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EX-32 - EX-32 - WATTS WATER TECHNOLOGIES INCwts-20180401xex32.htm
EX-31 - EX-31 - WATTS WATER TECHNOLOGIES INCwts-20180401xex31.htm
EX-10.3 - EX-10.3 - WATTS WATER TECHNOLOGIES INCwts-20180401ex103618090.htm
EX-10.2 - EX-10.2 - WATTS WATER TECHNOLOGIES INCwts-20180401ex102e3e751.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended April 1, 2018

 

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 001-11499

 

WATTS WATER TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

Delaware

 

04-2916536

(State or Other Jurisdiction of Incorporation or
Organization)

 

(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

 

(Former Name, Former Address and Former Fiscal year, if changed since last report.)

 

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 ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer  ☒

 

Accelerated filer  ☐

 

 

 

Non-accelerated filer  ☐

 

Smaller reporting company  ☐

 

Emerging growth company  ☐

(Do not check if a smaller reporting company)

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   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 29 , 2018

Class A Common Stock, $0.10 par value

 

27,819,548

 

 

 

Class B Common Stock, $0.10 par value

 

6,329,290

 

 

 

 

 

 


 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

 

INDEX

 

 

 

 

 

Part I. Financial Information 

    

3

 

 

 

 

Item 1. 

Financial Statements

 

3

 

 

 

 

 

Consolidated Balance Sheets at April 1, 2018 and December 31, 2017 (unaudited)

 

3

 

 

 

 

 

Consolidated Statements of Operations for the First Quarters ended April 1, 2018 and April 2, 2017 (unaudited)

 

4

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the First Quarters ended April 1, 2018 and April 2, 2017 (unaudited)

 

5

 

 

 

 

 

Consolidated Statements of Cash Flows for the First Quarters ended April 1, 2018 and April 2, 2017 (unaudited)

 

6

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

27

 

 

 

 

Item 4. 

Controls and Procedures

 

27

 

 

 

 

Part II. Other Information 

 

29

 

 

 

 

Item 1. 

Legal Proceedings

 

29

 

 

 

 

Item 1A. 

Risk Factors

 

29

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

29

 

 

 

 

Item 6. 

Exhibits

 

30

 

 

 

 

Signatures 

 

31

 

 

 

 

 

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share information)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

April 1,

 

December 31,

 

 

    

2018

    

2017

 

ASSETS

 

 

    

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

184.7

 

$

280.2

 

Trade accounts receivable, less allowance for doubtful accounts of $15.4 million at April 1, 2018 and $14.3 million at December 31, 2017

 

 

233.1

 

 

216.1

 

Inventories, net

 

 

 

 

 

 

 

    Raw materials

 

 

92.1

 

 

81.8

 

    Work in process

 

 

19.8

 

 

17.5

 

    Finished goods

 

 

169.9

 

 

159.8

 

Total Inventories

 

 

281.8

 

 

259.1

 

Prepaid expenses and other current assets

 

 

29.5

 

 

26.7

 

Assets held for sale

 

 

1.5

 

 

1.5

 

Total Current Assets

 

 

730.6

 

 

783.6

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

 

 

 

 

Property, plant and equipment, at cost

 

 

538.9

 

 

525.8

 

Accumulated depreciation

 

 

(337.8)

 

 

(327.3)

 

Property, plant and equipment, net

 

 

201.1

 

 

198.5

 

OTHER ASSETS:

 

 

 

 

 

 

 

Goodwill

 

 

554.2

 

 

550.5

 

Intangible assets, net

 

 

180.9

 

 

185.2

 

Deferred income taxes

 

 

2.6

 

 

1.6

 

Other, net

 

 

19.1

 

 

17.1

 

TOTAL ASSETS

 

$

1,688.5

 

$

1,736.5

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable

 

$

113.1

 

$

123.8

 

Accrued expenses and other liabilities

 

 

122.3

 

 

125.8

 

Accrued compensation and benefits

 

 

47.1

 

 

55.3

 

Current portion of long-term debt

 

 

22.5

 

 

22.5

 

Total Current Liabilities

 

 

305.0

 

 

327.4

 

LONG-TERM DEBT, NET OF CURRENT PORTION

 

 

424.1

 

 

474.6

 

DEFERRED INCOME TAXES

 

 

53.7

 

 

55.2

 

OTHER NONCURRENT LIABILITIES

 

 

49.9

 

 

50.3

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Preferred Stock, $0.10 par value; 5,000,000 shares authorized; no shares issued or outstanding

 

 

 

 

 

Class A common stock, $0.10 par value; 80,000,000 shares authorized; 1 vote per share; issued and outstanding, 27,852,496 shares at April 1, 2018 and 27,724,192 shares at December 31, 2017

 

 

2.8

 

 

2.8

 

Class B common stock, $0.10 par value; 25,000,000 shares authorized; 10 votes per share; issued and outstanding, 6,329,290 shares at April 1, 2018 and 6,379,290 shares at December 31, 2017

 

 

0.6

 

 

0.6

 

Additional paid-in capital

 

 

555.4

 

 

551.8

 

Retained earnings

 

 

383.6

 

 

372.9

 

Accumulated other comprehensive loss

 

 

(86.6)

 

 

(99.1)

 

Total Stockholders’ Equity

 

 

855.8

 

 

829.0

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

1,688.5

 

$

1,736.5

 

 

See accompanying notes to consolidated financial statements.

3


 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in millions, except per share information)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

First Quarter Ended

 

 

April 1,

 

April 2,

 

    

2018

    

2017

Net sales

 

$

378.5

 

$

347.2

Cost of goods sold

 

 

221.8

 

 

203.4

GROSS PROFIT

 

 

156.7

 

 

143.8

Selling, general and administrative expenses

 

 

112.8

 

 

107.6

Restructuring

 

 

 —

 

 

0.5

OPERATING INCOME

 

 

43.9

 

 

35.7

Other (income) expense:

 

 

 

 

 

 

Interest income

 

 

(0.4)

 

 

(0.2)

Interest expense

 

 

4.3

 

 

4.8

Other expense, net

 

 

0.7

 

 

0.3

Total other expense

 

 

4.6

 

 

4.9

INCOME BEFORE INCOME TAXES

 

 

39.3

 

 

30.8

Provision for income taxes

 

 

11.1

 

 

9.1

NET INCOME

 

$

28.2

 

$

21.7

Basic EPS

 

 

 

 

 

 

NET INCOME PER SHARE

 

$

0.82

 

$

0.63

Weighted average number of shares

 

 

34.3

 

 

34.4

Diluted EPS

 

 

 

 

 

 

NET INCOME PER SHARE

 

$

0.82

 

$

0.63

Weighted average number of shares

 

 

34.4

 

 

34.5

Dividends declared per share

 

$

0.19

 

$

0.18

 

See accompanying notes to consolidated financial statements.

4


 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

    

First Quarter Ended

 

 

April 1,

 

April 2,

 

    

2018

    

2017

Net income

 

$

28.2

 

$

21.7

Other comprehensive income, net of tax:

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

9.7

 

 

7.9

Cash flow hedges

 

 

2.8

 

 

0.1

Other comprehensive income

 

 

12.5

 

 

8.0

Comprehensive income

 

$

40.7

 

$

29.7

 

See accompanying notes to consolidated financial statements.

5


 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

First Quarter Ended

 

 

April 1,

 

April 2,

 

    

2018

    

2017

OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

28.2

 

$

21.7

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

Depreciation

 

 

7.1

 

 

6.6

Amortization of intangibles

 

 

5.6

 

 

5.5

Loss on disposal and impairment of intangibles, property, plant and equipment and other

 

 

 —

 

 

0.4

Stock-based compensation

 

 

2.7

 

 

2.9

Deferred income tax

 

 

(4.4)

 

 

5.3

Changes in operating assets and liabilities, net of effects from business acquisitions and divestures:

 

 

 

 

 

 

Accounts receivable

 

 

(13.9)

 

 

(12.5)

Inventories

 

 

(19.7)

 

 

(14.3)

Prepaid expenses and other assets

 

 

(1.6)

 

 

(2.7)

Accounts payable, accrued expenses and other liabilities

 

 

(30.1)

 

 

(22.0)

Net cash used in operating activities

 

 

(26.1)

 

 

(9.1)

INVESTING ACTIVITIES

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(7.3)

 

 

(5.8)

Net proceeds from the sale of assets, and other

 

 

 —

 

 

1.9

Business acquisitions, net of cash acquired and other

 

 

(1.5)

 

 

0.1

Net cash used in investing activities

 

 

(8.8)

 

 

(3.8)

FINANCING ACTIVITIES

 

 

 

 

 

 

Proceeds from long-term borrowings

 

 

20.0

 

 

10.0

Payments of long-term debt

 

 

(70.6)

 

 

(38.9)

Payment of capital leases and other

 

 

(0.4)

 

 

(3.3)

Proceeds from share transactions under employee stock plans

 

 

 —

 

 

0.3

Payments to repurchase common stock

 

 

(6.2)

 

 

(4.4)

Dividends

 

 

(6.7)

 

 

(6.2)

Net cash used in financing activities

 

 

(63.9)

 

 

(42.5)

Effect of exchange rate changes on cash and cash equivalents

 

 

3.3

 

 

4.0

DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(95.5)

 

 

(51.4)

Cash and cash equivalents at beginning of year

 

 

280.2

 

 

338.4

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

184.7

 

$

287.0

NON CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

Acquisition of businesses:

 

 

 

 

 

 

Fair value of assets acquired

 

$

0.7

 

$

 —

Cash paid, net of cash acquired

 

 

1.3

 

 

 —

Liabilities assumed

 

$

(0.6)

 

$

 —

Issuance of stock under management stock purchase plan

 

$

1.1

 

$

0.9

CASH PAID FOR:

 

 

 

 

 

 

Interest

 

$

4.0

 

$

4.0

Income taxes

 

$

7.0

 

$

5.0

 

See accompanying notes to consolidated financial statements.

 

 

6


 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1. Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the Watts Water Technologies, Inc. (the Company) Consolidated Balance Sheet as of April 1, 2018, the Consolidated Statements of Operations for the first quarters ended April 1, 2018 and April 2, 2017, the Consolidated Statements of Comprehensive Income for the first quarters ended April 1, 2018 and April 2, 2017, and the Consolidated Statements of Cash Flows for the first quarters ended April 1, 2018 and April 2, 2017.

 

The consolidated balance sheet at December 31, 2017 has been derived from the audited consolidated financial statements at that date. The accounting policies followed by the Company are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  The financial statements included in this report should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2017. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2018. 

 

The Company operates on a 52-week fiscal year ending on December 31.  Any quarterly data contained in this Quarterly Report on Form 10-Q generally reflect the results of operations for a 13-week period.

 

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.

 

2. Accounting Policies

 

The significant accounting policies used in preparation of these consolidated financial statements for the three months ended April 1, 2018 are consistent with those discussed in Note 2 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, with the exception of the Company’s change in its Revenue Recognition accounting policy resulting from the adoption of ASC 606 described herein.

 

Revenue Recognition

 

On January 1, 2018, the Company adopted the accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard” or “ASU 2014-09”) to all contracts using the modified retrospective method. The adoption of ASU 2014-09 was not material to the Company and as such, there was no cumulative effect upon the January 1, 2018 adoption date. As the impact of the new revenue standard is not material to the Company, there is no pro-forma disclosure presented as of and for the quarter ended April 1, 2018.   The Company expects the impact of the adoption of the new standard to be immaterial to the Company’s financial statements on an ongoing basis.

 

The Company recognizes revenue under the core principle to depict the transfer of control to the Company’s customers in an amount reflecting the consideration the Company expects to be entitled. In order to achieve that core principle, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.

 

The Company’s revenue for product sales is recognized on a point in time model, at the point control transfers to the customer, which is generally when products are shipped from the Company’s manufacturing or distribution facilities or

7


 

when delivered to the customer’s named location. Sales tax, value-added tax, or other taxes collected concurrent with revenue producing activities are excluded from revenue. Freight costs billed to customers for shipping and handling activities are included in revenue with the related cost included in selling, general and administrative expenses. See Note 3 for further disclosures and detail regarding revenue recognition.

 

Other Recently Adopted Accounting Standards

 

In February 2018, the FASB issued ASU 2018-02 “Income Statement-Reporting Comprehensive Income.” ASU 2018-02 provides guidance on the reclassification of certain tax effects from the Tax Cuts and Jobs Act from accumulated other comprehensive income. Current generally accepted accounting principles requires deferred tax liabilities and deferred tax assets to be adjusted for the effect of a change in tax laws or tax rates, with that effect included in income from operations in the period of enactment. This included the income tax effects of items in accumulated other comprehensive income. This guidance allows a reclassification from accumulated other comprehensive income to retained earnings for the tax effects on items in accumulated other comprehensive income related to the change in tax rates from the Tax Cuts and Jobs Act. This standard is effective for all entities for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. Early adoption of this standard is permitted. The Company adopted this standard in the first quarter of 2018, and it did not have a material impact on the Company’s financial statements.

 

In October 2016, the FASB issued ASU 2016-16 “Intra-Entity Transfers of Assets Other than Inventory.” ASU 2016-16 provides guidance on the timing of recognition of tax consequences of an intra-entity transfer of an asset other than inventory. The Company adopted the provision of this ASU during the first quarter of 2018, using the modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the quarter.

The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

Accounting Standards Updates

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016‑02 requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term for both finance and operating leases. ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018 and all interim periods thereafter. Early adoption is permitted for all entities. The Company plans to adopt this standard effective January 1, 2019, using the modified retrospective approach. The Company has begun evaluating the new lease standard, including the review and implementation of the necessary changes to its existing processes and systems that will be required to implement this new standard. The Company has a variety of categories of lease arrangements, including real estate, automobiles, manufacturing equipment, facility equipment, office equipment and certain service arrangements. The Company is currently reviewing its leasing arrangements in order to evaluate the impact of this standard on the Company’s financial statements. The Company does not expect a significant change in its leasing activity between now and adoption. The Company is unable to quantify the impact of adoption at this time, however the Company expects the primary impact to its consolidated financial position upon adoption will be the recognition, on a discounted basis, of its minimum commitments under non-cancelable operating leases on its consolidated balance sheets resulting in the recording of right-of-use assets and lease obligations. The Company currently does not expect ASC 842 to have a material effect on either its consolidated statement of operations or consolidated statement of cash flow. 

 

Shipping and Handling

 

Shipping and handling costs included in selling, general and administrative expenses amounted to $13.2 million and $12.8 million for the first quarters of 2018 and 2017, respectively.

 

Research and Development

 

Research and development costs included in selling, general and administrative expenses amounted to $8.5 million and $7.1 million for the first quarters of 2018 and 2017, respectively. 

 

8


 

3. Revenue Recognition

 

The Company is a leading supplier of products that manage and conserve the flow of fluids and energy into, through and out of buildings in the residential and commercial markets of the Americas, Europe, and AsiaPacific, Middle East, and Africa (“APMEA”). For over 140 years, the Company has designed and produced valve systems that safeguard and regulate water systems, energy efficient heating and hydronic systems, drainage systems and water filtration technology that helps purify and conserve water.

 

The Company distributes products through four primary distribution channels: wholesale, original equipment manufacturers (OEMs), specialty, and do-it-yourself (DIY). The Company operates in three geographic segments: Americas, Europe, and APMEA. Each of these segments sells similar products, which are comprised of the following principal product lines:

 

·

Residential & commercial flow control products—includes products typically sold into plumbing and hot water applications such as backflow preventers, water pressure regulators, temperature and pressure relief valves, and thermostatic mixing valves.

·

HVAC & gas products—includes commercial highefficiency boilers, water heaters and heating solutions, hydronic and electric heating systems for underfloor radiant applications, custom heat and hot water solutions, hydronic pump groups for boiler manufacturers and alternative energy control packages, and flexible stainless steel connectors for natural and liquid propane gas in commercial food service and residential applications. HVAC is an acronym for heating, ventilation and air conditioning.

·

Drainage & water reuse products—includes drainage products and engineered rain water harvesting solutions for commercial, industrial, marine and residential applications.

·

Water quality products—includes pointofuse and pointofentry water filtration, conditioning and scale prevention systems for both commercial and residential applications.

 

The following table disaggregates our revenue for each reportable segment, by distribution channel and principal product line. The Company believes that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, and cash flows are affected by economic factors:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the period ended April 1, 2018

 

 

 

 

(in millions)

 

 

 

 

Americas

 

Europe

 

APMEA

 

Consolidated

Distribution Channel

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

$

136.6

 

$

82.7

 

$

13.9

 

$

233.2

OEM

 

 

19.1

 

 

39.5

 

 

0.5

 

 

59.1

Specialty

 

 

67.6

 

 

 —

 

 

 —

 

 

67.6

DIY

 

 

17.8

 

 

0.8

 

 

 —

 

 

18.6

Total revenues

 

$

241.1

 

$

123.0

 

$

14.4

 

$

 378.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal Product Line

 

 

 

 

 

 

 

 

 

 

 

 

Residential & Commercial Flow Control

 

$

139.9

 

$

47.2

 

$

9.5

 

$

196.6

HVAC and Gas Products

 

 

62.5

 

 

53.9

 

 

4.3

 

 

120.7

Drainage and Water Re-use Products

 

 

16.5

 

 

21.6

 

 

0.3

 

 

38.4

Water Quality Products

 

 

22.2

 

 

0.3

 

 

0.3

 

 

22.8

Total revenues

 

$

241.1

 

$

123.0

 

$

14.4

 

$

378.5

 

The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to represent the contract with a customer. The Company’s contracts with customers are generally for products only and typically do not include other performance obligations such as professional services, extended warranties, or other material rights. In situations where sales are to a distributor, the Company has concluded that its contracts are with the distributor as the Company holds a contract bearing enforceable rights and obligations only with the distributor. As part of its consideration of the contract, the Company evaluates certain factors including the customer’s ability to pay (or credit risk). For each contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified performance obligations. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. As the Company’s standard payment terms are less than one year, the Company has elected the practical expedient under

9


 

ASC 606-10-32-18 to not assess whether a contract has a significant financing component. The Company allocates the transaction price to each distinct product based on their relative standalone selling price. The product price as specified on the purchase order is considered the standalone selling price as it is an observable input which depicts the price as if sold to a similar customer in similar circumstances. Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment from the Company’s manufacturing site or distribution center, or delivery to the customer’s named location. In certain circumstances, revenue from shipments to retail customers is recognized only when the product is consumed by the customer, as based on the terms of the arrangement, transfer of control is not satisfied until that point in time. In determining whether control has transferred, the Company considers if there is a present right to payment, physical possession and legal title, along with risks and rewards of ownership having transferred to the customer. In certain circumstances, the Company manufactures customized product without alternative use for its customers. However, as these arrangements do not entitle the Company a right to payment of cost plus a profit for work completed, the Company has concluded that revenue recognition at the point in time control transfers is appropriate and not over time recognition.

 

At times, the Company receives orders for products to be delivered over multiple dates that may extend across reporting periods. The Company invoices for each delivery upon shipment and recognizes revenues for each distinct product delivered, assuming transfer of control has occurred. As scheduled delivery dates are within one year, under the optional exemption provided by ASC 606-10-50-14 revenues allocated to future shipments of partially completed contracts are not disclosed.

 

The Company generally provides an assurance warranty that its products will substantially conform to the published specification. The Company’s liability is limited to either a credit equal to the purchase price or replacement of the defective part. Returns under warranty have historically been immaterial. The Company does not consider activities related to such warranty, if any, to be a separate performance obligation. For certain of its products, the Company will separately sell extended warranty and service policies to its customers. The Company considers the sale of the extended warranty a separate performance obligation. These policies typically are for periods ranging from one to three years. Payments received are deferred and recognized over the policy period. For all periods presented, the revenue recognized and the revenue deferred for under these policies is not material to the consolidated financial statements.

 

The timing of revenue recognition, billings and cash collections from the Company’s contracts with customers can vary based on the payment terms and conditions in the customer contracts. In some cases, customers will partially prepay for their goods; in other cases, after appropriate credit evaluations, payment is due in arrears. In addition, there are constraints which cause variability in the ultimate consideration to be recognized. These constraints typically include early payment discounts, volume rebates, rights of return, cooperative advertising, and market development funds.  The Company includes these constraints in the estimated transaction price when there is a basis to reasonably estimate the amount of variable consideration.  These estimates are based on historical experience, anticipated future performance and the Company’s best judgment at the time. When the timing of the Company’s recognition of revenue is different from the timing of payments made by the customer, the Company recognizes either a contract asset (performance precedes contractual due date) or a contract liability (customer payment precedes performance). Contracts with payment in arrears are recognized as receivables. The opening and closing balances of the Company’s contract assets and contract liabilities are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract

 

Contract

 

Contract

 

 

 

Assets

 

Liabilities - Current

 

Liabilities - Noncurrent

 

 

 

 

 

 

(in millions)

 

 

 

 

Opening - January 1, 2018

 

$

0.6

 

$

11.3

 

$

2.1

 

Closing - April 1, 2018

 

 

1.7

 

 

11.5

 

 

2.4

 

Increase

 

$

1.1

 

$

0.2

 

$

0.3

 

 

The amount of revenue recognized in the period that was included in the opening contract liability was $2.9 million. This revenue consists primarily of revenue recognized for shipments of product which had been prepaid as well as the amortization of extended warranty and service policy revenue. The Company did not recognize any material revenue from obligations satisfied in prior periods. The change in Contract Liabilities is not material for the first quarter of 2018.There were no impairment losses related to Contract Assets for the quarter ended April 1, 2018.

 

The Company incurs costs to obtain and fulfill a contract; however, the Company has elected the practical expedient under ASC 340-40-24-4 to recognize all incremental costs to obtain a contract as an expense when incurred if the amortization period is one year or less. The Company has elected to treat shipping and handling activities performed

10


 

after the customer has obtained control of the related goods as a fulfillment cost and the related cost is accrued for in conjunction with the recording of revenue for the goods.

 

4. Income Taxes 

 

The 2017 Tax Cuts and Jobs Act (“2017 Tax Act”) was enacted on December 22, 2017 and has resulted in significant changes to the U.S. corporate income tax system. These changes include (1) lowering the U.S. corporate income tax rate from 35% to 21%, (2) implementing a base erosion and anti-abuse tax, (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, (4) a new provision designed to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries, which allows for the possibility of utilizing foreign tax credits to offset the tax liability (subject to limitations), (5) a lower effective U.S. tax rate on certain revenues from sources outside the U.S., and (6) a one-time mandatory deemed repatriation tax (“Toll Tax”) on foreign subsidiaries’ previously untaxed accumulated foreign earnings.

 

In the period ended December 31, 2017, the Company recorded a provisional tax expense of $25.1 million related to the 2017 Tax Act, which included a $23.3 million charge for the Toll Tax. For the quarter ended April 1, 2018, the Company has not recorded any additional provisional expense or benefit related to the 2017 Tax Act.

 

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. These provisional amounts may be impacted by further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations, foreign tax credit computations, and state tax conformity to federal tax changes. When the Company refines these provisional amounts, any adjustments will be recorded in the period completed. The final analysis may be different from the Company’s current provisional amounts, which could materially affect the Company’s tax obligations and effective tax rate in the period or periods in which the adjustments are made.

 

As of April 1, 2018, the amounts recorded for the 2017 Tax Act remain provisional for the Toll Tax, the remeasurement of deferred taxes, and gross foreign tax credit carryforwards and related valuation allowances to offset foreign tax credit carryforwards. Further, the Company has not yet determined its policy election with respect to whether to record deferred taxes for basis differences expected to reverse as a result of the GILTI provisions in future periods or use the period cost method.

 

Due to the complexity of the new GILTI tax rules, the Company has included an estimate of the current GILTI impact in the Company’s tax provision for 2018. The Company’s GILTI estimate may be revised in future periods as we obtain additional data, and as the IRS issues new guidance on implementing the law changes.

 

5. Goodwill & Intangibles

 

The Company operates in three geographic segments: Americas, Europe, and APMEA. The changes in the carrying amount of goodwill by geographic segment are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 1, 2018

 

 

 

Gross Balance

 

Accumulated Impairment Losses

 

Net Goodwill

 

 

 

 

 

Acquired

 

Foreign

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

During

 

Currency

 

Balance

 

Balance

 

Impairment

 

Balance

 

 

 

 

 

January 1,

 

the

 

Translation

 

April 1,

 

January 1,

 

Loss During

 

April 1,

 

April 1,

 

 

    

2018

    

Period (1)

    

and Other

    

2018

    

2018

    

the Period

    

2018

    

2018

 

 

 

(in millions)

 

Americas

 

$

437.4

 

 

0.4

 

 

(0.3)

 

 

437.5

 

$

(24.5)

 

 

 

 

(24.5)

 

 

413.0

 

Europe

 

 

249.3

 

 

 

 

3.2

 

 

252.5

 

 

(129.7)

 

 

 —

 

 

(129.7)

 

 

122.8

 

APMEA

 

 

30.9

 

 

 —

 

 

0.4

 

 

31.3

 

 

(12.9)

 

 

 

 

(12.9)

 

 

18.4

 

Total

 

$

717.6

 

 

0.4

 

 

3.3

 

 

721.3

 

$

(167.1)

 

 

 —

 

 

(167.1)

 

 

554.2

 

 

11


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

Gross Balance

 

Accumulated Impairment Losses

 

Net Goodwill

 

 

 

 

 

Acquired

 

Foreign

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

During

 

Currency

 

Balance

 

Balance

 

Impairment

 

Balance

 

 

 

 

 

January 1,

 

the

 

Translation

 

December 31,

 

January 1,

 

Loss During

 

December 31,

 

December 31,

 

 

    

2017

    

Period

    

and Other

    

2017

    

2017

    

the Period

    

2017

    

2017

 

 

 

(in millions)

 

Americas

 

$

434.7

 

 

2.0

 

 

0.7

 

 

437.4

 

$

(24.5)

 

 

 

 

(24.5)

 

 

412.9

 

Europe

 

 

234.9

 

 

 

 

14.4

 

 

249.3

 

 

(129.7)

 

 

 —

 

 

(129.7)

 

 

119.6

 

APMEA

 

 

30.2

 

 

 —

 

 

0.7

 

 

30.9

 

 

(12.9)

 

 

 

 

(12.9)

 

 

18.0

 

Total

 

$

699.8

 

 

2.0

 

 

15.8

 

 

717.6

 

$

(167.1)

 

 

 —

 

 

(167.1)

 

 

550.5

 


(1)Americas goodwill additions during the first quarter of 2018 relate to an immaterial acquisition.

 

Intangible assets include the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 1, 2018

 

December 31, 2017

 

 

 

2018

 

2017

 

 

 

Gross

 

 

 

 

Net

 

Gross

 

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

    

Amount

    

Amortization

    

Amount

    

Amount

    

Amortization

    

Amount

 

 

 

(in millions)

 

Patents

 

$

16.1

 

$

(15.6)

 

$

0.5

 

$

16.1

 

$

(15.4)

 

$

0.7

 

Customer relationships

 

 

233.9

 

 

(137.4)

 

 

96.5

 

 

233.2

 

 

(133.5)

 

 

99.7

 

Technology

 

 

54.0

 

 

(24.1)

 

 

29.9

 

 

53.9

 

 

(23.1)

 

 

30.8

 

Trade names

 

 

26.2

 

 

(10.3)

 

 

15.9

 

 

25.5

 

 

(9.7)

 

 

15.8

 

Other

 

 

4.3

 

 

(3.5)

 

 

0.8

 

 

6.9

 

 

(6.0)

 

 

0.9

 

Total amortizable intangibles

 

 

334.5

 

 

(190.9)

 

 

143.6

 

 

335.6

 

 

(187.7)

 

 

147.9

 

Indefinite-lived intangible assets

 

 

37.3

 

 

 —

 

 

37.3

 

 

37.3

 

 

 —

 

 

37.3

 

 

 

$

371.8

 

$

(190.9)

 

$

180.9

 

$

372.9

 

$

(187.7)

 

$

185.2

 

 

Aggregate amortization expense for amortized intangible assets for the first quarters of 2018 and 2017 was $5.6 million and $5.5 million, respectively.

 

6. Financial Instruments and Derivative Instruments

 

Fair Value

 

The carrying amounts of cash and cash equivalents, trade receivables and trade payables approximate fair value because of the short maturity of these financial instruments.

 

The fair value of the Company’s 5.05% senior notes due 2020 is based on quoted market prices of similar notes (level 2).  The fair value of the Company’s borrowings outstanding under the Credit Agreement and the Company’s variable rate debt approximates its carrying value. The carrying amount and the estimated fair market value of the Company’s long-term debt, including the current portion, are as follows:

 

 

 

 

 

 

 

 

 

 

 

April 1,

 

December 31,

 

 

    

2018

    

2017

    

 

 

(in millions)

 

Carrying amount

 

$

448.9

 

$

499.5

 

Estimated fair value

 

$

449.9

 

$

501.1

 

 

12


 

Financial Instruments

 

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including deferred compensation plan assets and related liabilities, redeemable financial instruments, and derivatives. The fair values of these certain financial assets and liabilities were determined using the following inputs at April 1, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement at April 1, 2018 Using:

 

 

 

 

 

 

Quoted Prices in Active

 

Significant Other

 

Significant

 

 

 

 

 

 

Markets for Identical

 

Observable

 

Unobservable

 

 

 

 

 

 

Assets

 

Inputs

 

Inputs

 

 

    

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Plan asset for deferred compensation(1)

 

$

3.1

 

$

3.1

 

$

 —

 

$

 —

 

Interest rate swaps (1)

 

$

8.1

 

$

 —

 

$

8.1

 

$

 —

 

Designated foreign currency hedge (2)

 

$

0.2

 

$

 —

 

$

0.2

 

$

 —

 

Total assets

 

$

11.4

 

$

3.1

 

$

8.3

 

$

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Plan liability for deferred compensation(3)

 

$

3.1

 

$

3.1

 

$

 —

 

$

 —

 

Redeemable financial instrument(4)

 

$

3.0

 

$

 

$

 —

 

$

3.0

 

Total liabilities

 

$

6.1

 

$

3.1

 

$

 —

 

$

3.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2017 Using:

 

 

 

 

 

 

Quoted Prices in Active

 

Significant Other

 

Significant

 

 

 

 

 

 

Markets for Identical

 

Observable

 

Unobservable

 

 

    

 

 

 

Assets

 

Inputs

 

 Inputs

 

 

 

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Plan asset for deferred compensation(1)

 

$

3.2

 

$

3.2

 

$

 —

 

$

 —

 

Interest rate swaps (1)

 

$

5.6

 

$

 —

 

$

5.6

 

$

 —

 

Total assets

 

$

8.8

 

$

3.2

 

$

5.6

 

$

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Plan liability for deferred compensation(2)

 

$

3.2

 

$

3.2

 

$

 —

 

$

 —

 

Redeemable financial instrument(3)

 

 

2.9

 

 

 

 

 —

 

 

2.9

 

Total liabilities

 

$

6.1

 

$

3.2

 

$

 —

 

$

2.9

 


(1)Included on the Company’s consolidated balance sheet in other assets (other, net).

 

(2)   Included on the Company’s consolidated balance sheet in prepaid expenses and other current assets.

 

(3)Included on the Company’s consolidated balance sheet in accrued compensation and benefits.

 

(4)Included on the Company’s consolidated balance sheet in other current liabilities and relates to a mandatorily redeemable equity instrument as part of the Apex Valves Limited (“Apex”) acquisition in 2015.

 

The table below provides a summary of the changes in fair value of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period December 31, 2017 to April 1, 2018.