable
between June 30, 2002 and December 31, 2001. This increase in accounts
receivable is due to increased sales volume, a change in industry-wide payment
terms from our largest customer while remaining within normal industry
standards, and the addition of receivables from our Cheng Guan joint venture
established in March 2002.
On February 28, 2002, we entered into a new revolving credit facility with
a syndicate of banks (the "Revolving Credit Facility"), which replaced our
$100.0 million (U.S.) facility and our 39.4 million euro facility. The Revolving
Credit Facility provides for borrowings of up to $150.0 million (U.S.), which
includes a $100.0 million tranche for U.S. dollar borrowings and a $50.0 million
tranche for euro-based borrowings and matures in February 2005. Approximately
$46.0 million of borrowings under the Revolving Credit Facility were used to
repay amounts outstanding under the prior facilities. The Revolving Credit
Facility will be used to support our acquisition program, working capital
requirements and for general corporate purposes. As of June 30, 2002, long-term
debt included $68.9 million outstanding on the Revolving Credit Facility for
both U.S. dollar and euro-based borrowings.
Outstanding indebtedness under the Revolving Credit Facility bears
interest at one of three customary rates plus a margin of 100 basis points,
depending on the applicable base rate and our bond rating. The average interest
rate for borrowings under the Revolving Credit Facility was approximately 3.6%
at June 30, 2002. The Revolving Credit Facility includes operational and
financial covenants customary for facilities of this type, including, among
others, restrictions on additional indebtedness, liens and investments and
maintenance of certain leverage ratios. As of June 30, 2002, we were in
compliance with all covenants related to the Revolving Credit Facility.
Working capital (defined as current assets less current liabilities) as of
June 30, 2002 was $168.7 million compared to $142.6 million as of December 31,
2001. This increase is primarily due to the increase in accounts receivable. The
ratio of current assets to current liabilities was 2.4 to 1 as of June 30, 2002
compared to 2.3 to 1 as of December 31, 2001. Cash and cash equivalents were
$10.3 million as of June 30, 2002 compared to $12.0 million as of December 31,
2001. The increase in long-term debt to $163.3 million as of June 30, 2002 from
$123.2 million as of December 31, 2001 was due to the increase in working
capital, debt incurred to fund capital expenditures, the establishment of the
Cheng Guan joint venture and the acquisition of Hunter Innovations. Debt as a
percentage of total
21
capital employed (defined as short-term and long-term debt as a percentage of
the sum of short-term and long-term debt plus stockholders' equity) was 38.4% as
of June 30, 2002 compared to 33.7% as of December 31, 2001.
We anticipate that available funds from current operations and other
sources of liquidity will be sufficient to meet current operating requirements
and anticipated capital expenditures for at least the next 24 months. However,
we may have to consider external sources of financing for any large future
acquisitions.
Our long-term financial obligations are presented in the following table:
Less than After
Total 1 year 1-3 years 4-5 years 5 years
----- ------ --------- --------- -------
(in thousands)
Long-term debt, including current maturities (b) ....... $171,932 $8,614 $157,416 $4,735 $1,167
Operating leases ....................................... 1,859 602 1,106 151 --
------------------------------------------------------------
Total .................................................. $173,791 $9,216 $158,522 $4,886 $1,167
============================================================
(b) as recognized in the consolidated balance sheet
Letters of credit are purchased guarantees that ensure our performance or
payment to third parties in accordance with specified terms and conditions.
Amounts outstanding were approximately $18,816,000 as of June 30, 2002 and
$17,768,000 as of June 30, 2001. These instruments may exist or expire without
being drawn down. Therefore, they do not necessarily represent future cash
flows.
Certain of our loan agreements contain covenants that require, among other
items, the maintenance of certain financial ratios and limit our ability to
enter into secured borrowing arrangements.
We from time to time are involved with environmental proceedings and other
legal proceedings and incur costs on an ongoing basis related to these matters.
We have not incurred material costs in fiscal 2002 in connection with any of
these matters. During the first six months of 2002, we disbursed approximately
$3.0 million after-tax for defense and settlement costs related to the James
Jones case and this amount is recorded as discontinued operations in our
consolidated statement of cash flows. See Part II, Item 1, Legal Proceedings.
Critical Accounting Policies and Key Estimates
- ----------------------------------------------
Our management considers the following accounting policies and key
estimates as being critical in reporting our financial position and results of
operations.
o The proper application of revenue recognition criteria requires
certain judgments and estimates, including the assessment of credit
risk and sales return rates. Our management has used its best
estimates based on historic trends to establish these reserves.
o The valuation of inventory includes forecasted demand and
anticipated market pricing for our products.
o Contingencies and environmental remediation costs include estimates
for clean-up costs which could be paid over several years. Estimates
are based on management and legal counsel's best estimates of
ultimate liability.
o Product liability costs are estimated utilizing historic trends,
considering known insurance recoveries.
o In accounting for costs relating to the manufacturing restructuring
plan, certain estimates have been made in measuring the cost of the
plan and the impact on operations, including the estimated timing of
facility closures.
22
Our management believes that the estimates and assessments inherent in the
application of these accounting policies have been applied on a reasonable
basis. Actual results could differ from these estimates and assumptions, which
could impact our financial position and results of operations.
New Accounting Standards
- ------------------------
In August 2001, the FASB issued Financial Accounting Standards Board
Statement No. 143, "Accounting for Asset Retirement Obligations" ("FAS 143")
which requires companies to record the fair value of an asset retirement
obligation as a liability in the period it incurs a legal obligation associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction, development and/or normal use of the assets. The
company must also record a corresponding increase in the carrying value of the
related long-lived asset and depreciate that cost over the remaining useful life
of the asset. The liability must be increased each period for the passage of
time with the offset recorded as an operating expense. The liability must also
be adjusted for changes in the estimated future cash flows underlying the
initial fair value measurement. Companies must also recognize a gain or loss on
the settlement of the liability. The provisions of FAS 143 are effective for
fiscal years beginning after June 15, 2002. At the date of the adoption of FAS
143, companies are required to recognize a liability for all existing asset
retirement obligations and the associated asset retirement costs. We are
currently evaluating the effect that the adoption of FAS 143 will have on our
results of operations and our financial position.
Effective January 1, 2002, the Company also adopted FAS 144 which
addresses the accounting and reporting for the impairment or disposal of
long-lived assets. FAS 144 supercedes Financial Accounting Standards Board
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("FAS 121") but retains many of the
fundamental provisions of FAS 121. FAS 144 also supercedes the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30") for the disposal of a segment of a business. However,
FAS 144 retains the requirements of APB 30 to report discontinued operations
separately and extends that reporting requirement to components of an entity
that has either been disposed of or is classified as held for sale. FAS 144
excludes goodwill and other intangibles that are not amortized from its scope.
For assets to be held and used, FAS 144 addresses the recoverability of an asset
or group of assets, clarifies how an impairment loss should be allocated, and
creates a requirement to use a fair value if market prices are not available and
uncertainties exist about the timing and amount of cash flows. For long-lived
assets to be disposed of by sale, FAS 144 establishes the criteria to be met to
qualify for this classification, defines the timing of when the related sale
must be consummated, eliminates the net realizable value measurement approach
for segments of a business and certain acquired assets in a business
combination, and defines costs to sell the asset. FAS 144 was effective for
fiscal years beginning after December 15, 2001 and was not material to our
consolidated financial statements.
In April 2002, FAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections," was issued.
FAS 145 rescinds FAS 4 and FAS 64 related to classification of gains and losses
on debt extinguishment such that most debt extinguishment gains and losses will
no longer be classified as extraordinary. FAS 145 also amends FAS 13 with
respect to sales-leaseback transactions. The Company adopted the provisions of
FAS 145 effective April 1, 2002, and was not material to our consolidated
financial statements.
In July 2002, the FASB issued FAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The principal difference between
this Statement and Issue 94-3 relates to its requirements for recognition of a
liability for a cost associated with an exit or disposal activity. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost as defined in Issue 94-3 was recognized as
the date of an entity's commitment to an exit plan. The provisions of this
statement are effective for exit or disposal activities that are initiated after
December 31, 2002.
23
Quantitative and Qualitative Disclosures about Market Risks
- -----------------------------------------------------------
We use derivative financial instruments primarily to reduce our exposure
to adverse fluctuations in foreign exchange rates, interest rates and prices of
certain raw materials used in the manufacturing process. We do not enter into
derivative financial instruments for trading purposes. As a matter of policy,
all derivative positions are used to reduce risk by hedging underlying economic
exposure. The derivatives we use are instruments with liquid markets.
Our consolidated earnings, which are reported in U.S. dollars, are subject
to translation risks due to changes in foreign currency exchange rates. However,
our overall exposure to such fluctuations is reduced by the diversity of our
foreign operating locations which encompass a number of different European
locations, Canada and China.
Our foreign subsidiaries transact most business, including certain
intercompany transactions, in foreign currencies. Such transactions are
principally purchases or sales of materials and are denominated in European
currencies or the U.S. or Canadian dollar. We use foreign currency forward
exchange contracts to manage the risk related to intercompany purchases that
occur during the course of a fiscal year and certain open foreign currency
denominated commitments to sell products to third parties.
We have historically had a very low exposure to changes in interest rates.
Interest rate swaps are used to mitigate the impact of interest rate
fluctuations on certain variable rate debt instruments. However, our senior
notes and our U.S. revolving line of credit are subject to the impact of changes
in interest rates.
We purchase significant amounts of bronze ingot, brass rod and cast iron
which are utilized in manufacturing our many product lines. Our operating
results can be adversely affected by changes in commodity prices if we are
unable to pass on related price increases to our customers. We manage this risk
by monitoring related market prices, working with our suppliers to achieve the
maximum level of stability in their costs and related pricing, seeking
alternative supply sources when necessary and passing increases in commodity
costs to our customers, to the maximum extent possible, when they occur.
Additionally, on a limited basis, we use commodity futures contracts to manage
this risk.
Certain Factors Affecting Future Results
- ----------------------------------------
This report includes statements which are not historical facts and are
considered forward looking within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward looking statements reflect the
Company's current views about future results of operation and other forward
looking information and may be identified by their use of words like "plan",
"believe", "expect", "will", "anticipate", "estimate" and other words of similar
meaning. You should not rely on forward looking statements, because the
Company's actual results may differ materially from those indicated by these
forward looking statements as a result of a number of important factors. These
factors include, but are not limited to, the following: loss of market share
through competition, introduction of competing products by other companies,
pressure on prices from competitors, suppliers, and/or customers, failure or
delay in developing new products, lack of acceptance of new products, failure to
manufacture products that meet required performance and safety standards,
foreign exchange fluctuations, cyclicality of industries, such as plumbing and
heating wholesalers and home improvements retailers, in which the Company
markets certain of its products, reductions in the supply of raw materials,
increases in the prices of raw materials, economic factors, such as the levels
of housing starts and remodeling, impacting the markets where the Company's
products are sold, manufactured, or marketed, environmental compliance costs,
product liability risks, the results and timing of the Company's manufacturing
restructuring plan, changes in the status or current litigation, including the
James Jones case, and other risks and uncertainties discussed under "Managements
Discussion and Analysis of Financial Condition and Results of Operation -
Certain Factors Affecting Future Results" in the Company's Annual Report on Form
10-K for the year ended December 31, 2001 filed with the Securities Exchange
Commission and other reports Watts files from time to time with the Securities
and Exchange Commission.
24
Part II
- -------
Item l. Legal Proceedings
-----------------
We are subject to a variety of potential liabilities connected with our
business operations, including potential liabilities and expenses associated
with possible product defects or failures and compliance with environmental
laws. We maintain product liability and other insurance coverage, which we
believe to be generally in accordance with industry practices. Nonetheless, such
insurance coverage may not be adequate to protect us fully against substantial
damage claims which may arise from product defects and failures.
James Jones Litigation
- ----------------------
On June 25, 1997, Nora Armenta (the "Relator") sued James Jones Company,
Watts Industries, which formerly owned James Jones, Mueller Co. and Tyco
International (U.S.) 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 (the
"Armenta case"). Late in 1998, the Los Angeles Department of Water and Power
("LADWP") intervened. In December 2000, the court allowed the Relator to file a
Second Amended Complaint, which added a number of new cities and water districts
as plaintiffs and brought the total number of plaintiffs to 161. On June 3,
2002, the California Superior Court excluded 47 cities from this total of 161,
and the Relator has sought appellate review of this order. To date, 14 of the
total number of plaintiffs have intervened.
The First Amended Complaint alleges that our 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. The Relator 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 LADWP'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 LADWP also sought 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 municipal and home plumbing systems by municipalities
and national and local codes 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.
In June 2001, our company and the other defendants reached a proposed
settlement with the LADWP, one of the plaintiffs, which was approved by the
California Superior Court on October 31, 2001 and by the Los Angeles City
Council on December 14, 2001.
On February 14, 2001, we filed a complaint in the California Superior
Court against our insurers for coverage of the claims in the Armenta case. The
James Jones Company filed a similar complaint and on October 30, 2001 the
California Superior Court ruled that Zurich American Insurance Company must pay
all reasonable defense costs incurred by us in the James Jones case since April
23, 1998 as well as our future defense costs in this case until its final
resolution. Zurich appealed the October 30, 2001 ruling, and on March 7, 2002,
the California Court of Appeal granted our motion to dismiss Zurich's appeal of
this Superior Court ruling. After the trial court's resolution of the coverage
25
case, Zurich can then appeal this ruling. Zurich is also seeking an order from
the federal court in Chicago, Illinois to compel arbitration of this insurance
coverage dispute. We are currently unable to predict the outcome of the
litigation relating to insurance coverage. We intend to continue to contest
vigorously the James Jones case and its related litigation.
The plaintiff seeks three times an unspecified amount of actual damages
and alleges that the municipalities have suffered hundreds of millions of
dollars in damages. The plaintiff also seeks civil penalties of $10,000 for each
false claim and alleges that defendants are responsible for tens of thousands of
false claims. We settled with the City of Los Angeles, by far the most
significant city, for $5.7 million plus the Relator's statutory share and
attorneys' fees. Co-defendants will contribute $2 million toward this
settlement. The court has required the plaintiff to select cities with the
strongest claims to be tried first. After we settled with the City of Los
Angeles, the plaintiff made an offer to settle the balance of this case for
$121.9 million, which we have rejected. We have a reserve in the amount of $3.4
million after-tax with respect to the James Jones case in our consolidated
balance sheet as of June 30, 2002. We believe, on the basis of all available
information, that this reserve is adequate to cover our probable and reasonably
estimable losses resulting from the James Jones case. However, litigation is
inherently uncertain, and we believe that there exists a reasonable possibility
that we may ultimately incur losses in the James Jones case in excess of the
amount accrued. We are currently unable to make an estimate of the range of any
additional losses.
Environmental
- -------------
Our foundry and other operations, including our storage and disposal of
solid and hazardous wastes, are subject to various foreign, federal, state and
local laws and regulations relating to environmental matters. Compliance with
these laws and regulations requires us to incur expenses and monitor our
operations on an ongoing basis.
We are currently a party to or otherwise involved in various
administrative or legal proceedings under federal, state or local environmental
laws or regulations involving a limited number of our sites or third party
disposal sites. In addition, there may be soil or groundwater contamination at
current or previously owned or operated properties or at third party sites to
which our waste is sent for disposal. Based on facts presently known to us, we
do not believe that the outcome of these environmental proceedings or other
matters will have a material adverse effect on our liquidity, financial
condition or results of operations. Given the nature, history and scope of our
manufacturing operations, however, and given that there may be future changes to
laws or the enforcement thereof, there can be no assurance that we will not
become subject to other environmental proceedings or liabilities in the future
which may be material to us.
Other Litigation
- ----------------
Other lawsuits and proceedings or claims, arising from the ordinary course
of operations, are also pending or threatened against us and our subsidiaries.
Based on the facts currently known to us, we do not believe that the ultimate
outcome of these other litigation matters will have a material adverse effect on
our financial condition or results of operation.
26
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Annual Meeting of Stockholders of the Company was held on April 23,
2002.
(b) 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, Daniel J. Murphy,
III and Roger A. Young 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 100,506,687 votes FOR 1,044,243 votes WITHHELD
Mr. K. McAvoy 101,396,852 votes FOR 154,078 votes WITHHELD
Mr. G. Moran 101,475,056 votes FOR 75,874 votes WITHHELD
Mr. D. Murphy 101,475,056 votes FOR 75,874 votes WITHHELD
Mr. R. Young 101,475,656 votes FOR 75,274 votes WITHHELD
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:
101,379,063 votes FOR 164,089 votes WITHHELD 7,778 votes ABSTAINED
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The exhibits are furnished elsewhere in this report.
(b) Reports filed on Form 8-K during the Quarter ended June 30, 2002.
The Company did not file any reports on Form 8-K with the Securities and
Exchange Commission during the quarter ending June 30, 2002.
27
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 9, 2002 By: /s/ Patrick S. O'Keefe
-------------- ----------------------
Patrick S. O'Keefe
Chief Executive Officer
Date: August 9, 2002 By: /s/ William C. McCartney
-------------- ------------------------
William C. McCartney
Chief Financial Officer and Treasurer
28
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 Promissory Note dated as of May 9, 2002 issued by Watts Regulator
Company and Watts Industries, Inc. as borrowers. (3)
11 Computation of Earnings per Share (4)
(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 Quarterly Report on Form 10-Q for the Quarter
ended March 31, 1999.
(3) This Note is substantially similar in all material respects
to all other Notes issued to the shareholders of Hunter
Innovations, Inc.
(4) Incorporated by reference to the Notes to Consolidated
Financial Statements, Note 6, of this Report.
29