UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
--------------
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at April 25, 2003
----- -----------------------------
Class A Common, $.10 par value 19,360,318
Class B Common, $.10 par value 7,805,224
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
---------------------------------------
INDEX
-----
Part I. Financial Information Page #
--------------------- ------
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2003
and December 31, 2002 (unaudited) 3
Consolidated Statements of Income for the Three Months
Ended March 31, 2003 and 2002 (unaudited) 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2003 and 2002 (unaudited) 5
Notes to Consolidated Financial Statements 6-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 23
Part II. Other Information
-----------------
Item 1. Legal Proceedings 24-26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Certifications 28-29
Exhibit Index 30
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands, except share amounts)
(Unaudited)
March 31, December 31,
2003 2002
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 15,675 $ 10,973
Trade accounts receivable, less allowance for doubtful accounts of
$7,359 at March 31, 2003 and $7,322 at December 31, 2002 ......... 135,426 123,504
Inventories:
Raw materials .................................................... 43,513 40,591
Work in process .................................................. 19,244 17,289
Finished goods ................................................... 80,415 75,535
--------- ---------
Total Inventories ............................................. 143,172 133,415
Prepaid expenses and other assets ................................... 13,573 10,732
Deferred income taxes ............................................... 22,686 21,927
Net assets held for sale ............................................ 2,517 2,464
--------- ---------
Total Current Assets ............................................. 333,049 303,015
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost .............................. 256,295 248,933
Accumulated depreciation ............................................ (121,009) (114,557)
--------- ---------
Property, plant and equipment, net ............................... 135,286 134,376
--------- ---------
OTHER ASSETS:
Goodwill ............................................................ 164,303 163,226
Other ............................................................... 34,336 33,895
--------- ---------
TOTAL ASSETS ............................................................ $ 666,974 $ 634,512
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................... $ 63,507 $ 64,704
Accrued expenses and other liabilities .............................. 72,750 69,202
Accrued compensation and benefits ................................... 12,659 15,514
Current portion of long-term debt ................................... 87,086 82,211
--------- ---------
Total Current Liabilities ........................................ 236,002 231,631
--------- ---------
LONG-TERM DEBT, NET OF CURRENT PORTION .................................. 73,934 56,276
DEFERRED INCOME TAXES ................................................... 21,288 20,792
OTHER NONCURRENT LIABILITIES ............................................ 20,181 19,743
MINORITY INTEREST ....................................................... 10,149 10,134
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: 18,960,804 shares at
March 31, 2003 and 18,863,482 shares at December 31, 2002 ........ 1,896 1,886
Class B Common Stock, $.10 par value; 25,000,000 shares authorized;
10 votes per share; issued and outstanding: 8,185,224 shares at
March 31, 2003 and December 31, 2002, respectively .............. 819 819
Additional paid-in capital .......................................... 46,332 45,132
Retained earnings ................................................... 264,855 259,893
Accumulated other comprehensive income (loss) ....................... (8,482) (11,794)
--------- ---------
Total Stockholders' Equity ....................................... 305,420 295,936
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................. $ 666,974 $ 634,512
========= =========
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
----------------------
March 31, March 31,
2003 2002
--------- ---------
Net sales ........................................................ $ 165,692 $ 143,320
Cost of goods sold ............................................... 109,928 93,841
--------- ---------
GROSS PROFIT ................................................. 55,764 49,479
Selling, general & administrative expenses ....................... 39,854 35,227
Restructuring .................................................... -- 10
--------- ---------
OPERATING INCOME ............................................. 15,910 14,242
--------- ---------
Other (income) expense:
Interest income .............................................. (115) (86)
Interest expense ............................................. 2,084 1,830
Other, net ................................................... (62) 75
Minority interest ............................................ (21) 35
--------- ---------
1,886 1,854
--------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ....... 14,024 12,388
Provision for income taxes ....................................... 5,088 4,332
--------- ---------
INCOME FROM CONTINUING OPERATIONS ............................ 8,936 8,056
Loss from discontinued operations, net of tax benefit of $1,455 .. (2,326) --
--------- ---------
NET INCOME ................................................... $ 6,610 $ 8,056
========= =========
BASIC EARNINGS PER SHARE
Continuing Operations ........................................ $ .33 $ .30
Discontinued Operations ...................................... (.09) --
--------- ---------
NET INCOME ................................................... $ .24 $ .30
========= =========
Weighted average number of shares ................................ 27,065 26,532
========= =========
DILUTED EARNINGS PER SHARE
Continuing Operations ........................................ $ .33 $ .30
Discontinued Operations ...................................... (.09) --
--------- ---------
NET INCOME ................................................... $ .24 $ .30
========= =========
Weighted average number of shares ................................ 27,264 26,943
========= =========
Dividends per common share .................................. $ .06 $ .06
========= =========
See accompanying notes to consolidated financial statements.
4
WATTS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Three Months Ended
---------------------
March 31, March 31,
2003 2002
--------- ---------
OPERATING ACTIVITIES
Income from continuing operations ....................................... $ 8,936 $ 8,056
Adjustments to reconcile net income from continuing operations to net
cash provided by continuing operating activities:
Depreciation ......................................................... 5,516 5,712
Amortization ......................................................... 186 98
Deferred income taxes ................................................ (240) 155
(Gain) / loss on disposal of assets .................................. 1 (64)
Equity in undistributed loss of affiliates ........................... (19) (8)
Changes in operating assets and liabilities, net of effects
from acquisitions and dispositions:
Accounts receivable ............................................... (10,567) (13,034)
Inventories ....................................................... (8,259) 1,683
Prepaid expenses and other assets ................................ (3,400) (4,628)
Accounts payable, accrued expenses and other liabilities .......... (2,884) 2,611
-------- --------
Net cash provided by (used in) operating activities ..................... (10,730) 581
-------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment .............................. (5,047) (5,537)
Proceeds from sale of property, plant and equipment ..................... 115 67
Business acquisitions, net of cash acquired ............................. -- (8,175)
Decrease / (Increase) in other assets ................................... (370) 53
-------- --------
Net cash used in investing activities ................................... (5,302) (13,592)
-------- --------
FINANCING ACTIVITIES
Proceeds from long-term borrowings ...................................... 49,002 28,000
Payments of long-term debt .............................................. (27,315) (13,884)
Proceeds from exercise of stock options ................................. 1,210 602
Dividends ............................................................... (1,648) (1,597)
-------- --------
Net cash provided by financing activities ............................... 21,249 13,121
-------- --------
Effect of exchange rate changes on cash and cash equivalents ................ 324 (287)
Net cash used in discontinued operations .................................... (839) (1,529)
-------- --------
CHANGE IN CASH AND CASH EQUIVALENTS ........................................ 4,702 (1,706)
Cash and cash equivalents at beginning of period ............................ 10,973 11,997
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................. $ 15,675 $ 10,291
======== ========
NON CASH INVESTING AND FINANCING ACTIVITIES
Acquisitions of businesses:
Fair value of assets acquired ..................................... $ -- $ 12,016
Cash Paid ......................................................... -- 8,175
-------- --------
Liabilities Assumed ............................................... $ -- $ 3,841
======== ========
See accompanying notes to consolidated financial statements.
5
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 March 31, 2003, its Consolidated
Statements of Income for the three months ended March 31, 2003 and 2002, and its
Consolidated Statements of Cash Flows for the three months ended March 31, 2003
and 2002.
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date. The accounting policies followed by the
Company are described in the December 31, 2002 financial statements which are
contained in the Company's December 31, 2002 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,
2002 Annual Report on Form 10-K.
Certain amounts in fiscal year 2002 have been reclassified to permit
comparison with the 2003 presentation.
2. Accounting Policies
-------------------
Shipping and Handling
The Company's shipping costs included in selling, general and
administrative expense amounted to $5,060,000 and $5,020,000 for the three
months ended March 31, 2003 and 2002, respectively.
Goodwill and Other Intangible Assets
The Company adopted Financial Accounting Standards Board Statement No. 142
"Goodwill and Other Intangible Assets" (FAS 142) on January 1, 2002, and as a
result no longer amortizes goodwill. The valuation of goodwill and intangible
assets is reviewed for impairment annually in accordance with FAS 142.
Intangible assets such as purchased technology are generally recorded in
connection with a business acquisition. In larger, more complex acquisitions,
the value assigned to intangible assets is determined by an independent
valuation firm based on estimates and judgments regarding expectations of the
success and life cycle of products and technology acquired. If actual product
acceptance differs significantly from the estimates, the Company may be required
to record an impairment charge to write down the assets to their realizable
value. The annual goodwill impairment test involves the use of estimates related
to the fair market value of the business unit with which the goodwill is
associated. The value is estimated using the future cash flow valuation
methodology.
The changes in the carrying amount of goodwill for the three months ended
March 31, 2003 are as follows:
(in thousands)
Carrying amount as of December 31, 2002............. $163,226
Adjustments to goodwill during the period........... (145)
Effect of change in rates used for translation...... 1,222
--------
Carrying amount as of March 31, 2003................ $164,303
========
6
Other Intangible Assets include the following and are presented in "Other
Assets: "Other", in the Consolidated Balance Sheet:
As of March 31, 2003
Gross Carrying Accumulated
Amount Amortization
------ ------------
(in thousands)
Patents ............................. $ 8,569 $(3,531)
Other ............................... 15,147 (1,017)
------- -------
Total ............................ $23,716 $(4,548)
======= =======
Aggregate amortization expense for amortized other intangible assets for
the three months ended March 31, 2003 is $186,000. Additionally, future
amortization expense on other intangible assets approximates $487,000 for the
remainder of fiscal 2003, $542,000 for fiscal 2004, and $521,000 for fiscal
2005, 2006 and 2007.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Stock Based Compensation
The Company accounts for stock based compensations in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25), and related interpretations. The Company records stock
based compensation expense associated with its Management Stock Purchase Plan
due to the discount from market price. Stock-based compensation expense is
amortized to expense on a straight-line basis over the vesting period. The
following table illustrates the effect on reported net income and earnings per
common share as if the Company had applied the fair value method to measure
stock-based compensation as required under the disclosure provisions of
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation"(FAS 123) as amended by Financial Accounting Standards
Board Statement No. 148 "Accounting for Stock-Based Compensation Transition and
Disclosure"(FAS 148).
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
(in thousands)
Net income, as reported .................. $ 6,610 $ 8,056
Add: Stock-based employee compensation
expense from the Management Stock
Purchase Plan included in
reported net income, net of tax ....... 51 55
Deduct: Stock-based employee expense
determined under the fair value method,
net of tax:
Restricted stock units (Management
Stock Purchase Plan) ................ (42) (30)
Employee stock options ................ (129) (146)
------- -------
Pro-forma net income ..................... $ 6,490 $ 7,935
======= =======
Earnings per share:
Basic--as reported .................... $ 0.24 $ 0.30
Basic--pro-forma ...................... $ 0.24 $ 0.30
Dilutive--as reported ................. $ 0.24 $ 0.30
Dilutive--pro-forma ................... $ 0.24 $ 0.30
7
New Accounting Standards
In August 2001, the Financial Accounting Standards Board (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.
The Company has adopted FAS 143 effective January 1, 2003 and its adoption was
not material to the consolidated financial statements.
In July 2002, the FASB issued Financial Accounting Standards Board
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" (FAS 146). 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 at 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. The Company
adopted FAS 146 effective January 1, 2003 and its adoption was not material to
the consolidated financial statements.
In November 2002, the FASB issued Financial Accounting Standards Board
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45).
FIN 45 requires that a liability be recorded in the guarantor's balance sheet
upon issuance of certain guarantees. In addition, FIN 45 requires disclosures
about the guarantees that an entity has issued, including a roll-forward of the
entity's product warranty liabilities. The Company will apply the recognition
provisions of FIN 45 prospectively to guarantees issued after December 31, 2002.
The Company adopted the disclosure provisions of FIN 45 effective December 31,
2002. The Company does offer warranties, but the returns under warranty have
been immaterial. The warranty reserve is part of the sales returns and
allowances, a component of the Company's allowance for doubtful accounts. The
Company adopted FIN 45 effective January 1, 2003 and its adoption was not
material to the consolidated financial statements.
3. Discontinued Operations
-----------------------
In September 1996, the Company divested its Municipal Water Group of
businesses, which included Henry Pratt, James Jones Company and Edward Barber
and Company Ltd. Costs and expenses related to the Municipal Water Group for
fiscal 2003 relate to legal and settlement costs associated with the James Jones
litigation (see Note 11). Specifically, in 2003, an offer of $13 million, of
which Watts is responsible for $11 million, has been made to settle the claims
of the three cities (Santa Monica, San Francisco and East Bay Municipal Water
District) chosen by the Relator as having the strongest claims. This offer
included the Relator's statutory share. Subject to approval by their governing
bodies, these three cities have accepted this $13 million offer, and the
material terms of this settlement embodied in a memorandum of understanding have
been confirmed in California Superior Court proceedings. This offer required the
Company to record a charge to discontinued operations of $2,326,000, net of an
income tax benefit of $1,455,000 in the quarter ended March 31, 2003.
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
8
maximize the overall effectiveness of its foreign currency hedge positions.
During the three months ended March 31, 2003, 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. There were no ineffective
amounts for the three months ended March 31, 2003.
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 months ended March 31, 2003.
5. Restructuring
-------------
The Company is in the process of 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 and other low cost
areas of the world. The implementation of this manufacturing restructuring plan
began during the fourth quarter of fiscal 2001. The projects for which charges
were recorded in the fourth quarter of fiscal 2001 are essentially complete.
During 2002, the Company decided to expand the scope of the manufacturing
restructuring plan and transfer certain production to low cost manufacturing
plants in Tunisia and Bulgaria. The expanded plan is expected to be completed by
the end of fiscal 2003. The Company recorded pre-tax manufacturing restructuring
and other costs of $446,000 in the first quarter of fiscal 2003, $4,089,000 for
fiscal 2002 and $5,831,000 in the fourth quarter of fiscal 2001. The
manufacturing restructuring and other costs recorded consist primarily of
severance costs, asset write-downs and accelerated depreciation. The severance
costs, which have been recorded as restructuring, are for 38 employees in
manufacturing and administration groups, 26 of whom have been terminated as of
March 31, 2003. 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 are recorded in cost of goods sold. Accelerated
depreciation is based on shorter remaining estimated useful lives of certain
fixed assets and has been recorded in cost of goods sold. Other costs consist
primarily of removal and shipping costs associated with relocation of
manufacturing equipment and has been recorded in cost of goods sold.
Details of our manufacturing restructuring plan through March 31, 2003 are
as follows:
Initial Utilized Balance Provisions Utilized Balance Provisions Utilized Balance
Provision 2001 12/31/01 2002 2002 12/31/02 2003 2003 3/31/03
--------- ---- -------- ---- ---- -------- ---- ---- -------
(in thousands)
Restructuring/other ... $1,454 $ 692 $762 $ 638 $ 981 $419 $ -- $121 $298
Asset write-downs ..... 4,300 4,300 -- 2,491 2,491 -- 191 191 --
Other costs ........... 77 77 -- 960 960 -- 255 255 --
------ ------ ---- ------ ------ ---- ---- ---- ----
Total ................. $5,831 $5,069 $762 $4,089 $4,432 $419 $446 $567 $298
====== ====== ==== ====== ====== ==== ==== ==== ====
9
6. Earnings per Share
------------------
The following tables set forth the reconciliation of the calculation of
earnings per share:
For the Three Months Ended March 31, 2003
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income from continuing operations ... $ 8,936,000 27,065,478 $0.33
Loss from discontinued operations ... (2,326,000) (0.09)
----------- -----
Net income .......................... $ 6,610,000 $0.24
=========== =====
Effect of dilutive securities
Common stock equivalents ............ 198,781
Diluted EPS
Income from continuing operations ... $ 8,936,000 $0.33
Loss from discontinued operations ... (2,326,000) (0.09)
----------- ----------- -----
Net income .......................... $ 6,610,000 27,264,259 $0.24
=========== =========== =====
For the Three Months Ended March 31, 2002
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS
Net income .......................... $ 8,056,000 26,531,756 $0.30
=========== =====
Effect of dilutive securities
Common stock equivalents ............ 411,273
-----------
Diluted EPS
Net income .......................... $ 8,056,000 26,943,029 $0.30
=========== =========== =====
Stock options to purchase 941,660 shares and 158,744 shares of common
stock were outstanding at March 31, 2003 and 2002, respectively, but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares
and therefore, the effect would have been antidilutive.
7. Segment Information
-------------------
The following table presents certain operating segment information:
(in thousands)
North
America Europe Asia Corporate Consolidated
------- ------ ---- --------- ------------
Three months ended March 31, 2003:
Net sales ........................ $112,955 $ 48,669 $ 4,068 -- $165,692
Operating income ................. 15,162 4,860 (483) (3,629) 15,910
Capital expenditures ............. 1,496 607 2,944 -- 5,047
Depreciation and amortization .... 3,243 2,074 385 -- 5,702
Identifiable assets .............. 387,870 222,661 56,443 -- 666,974
Three months ended March 31, 2002:
Net sales ........................ $109,881 $ 31,371 $ 2,068 -- $143,320
Operating income ................. 13,831 3,332 38 (2,959) 14,242
Capital expenditures ............. 3,187 956 1,394 -- 5,537
Depreciation and amortization .... 3,900 1,704 206 -- 5,810
Identifiable assets .............. 351,141 156,215 35,322 -- 542,678
10
The above operating segments are presented on a basis consistent with the
presentation included in the Company's December 31, 2002 financial statements.
There have been no material changes in the identifiable assets of the individual
segments since December 31, 2002.
The corporate segment consists primarily of compensation expense for
corporate headquarters' staff, professional fees, including legal and audit, and
product and general liability insurances.
8. Other Comprehensive Income (Loss)
---------------------------------
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, 2002 .......... $(11,794) -- $(11,794)
Change in period ................... 3,533 (221) 3,312
-------- ---- --------
Balance March 31, 2003 ............. $ (8,261) (221) $ (8,482)
======== ==== ========
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)
======== ==== ========
Accumulated other comprehensive income/(loss) in the Consolidated Balance
Sheets as of March 31, 2003 and March 31, 2002 consists of cumulative
translation adjustments and changes in the fair value of certain financial
instruments that qualify for hedge accounting as required by FAS 133. The
Company's total comprehensive income was as follows:
Three Months Ended
March 31,
---------
2003 2002
---- ----
(in thousands)
Net income ..................................................... $6,610 $8,056
Unrealized gains/(loss) on derivative instruments, net of tax .. (221) 32
Foreign currency translation adjustments ....................... 3,533 (1,761)
------ ------
Total comprehensive income ..................................... $9,922 $6,327
====== ======
9. Acquisitions
------------
On July 29, 2002, a wholly-owned subsidiary of the Company acquired F&R
Foerster and Rothmann GmbH (F&R) located in Neuenburg am Rhein, Germany, for
approximately $2.3 million in cash less assumed net debt of $0.8 million. F&R
manufactures and distributes a line of gauges predominately to the French and
German OEM markets.
On July 15, 2002, a wholly-owned subsidiary of the Company acquired ADEV
Electronic SA (ADEV) located in Rosieres, France and its closely affiliated
distributor, E.K. Eminent A.B. (Eminent) located in Gothenburg, Sweden for
approximately $12.9 million in cash less assumed net debt of $3.5 million. ADEV
also has a low cost manufacturing facility located in Tunisia. 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.
11
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 annual installments through 2006. Hunter Innovations was
founded in 1995 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.
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 People's Republic of China. Cheng Guan, 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 the Company and 40% by its Chinese
partner. The Company has invested $7.8 million to obtain this 60% interest.
Subsequent Event
On April 18, 2003, a wholly-owned subsidiary of the Company acquired
Martin Orgee UK Ltd located in Kidderminster, West Midlands, United Kingdom for
approximately $1.3 million in cash. Martin Orgee distributes a line of plumbing
and heating products to the wholesale, commercial and OEM markets in the United
Kingdom and Southern Ireland. Martin Orgee also assembles pumping groups for
under-floor radiant heat systems. Martin Orgee's annual sales, prior to the
acquisition, were $2.7 million.
10. Debt Issuance
-------------
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 2.9% at March 31, 2003. 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 March 31, 2003,
the Company was in compliance with all covenants related to the Revolving Credit
Facility.
11. Contingencies and Environmental Remediation
-------------------------------------------
Contingencies
In April 1998, the Company became aware of a complaint that was filed
under seal in the State of California alleging violations of the California
False Claims Act. The complaint alleges that a former subsidiary of the Company
(James Jones 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 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 and 47 of which have been ordered excluded from the
case. In June 2001, the Company and other defendants reached a proposed
settlement with the Los Angeles Department of Water and Power, 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.
In this case, Nora Armenta (the Relator) sued James Jones Company,Watts
Industries, Inc. (which formerly owned James Jones), Mueller Co. and Tyco
International (U.S.) in the California Superior Court for Los Angeles County.
The Relator seeks three times an unspecified amount of actual damages and
alleges that the municipalities have suffered hundreds of millions of dollars in
damages. The Relator also seeks civil penalties of $10,000 for each false claim
and alleges that defendants are responsible for tens of thousands of false
claims. The Company 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 $2.0 million toward this
settlement. An additional offer has been made for $13 million ($11 million from
12
the Company and $2 million from the James Jones Company), plus payment of
Relator's attorney's fees, to settle the claims of the three cities (Santa
Monica, San Francisco and East Bay Municipal Water District) chosen by the
Relator as having the strongest claims to be tried first. This offer included
the Relator's statutory share. Subject to approval by their governing bodies,
these three cities have accepted this $13 million offer, and the material terms
of this settlement embodied in a memorandum of understanding have been confirmed
in California Superior Court proceedings (see Note 3).
After the Company settled with the City of Los Angeles, the Relator made
an offer to settle the balance of this case for $121.9 million, which the
Company has rejected. The Company has a reserve in the amount of $12.8 million
after-tax with respect to the James Jones Litigation in its consolidated balance
sheet as of March 31, 2003. The Company believes, on the basis of all available
information, that this reserve is adequate to cover its probable and reasonably
estimable losses resulting from the James Jones Litigation. 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 Litigation in
excess of the amount accrued. The Company is currently unable to make an
estimate of the range of any additional losses.
On February 14, 2001, the Company filed a complaint in the California
Superior Court against its insurers for coverage of the claims in the Armenta
case. The James Jones Company filed a similar complaint, the cases were
consolidated, and on October 30, 2001 the California Superior Court made a
summary adjudication ruling that Zurich American Insurance Company must pay all
reasonable defense costs incurred by the Company in the Armenta case since April
23, 1998 as well as the Company's future defense costs in this case until its
final resolution. Zurich has subsequently paid the Company approximately $11.0
million for defense costs. On October 24, 2002, the California Superior Court
made another summary adjudication ruling that Zurich must indemnify and pay the
Company for the amounts the Company must pay under its settlement agreement with
the City of Los Angeles, and, on January 16, 2003, Zurich paid the Company $2.7
million in compliance with this order. Zurich has asserted that all amounts
(both defense costs and amounts paid in settlement) paid by it to us are subject
to reimbursement under Deductible Agreements between the Company and Zurich, and
the Company has recorded this amount as a liability. However, management and
counsel anticipate that the Company will ultimately prevail on this issue.
Zurich appealed the orders requiring it to pay defense costs, the California
Court of Appeal accepted that appeal and it is currently pending. Zurich also
sought appellate review of the order that found coverage and required Zurich to
indemnify the Company for the settlement with the City of Los Angeles. On March
26, 2003, the California Court of Appeal denied Zurich's petition for appellate
review of this order, but Zurich will still be able to appeal this order at the
end of the case. The Company is currently unable to predict the outcome of the
litigation relating to the Los Angeles indemnification coverage. The Company
intends to contest vigorously the Armenta case and its related litigation.
Environmental Remediation
The Company has been named as a potentially responsible party with respect
to a limited number of identified contaminated sites. The level of contamination
varies significantly from site to site as do the related levels of remediation
efforts. Environmental liabilities are recorded based on the most probable cost,
if known, or on the estimated minimum cost of remediation. The Company's accrued
estimated environmental liabilities are based on assumptions, which are subject
to a number of factors and uncertainties. Circumstances which can affect the
reliability and precision of these estimates include identification of
additional sites, environmental regulations, level of cleanup required,
technologies available, number and financial condition of other contributors to
remediation and the time period over which remediation may occur. The Company
recognizes changes in estimates as new remediation requirements are defined or
as new information becomes available. The Company estimates that its accrued
environmental remediation liabilities will likely be paid over the next five to
ten years.
For several years, the New York Attorney General (NYAG) has threatened to
bring suit against approximately 16 Potentially Responsible Parties (PRPs),
including Watts (Jameco) for incurred remediation costs and for operation and
maintenance costs that will be incurred in connection with the cleanup of a
landfill site in Babylon, Long Island. The NYAG has identified recovery numbers
between $19 million and $24 million, but it is too early to know what the final
recovery number will be, what the final number of PRPs will be or what
proportion of the final costs may be allocated to the Company.
13
Asbestos Litigation
As of March 31, 2003, the Company was a defendant in approximately 100
actions filed in Mississippi and New Jersey state courts and alleging injury or
death as a result of exposure to asbestos. These filings typically name multiple
defendants, and are filed on behalf of many plaintiffs. They do not identify any
particular products of ours as a source of asbestos exposure, and there is no
reason to conclude that these filings will have a material effect on the
Company's liquidity, financial condition or results of operations.
Other Litigation
On or about March 26, 2003, a class action complaint was filed by North
Carolina Hospitality Group, Inc. (NCHG) in the Circuit Court of Maryland, Prince
George's County, naming Watts Industries, Inc. and Watts Regulator Company as
defendants. NCHG alleges that certain Watts commercial valve models contain a
design defect that causes them to fail prematurely. The complaint asserts claims
for breach of implied warranty of merchantability, strict liability for
defective design, strict liability for failure to warn, negligence and unjust
enrichment. The complaint seeks unspecified compensatory damages sufficient to
permit the members of the alleged class (national or Maryland purchasers of the
valves for self use) to inspect, repair and /or replace the valves, and also
seeks to recover costs, interest and attorneys fees.
We believe that the allegations in the complaint are without merit and
intend to defend vigorously against those claims. Based on the facts presently
known to us, we do not believe that the ultimate outcome of this litigation will
have a material adverse effect on our liquidity, financial condition or results
of operations. However, litigation is inherently uncertain, and there can be no
assurances as to the ultimate outcome and the actual liability to us to fully
resolve this litigation.
Other lawsuits and proceedings or claims, arising from the ordinary course
of operations, are also pending or threatened against the Company and its
subsidiaries. Based on the facts currently known to it, the Company does not
believe that the ultimate outcome of these other litigation matters will have a
material adverse effect on its financial condition or results of operation.
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------------------------------------------------------------------------
OF OPERATIONS
-------------
Recent Developments
On April 18, 2003, we acquired Martin Orgee UK Ltd located in
Kidderminster, West Midlands, United Kingdom for approximately $1.3 million in
cash. Martin Orgee distributes a line of plumbing and heating products to the
wholesale, commercial and OEM markets in the United Kingdom and Southern
Ireland. Martin Orgee also assembles pumping groups for under-floor radiant heat
systems. Martin Orgee's annual sales, prior to the acquisition, were $2.7
million.
Acquisitions
On July 29, 2002, a wholly-owned subsidiary of the Company acquired F&R
Foerster and Rothmann GmbH (F&R) located in Neuenburg am Rhein, Germany, for
approximately $2.3 million in cash less assumed net debt of $0.8 million. F&R
manufactures and distributes a line of gauges predominately to the French and
German OEM markets.
On July 15, 2002, a wholly-owned subsidiary of the Company acquired ADEV
Electronic SA (ADEV) located in Rosieres, France and its closely affiliated
distributor, E.K. Eminent A.B. (Eminent) located in Gothenburg, Sweden for
approximately $12.9 million in cash less assumed net debt of $3.5 million. ADEV
also has a low cost manufacturing facility located in Tunisia. 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.
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 annual installments through 2006. Hunter Innovations was
founded in 1995 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.
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 People's Republic of China. Cheng Guan, 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 the Company and 40% by its Chinese
partner. The Company has invested $7.8 million to obtain this 60% interest.
15
Results of Operations
- ---------------------
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
- -------------------------------------------------------------------------------
Net Sales. Net sales for the three months ended March 31, 2003 increased
$22,372,000 (15.6%) to $165,692,000 compared to $143,320,000 for the same period
in 2002. The increase in net sales is attributable to the following:
(in thousands)
Internal Growth............................... $2,908 2.0%
Acquisitions.................................. 11,364 7.9%
Foreign Exchange.............................. 8,100 5.7%
------- -----
Total Change.................................. $22,372 15.6%
======= =====
The increase in net sales from internal growth is primarily attributable
to increased units sales in the do-it-yourself (DIY) market in North America and
increased unit sales in the original equipment manufacturers (OEM) market in
Europe, partially offset by a decrease in sales to the Chinese domestic market
and a slight decrease in sales to the North American wholesale market. The
growth in net sales from acquired businesses is due to the inclusion of the net
sales of Cheng Guan, our most recent China joint venture, which we established
on March 5, 2002; ADEV and Eminent, acquired on July 15, 2002; and F&R, acquired
on July 29, 2002. The favorable impact of foreign exchange is due primarily to
the euro appreciating against the U.S. dollar compared to the same period in
2002.
We monitor our net sales in three geographical segments: North America,
Europe and Asia. As outlined below, North America, Europe and Asia accounted for
68.2%, 29.4% and 2.4% of net sales, respectively, in the three months ended
March 31, 2003, compared to 76.7%, 21.9% and 1.4% of net sales, respectively, in
the three months ended March 31, 2002:
March 31, 2003 March 31, 2002 Change
-------------- -------------- ------
(in thousands)
North America..................... $112,955 $109,881 $3,074
Europe............................ 48,669 31,371 17,298
Asia.............................. 4,068 2,068 2,000
-------- -------- -------
Total............................. $165,692 $143,320 $22,372
======== ======== =======
The increase in net sales in North America is due to increased unit
shipments in the do-it-yourself market offset by a slight decrease in the
wholesale market. The increase in net sales in Europe is primarily due to the
ADEV, Eminent and F&R acquisitions and the appreciation of the euro against the
U.S. dollar. The increase in net sales in Asia is primarily due to the inclusion
of our Cheng Guan joint venture partially offset by decreased unit shipments in
the Chinese domestic market.
Gross Profit. Gross profit for the three months ended March 31, 2003 increased
$6,285,000 (12.7%) to $55,764,000 from $49,479,000 for the comparable quarter
last year and decreased as a percentage of net sales to 33.7% from 34.5%. We
charged $446,000 and $847,000 of costs associated with our manufacturing
restructuring plan to cost of sales for the three months ended March 31, 2003
and 2002, respectively. Excluding the costs associated with the manufacturing
restructuring plan, gross profit would have increased $5,884,000 (11.7%) and
decreased as a percentage of sales to 33.9% from 35.1%. The gross profit
increase is primarily attributable to inclusion of the gross profit of the
acquired companies and the appreciation of the euro against the U.S dollar
partially offset by start-up costs associated with our new manufacturing plant
in China. The gross profit percentage decrease is primarily due to acquired
companies operating at lower gross margins than the rest of the company,
increased unit shipments to the DIY market and the start-up costs for our new
China facility.
16
Selling, General and Administrative Expense. Selling, general and administrative
expenses for the three months ended March 31, 2003 increased $4,627,000 (13.1%)
to $39,854,000 compared to $35,227,000 for the same period in 2002. 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 the appreciation of the euro against the U.S. dollar
compared to the prior period.
Restructuring Expense. The restructuring expense for the three months ended
March 31, 2002 was for severance costs associated with our manufacturing
restructuring plan. There was no restructuring expense in the three months ended
March 31, 2003.
Operating Income. Operating income for the three months ended March 31, 2003,
increased $1,668,000 (11.7%) to $15,910,000 compared to $14,242,000 for the same
period in 2002 due to increased gross profit, partially offset by increased
selling, general and administrative expenses. The manufacturing restructuring
plan costs reduced operating income by $446,000 and $857,000 in the three months
month ending March 31, 2003 and 2002, respectively.
Our operating income/(loss) by segment for the three months ended March
31, 2003, and 2002 was as follows:
March 31, 2003 March 31, 2002 Change
-------------- -------------- ------
(in thousands)
North America.................... $15,162 $13,831 $1,331
Europe........................... 4,860 3,332 1,528
Asia............................. (483) 38 (521)
Corporate........................ (3,629) (2,959) (670)
------- ------- ------
Total............................ $15,910 $14,242 $1,668
======= ======= ======
The increase in operating income in North America is primarily due to
increased sales volume and reduced factory overhead spending offset by increased
pension and worker's compensation expense. The increased operating income in
Europe is primarily due to the inclusion of operating earnings of acquired
companies. The decrease in operating income in China is due to start up costs
associated with our new manufacturing plant in China. Corporate expenses are
primarily for compensation expense, professional fees, including legal and audit
expenses, product and general liability insurances. The increase in corporate
expenses is primarily due to increased legal and audit expenses.
Interest Expense. Interest expense increased $254,000 (13.9%) in the quarter
ended March 31, 2003 to $2,084,000 compared to $1,830,000 for the same period in
2002, primarily due to increased amounts of outstanding indebtedness. On
September 1, 2001, we entered into an interest rate swap with respect to our
$75,000,000 8 3/8% notes due December 2003. The swap converted the interest from
fixed to floating. On August 5, 2002, we sold the swap and received $2,315,000
in cash. In the quarter ended March 31, 2003, we reduced interest expense by
$393,000 by amortizing the adjustment to the fair value. In the quarter ended
March 31, 2002, we reduced interest expense by $516,000 for the effectiveness of
the swap.
Income Taxes. Our effective tax rate for continuing operations for the three
months ended March 31, 2003 increased to 36.3% from 35.0% for the three months
ended March 31, 2002. The increase is primarily attributable to an increase in
our domestic rate due to state legislative changes and a change in our European
earnings mix towards countries with higher tax rates.
Income From Continuing Operations. Income from continuing operations for the
three months ended March 31, 2003 increased $880,000 (10.9%) to $8,936,000, or
$0.33 per common share, compared to $8,056,000, or $0.30 per common share, for
the three months ended March 31, 2002 on a diluted basis.
Loss From Discontinued Operations. We recorded a charge net of tax to
discontinued operations for the three months ended March 31, 2003 of $2,326,000,
or ($.09) per common share on a diluted basis, for legal expenses associated
with the litigation involving the James Jones Company. See Part II, Item 1,
"Legal Proceedings".
17
Liquidity and Capital Resources
During the three-month period ended March 31, 2003, we utilized
$10,730,000 of cash for continuing operations. This utilization was primarily
due to increased accounts receivable and inventories, in both North America and
Europe, and a pension contribution of $3,000,000 on January 29, 2003. The
increase in inventory in North America is primarily due to planned increases in
imported raw materials and finished goods, as well as, a ramp up to support
increased retail business. The increase in inventory in Europe is primarily due
to safety stock growth to cover planned distribution relocations. The increase
in accounts receivable is due to increased sales volume in Europe, which
typically has longer payment terms, and increased sales to our largest customer
in North America, which changed to longer payment terms in the first quarter of
2002. Also contributing to cash used in operations is the normal occurrence of
payouts during the first quarter associated with annual insurance plans,
management and customer incentive plans.
We spent $4,932,000 on capital equipment for the three months ended March
31, 2003, net of proceeds from sales of property, plant and equipment of
$115,000. Capital expenditures were primarily for manufacturing machinery and
equipment as part of our ongoing commitment to improve our manufacturing
capabilities. Our net capital expenditure budget for the twelve months ending
December 31, 2003 is $15,536,000, which includes the expected proceeds from the
sale of one of our facilities that was closed as part of our manufacturing
restructuring plan. The two largest components of this budget are for a building
to be added to our joint venture facility in Taizhou, China and for additional
machinery and equipment for our wholly owned bronze and brass manufacturing
plant in Tianjin, China.
We expect to contribute an additional $800,000 to our pension plan in the
third quarter of fiscal 2003 to fund the minimum contribution required. We also
intend to refinance our $75.0 million 8 3/8% notes prior to the stated maturity
of December 1, 2003.
On February 28, 2002, we entered into a 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 is
being used to support our acquisition program, working capital requirements and
for general corporate purposes. As of March 31, 2003, long-term debt included
$59.3 million outstanding on the Revolving Credit Facility for both U.S. dollar
and euro-based borrowings. Due to increased use of cash in the quarter ended
March 31, 2003, we accessed our line of credit in the U.S. for $19,000,000.
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 2.9%
at March 31, 2003. 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 March 31, 2003, we were in
compliance with all covenants related to the Revolving Credit Facility.
On January 16, 2003, we received $2,726,000 in cash as an indemnification
payment for costs we incurred in the James Jones case. This cash has been
recorded as a liability at March 31, 2003. On March 28, 2003, we received
$1,495,000 in cash for reimbursement of defense costs related to the James Jones
case.
Working capital (defined as current assets less current liabilities) as of
March 31, 2003 was $97.0 million compared to $71.4 million as of December 31,
2002. This increase is primarily due to an increase in accounts receivable and
inventory. The ratio of current assets to current liabilities was 1.4 to 1 as of
March 31, 2003 compared to 1.3 to 1 as of December 31, 2002. Included in this
ratio are our $75.0 million 8 3/8% notes due in December 2003 that we plan to
refinance prior to maturity. Cash and cash equivalents were $15.7 million as of
March 31, 2003 compared to $11.0 million as of December 31, 2002. Our total debt
increased to $161.0 million as of March 31, 2003 from $138.5 million as of
December 31, 2002 due to the increase in working capital (exclusive of the
current portion of long-term debt impact) and debt incurred to fund capital
expenditures.
18
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 as of March 31, 2003 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(a).................... $161,020 $87,087 $68,129 $4,723 $1,081
Operating leases.................... 6,953 1,263 2,053 1,278 2,359
Capital leases...................... 1,513 557 702 254 --
-------- ------- ------- ------ ------
Total............................... $169,486 $88,907 $70,884 $6,255 $3,440
======== ======= ======= ====== ======
(a) 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 $25,559,000 as of March 31, 2003 and
$19,522,000 as of December 31, 2002. These instruments may exist or expire
without being drawn down. Therefore, they do not necessarily represent future
cash flow obligations.
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 2003 in connection with any of
these matters.
Critical Accounting Policies and Key Estimates
The preparation of our financial statements in accordance with accounting
principles generally accepted in the United States (GAAP) requires us to make
judgments, assumptions and estimates that affect the amounts reported. A
critical accounting estimate is an assumption about highly uncertain matters and
could have a material effect on the financial statements if another, also
reasonable, amount were used, or, a change in the estimate is reasonably likely
from period to period. We base our assumption on historical experience and on
other estimates that we believe are reasonable under the circumstances. Actual
results could differ significantly from these estimates. See Note 2 of Notes to
Consolidated Financial Statements in our Annual Report on Form 10-K for the year
ended December 31, 2002 that describes the significant accounting policies
utilized in the preparation of the consolidated financial statements.
We have discussed the development, selection and disclosure of the
estimates with our Audit Committee. Management believes the following critical
accounting policies reflect our most significant estimates and assumptions:
Allowance for doubtful accounts
We encounter risks associated with the collectibility of customer
accounts. Management specifically analyzes individual accounts receivable,
historical bad debts and allowances, concentration of receivables by customer,
customer credit worthiness, current economic trends and changes in customer
payment terms when evaluating the allowance for doubtful accounts. These factors
along with the aging of the accounts receivable are used in determining the
adequacy of the allowance. If circumstances relating to specific customers
change, our estimates of the recoverability of receivables could be further
adjusted.
19
Inventory valuation
Inventories are generally stated at the lower of cost or market with costs
determined on a first-in, first-out basis. We utilize our historical experience
as the basis for determining the value of our excess or obsolete inventories.
Changes in market conditions, lower than expected customer demand or changes in
technology or features could result in additional obsolete inventory that is not
saleable and could require additional inventory reserve provisions.
Legal contingencies
We are a defendant in numerous legal matters including those involving
environmental law and product liability as discussed in Note 15 of Notes to
Consolidated Financial Statements in our Annual Report on Form 10-K for the year
ended December 31, 2002. As required by Financial Accounting Standards Board
Statement No. 5 "Accounting for Contingencies" we determine whether an estimated
loss from a loss contingency should be accrued by assessing whether a loss is
deemed probable and the loss amount can be reasonably estimated, net of any
applicable insurance proceeds. We develop our estimates in consultation with
outside counsel handling our defense in these matters, which involves an
analysis of potential results. Final settlement of these matters could result in
significant effects of the Company's results of operations, cash flows and
financial position.
Goodwill and other intangibles
We adopted Financial Accounting Standards Board Statement No. 142
"Goodwill and Other Intangible Assets" (FAS 142) on January 1, 2002, and as a
result we no longer amortize goodwill. The valuation of goodwill and intangible
assets is reviewed for impairment annually in accordance with FAS 142.
Intangible assets such as purchased technology are generally recorded in
connection with a business acquisition. In our larger, more complex
acquisitions, the value assigned to intangible assets is determined by an
independent valuation firm based on estimates and judgments regarding
expectations of the success and life cycle of products and technology acquired.
If actual product acceptance differs significantly from the estimates, we may be
required to record an impairment charge to write down the assets to their
realizable value. The annual goodwill impairment test involves the use of
estimates related to the fair market value of the business unit with which the
goodwill is associated. The value is estimated using the future cash flow
valuation methodology. A severe decline in market value could result in an
unexpected impairment charge to goodwill which could have a material impact on
the results of operations and financial position.
Business combinations
In addition to the requirements set forth in FAS 141 regarding intangible
assets, it is necessary to make other estimates relating to the assets acquired,
liabilities assumed, and assumptions of future growth of the acquired companies.
There are no assurances that such estimates or assumptions will be accurate.
Pension benefits
The calculation of employee pension benefit costs and obligations by
actuaries are dependent on our assumptions. These assumptions include salary
growth, long-term return on plan assets, discount rates and other factors. The
key factors utilized by the actuaries are discussed in further detail in Note 14
of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K
for the year ended December 31, 2002.
Income taxes
We recognize deferred tax liabilities and assets for the expected future
consequences of events that have been reflected in our consolidated financial
statements. We present our financials in accordance with the rules of Financial
Accounting Standards Board Statement No. 109 "Accounting for Income Taxes" (FAS
109). Deferred tax liabilities and assets are determined based on differences
between the book values and tax bases of particular assets and liabilities,
using tax rates in effect for the years in which the differences are expected to
reverse. A valuation allowance is provided to offset any net deferred tax assets
if, based upon the available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized.
20
New Accounting Standards
In August 2001, the Financial Accounting Standards Board (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 have adopted FAS 143 effective January 1, 2003 and its adoption was not
material to our consolidated financial statements.
In July 2002, the FASB issued Financial Accounting Standards Board
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" (FAS 146). 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 at 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. We have adopted
FAS 146 effective January 1, 2003 and its adoption was not material to our
consolidated financial statements.
In November 2002, the FASB issued Financial Accounting Standards Board
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45).
FIN 45 requires that a liability be recorded in the guarantor's balance sheet
upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the
guarantees that an entity has issued, including a roll-forward of the entity's
product warranty liabilities. We will apply the recognition provisions of FIN 45
prospectively to guarantees issued after December 31, 2002. We adopted the
disclosure provisions of FIN 45 effective December 31, 2002. We do offer
warranties, but the returns under warranty have been immaterial. The warranty
reserve is part of our reserve for sales returns and allowances, a component of
our allowance for doubtful accounts. We adopted FIN 45 effective January 1, 2003
and its adoption was not material to our consolidated financial statements.
In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46)
which requires the consolidation of variable interest entities by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003 (Q3 of fiscal 2003). We are currently evaluating
the effect that the adoption of FIN 46, including our requirement to consolidate
Jameco International, LLC, will have on our results of operations and financial
condition.
21
Item 3. 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. At March 31, 2003, we
maintained an insignificant amount in notional value of Canadian currency
forward contracts. As such, with any change in the Canadian exchange we will not
expect a material impact on our consolidated financial statements.
We have historically had a very low exposure to changes in interest rates.
Interest rate swaps are used on a limited basis to mitigate the impact of
interest rate fluctuations on certain variable rate debt instruments. However,
our Revolving Credit Facility is 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
successfully implement the Company's acquisition strategy; foreign exchange rate
fluctuations, risks associated with international sales and operations,
including China; reductions or interruptions 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, loss of a major customer; the results and timing of the
Company's manufacturing restructuring plan, changes in the status of 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, 2002 filed
with the Securities Exchange Commission and other reports Watts files from time
to time with the Securities and Exchange Commission.
22
Item 4. Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures.
As required by Rule 13a-15 under the Securities Exchange Act of 1934,
within the 90 days prior to the date of this report, we carried out an
evaluation under the supervision and with the participation of our management,
including the our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the our disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the our disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. In connection with the new rules, we
currently are in the process of further reviewing and documenting our disclosure
controls and procedures, including our internal controls and procedures for
financial reporting, and may from time to time make changes aimed at enhancing
their effectiveness and to ensure that our systems evolve with our business.
(b) Changes in internal controls.
None.
23
Part II
- -------
Item l. Legal Proceedings
-----------------
James Jones Litigation
As previously disclosed, 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. 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. The Relator was not able to obtain appellate modification 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, we 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.
In this case, Nora Armenta (the Relator) sued James Jones Company, Watts
Industries, Inc. (which formerly owned James Jones), Mueller Co. and Tyco
International (U.S.) in the California Superior Court for Los Angeles County.
The Relator seeks three times an unspecified amount of actual damages and
alleges that the municipalities have suffered hundreds of millions of dollars in
damages. The Relator 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 $2.0 million toward this settlement. An additional
offer has been made for $13 million ($11 million from us and $2 million from the
James Jones Company), plus payment of Relator's attorney's fees, to settle the
claims of the three cities (Santa Monica, San Francisco and East Bay Municipal
Water District) chosen by the Relator as having the strongest claims to be tried
first. This offer included the Relator's statutory share. Subject to approval by
their governing bodies, these three cities have accepted this $13 million offer,
and the material terms of this settlement embodied in a memorandum of
understanding have been confirmed in California Superior Court proceedings.
24
After we settled with the City of Los Angeles, the Relator made an offer
to settle the balance of this case for $121.9 million, which has been rejected.
We have a reserve in the amount of $12.8 million after-tax with respect to the
James Jones Litigation in our consolidated balance sheet as of March 31, 2003.
We believe, on the basis of all available information, that this reserve is
adequate to cover its probable and reasonably estimable losses resulting from
the James Jones Litigation. However, litigation is inherently uncertain, and we
believe that there exists a reasonable possibility that we may ultimately incur
losses in the James Jones Litigation in excess of the amount accrued. We are
currently unable to make an estimate of the range of any additional losses.
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, the cases were consolidated, and
on October 30, 2001 the California Superior Court made a summary adjudication
ruling that Zurich American Insurance Company must pay all reasonable defense
costs incurred by us in the Armenta case since April 23, 1998 as well as our
future defense costs in this case until its final resolution. Zurich has
subsequently paid us approximately $11.0 million for defense costs. On October
24, 2002, the California Superior Court made another summary adjudication ruling
that Zurich must indemnify and pay us for the amounts we must pay under its
settlement agreement with the City of Los Angeles, and, on January 16, 2003,
Zurich paid us $2.7 million in compliance with this order. Zurich has asserted
that all amounts (both defense costs and amounts paid in settlement) paid by it
to us are subject to reimbursement under Deductible Agreements between us and
Zurich, and we have recorded this amount as a liability. However, management and
counsel anticipate that we will ultimately prevail on this issue. Zurich
appealed the orders requiring it to pay defense costs, the California Court of
Appeal accepted that appeal and it is currently pending. Zurich also sought
appellate review of the order that found coverage and required Zurich to
indemnify us for the settlement with the City of Los Angeles. On March 26, 2003,
the California Court of Appeal denied Zurich's petition for appellate review of
this order, but Zurich will still be able to appeal this order at the end of the
case. We are currently unable to predict the outcome of the litigation relating
to the Los Angeles indemnification coverage. We intend to contest vigorously the
Armenta case and its related litigation.
Based on management's assessment, we do not believe that the ultimate
outcome of the James Jones case will have a material adverse effect on our
liquidity, financial condition or results of operations. While this assessment
is based on all available information, litigation is inherently uncertain, and
the actual liability to us to fully resolve this litigation cannot be predicted
with any certainty. We intend to continue to contest vigorously the James Jones
case and the related litigation.
Asbestos Litigation
As of March 31, 2003, we are a defendant in approximately 100 actions
filed in Mississippi and New Jersey state courts and alleging injury or death as
a result of exposure to asbestos. These filings typically name multiple
defendants, and are filed on behalf of many plaintiffs. They do not identify any
particular products of ours as a source of asbestos exposure, and there is no
reason to conclude that these filings will have a material effect on our
liquidity, financial condition or results of operations.
Other Litigation
On or about March 26, 2003, a class action complaint was filed by North
Carolina Hospitality Group, Inc. (NCHG) in the Circuit Court of Maryland, Prince
George's County, naming Watts Industries, Inc. and Watts Regulator Company as
defendants. NCHG alleges that certain Watts commercial valve models contain a
design defect that causes them to fail prematurely. The complaint asserts claims
for breach of implied warranty of merchantability, strict liability for
defective design, strict liability for failure to warn, negligence and unjust
enrichment. The complaint seeks unspecified compensatory damages sufficient to
permit the members of the alleged class (national or Maryland purchasers of the
valves for self use) to inspect, repair and /or replace the valves, and also
seeks to recover costs, interest and attorneys fees.
We believe that the allegations in the complaint are without merit and
intend to defend vigorously against those claims. Based on the facts presently
known to us, we do not believe that the ultimate outcome of this litigation will
have a material adverse effect on our liquidity, financial condition or results
of operations. However, litigation
25
is inherently uncertain, and there can be no assurances as to the ultimate
outcome and the actual liability to us to fully resolve this litigation.
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 March 31, 2003.
On February 23, 2003, we filed a Form 8-K reporting under Item 5 that we
issued a press release announcing our earnings for the three months and
year ended December 31, 2002, and filing the press release as an Exhibit.
We filed a Form 8-K on February 25, 2003, under Item 5 reporting that Mr.
Timothy P. Horne, a member of our Board of Directors, our controlling
stockholder, and former Chief Executive Officer and Chairman, had entered
into an agreement with the SEC to settle the civil action commenced by the
SEC on August 15, 2002, against Mr. Horne; and reporting that Michael O.
Fifer, our former President of North American operations, had left the
Company.
We filed a Form 8-K on February 28, 2003, under Item 5, reporting that Mr.
Timothy P. Horne, a member of our board of Directors, our controlling
stockholder, and our former Chief Executive Officer, President and
Chairman, established pre-arranged plans to sell shares of our Class A
Common Stock in accordance with Rule 10b5-1 under the Securities Exchange
Act of 1934.
On March 26, 2003, we filed a Form 8-K reporting under Item 5, that we
issued a press release setting forth our revised earnings for the three
months and year ended December 31, 2002, and filing the press release as
an Exhibit.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WATTS INDUSTRIES, INC.
Date: May 9, 2003 By: /s/ Patrick S. O'Keefe
----------- ----------------------
Patrick S. O'Keefe
Chief Executive Officer
Date: May 9, 2003 By: /s/ William C. McCartney
----------- ------------------------
William C. McCartney
Chief Financial Officer and Treasurer
27
WATTS INDUSTRIES, INC.
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATIONS
I, Patrick S. O'Keefe, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Watts Industries, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003
----------- /s/ Patrick S. O'Keefe
----------------------
Patrick S. O'Keefe
Chief Executive Officer
28
WATTS INDUSTRIES, INC.
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATIONS
I, William C. McCartney, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Watts Industries, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003
----------- /s/ William C. McCartney
------------------------
William C. McCartney
Chief Financial Officer and Treasurer
29
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 July 24, 2002 (2)
11 Computation of Earnings per Share (3)
(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
Registrants' Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on November 12,
2002.
(3) Incorporated by reference to the Notes to Consolidated
Financial Statements, Note 6, of this Report.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
*Filed as an Exhibit to this Quarterly Report on Form 10-Q.
30