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 September 30, 1995 or ___ / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to _______________ Commission file number 0-14787 - WATTS INDUSTRIES, INC. - (Exact name of registrant as specified in its charter) DELAWARE 04-2916536 - (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 815 Chestnut Street, North Andover, MA 01845 - (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (508) 688-1811 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 31, 1995 - ------------------------------ ----------------------------- Class A Common, $.10 par value 18,270,338 Class B Common, $.10 par value 11,365,627 WATTS INDUSTRIES, INC. AND SUBSIDIARIES INDEX Part I. Financial Information Page # Item 1. Condensed Consolidated Balance Sheets 3 at September 30, 1995 and June 30, 1995. Condensed Consolidated Statements of 4 Earnings for the Three Months Ended September 30, 1995 and September 30, 1994. Condensed Consolidated Statements of 5 Cash Flows for the Three Months Ended September 30, 1995 and September 30, 1994. Notes to Condensed Consolidated 6,7, Financial Statements. 8,9 Item 2. Management's Discussion and Analysis 10,11, of Financial Condition and Results of 12, Operations. Part II. Other Information Item 6. Exhibits and Reports on Form 8-K. 13 Signatures 14 Exhibit Index 15 Exhibit 11 - Computation of Per Share 16 Earnings. Exhibit 27 - Financial Data Schedule 17 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WATTS INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share information) (Unaudited) Sept. 30, June 30, 1995 1995 _________ _________ CURRENT ASSETS Cash and cash equivalents.........................$ 0 $ 4,257 Short-term investments............................ 0 4,483 Trade accounts receivable, less allowance for doubtful accounts of $5,952 and $5,828...... 130,390 118,769 Inventories: Finished goods.............................. 83,327 82,638 Work in process............................. 44,371 42,034 Raw materials............................... 78,672 76,155 _________ _________ 206,370 200,827 Prepaid expenses and other current assets......... 16,950 13,588 Deferred tax benefit.............................. 14,132 13,206 _________ _________ Total Current Assets......................... 367,842 355,130 OTHER ASSETS Intangible assets, net............................ 8,605 8,210 Goodwill.......................................... 159,332 149,078 Other............................................. 10,927 9,141 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at cost............. 284,770 279,970 Less allowance for depreciation.................. (116,655) (111,558) _________ _________ Property, plant and equipment, net................ 168,115 168,412 _________ _________ TOTAL ASSETS $ 714,821 $ 689,971 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable..................................$ 44,019 $ 40,726 Accrued expenses.................................. 51,870 46,193 Accrued compensation and related items............ 8,318 10,796 Income taxes...................................... 11,815 3,625 Current portion of long-term debt................. 11,183 11,767 _________ _________ Total Current Liabilities.................... 127,205 113,107 LONG-TERM DEBT, less current portion................. 133,894 132,821 DEFERRED INCOME TAXES................................ 16,842 17,569 OTHER LIABILITIES.................................... 13,437 14,098 MINORITY INTEREST.................................... 6,662 6,422 STOCKHOLDERS' EQUITY Class A Common Stock, $.10 par value; 80,000,000 shares authorized, 18,270,338 shares issued and outstanding at September 30..... 1,827 1,822 Class B Common Stock, $.10 par value; 25,000,000 shares authorized, 11,365,627 shares issued and outstanding at September 30..... 1,137 1,140 Additional paid-in capital........................ 95,629 95,496 Retained earnings................................. 317,775 307,493 Equity adjustment from translation................ 413 3 _________ _________ Total Stockholders' Equity................... 416,781 405,954 _________ _________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....... $ 714,821 $ 689,971 ========= ========= See accompanying notes to condensed consolidated financial statements. WATTS INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Amounts in thousands, except per share data) (Unaudited) Three Months Ended ________ _____________ Sept. 30, Sept. 30, 1995 1994 _________ _________ Net sales ........................................$ 175,304 $ 152,677 Cost of goods sold ............................... 113,448 96,994 _________ _________ GROSS PROFIT ................................ 61,856 55,683 Selling, general & administrative expenses ....... 39,042 34,849 _________ _________ OPERATING INCOME ............................ 22,814 20,834 Other (income) expense: Interest income ............................. (321) (750) Interest expense ............................ 2,846 2,410 Other - net ................................. 617 264 _________ _________ 3,142 1,924 _________ _________ EARNINGS BEFORE INCOME TAXES ................ 19,672 18,910 Provision for income taxes ....................... 7,538 7,520 _________ _________ NET EARNINGS ................................$ 12,134 $ 11,390 ========= ========= Primary and fully-diluted earnings per share : $ .41 $ .38 ========= ========= Cash dividends per share.......................... $ .0625 $ .0550 ========= ========= See accompanying notes to condensed consolidated financial statements. WATTS INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) Three Months Ended ________ _____________ Sept 30, Sept 30, 1995 1994 _________ _________ OPERATING ACTIVITIES Net earnings $ 12,134 $ 11,390 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amoritzation 6,973 5,966 Provision for deferred income taxes (1,171) 317 (Gain)Loss on disposal of fixed assets 54 (26) Changes in operating assets and liabilities, net of effects from business acquisitions: Accounts receivable (9,553) (15,375) Inventories (2,198) 4,557 Prepaid expenses and other assets (4,988) (906) Accounts payable and accrued expenses 9,009 6,297 _________ _________ NET CASH PROVIDED BY OPERATING ACTIVITIES 10,260 12,220 INVESTING ACTIVITIES Additions to property, plant and equipment (5,114) (5,051) Proceeds from disposal of equipment 301 50 Increase in intangible assets (679) (482) Business acquisitions, net of cash acquired (12,352) (41,526) Repayment of debt of acquired businesses (305) Net changes in short-term investments 4,483 38,804 _________ _________ NET CASH USED IN INVESTING ACTIVITIES (13,361) (8,510) FINANCING ACTIVITIES Proceeds from exercise of stock options 44 170 Proceeds of long-term borrowings 17,500 114 Payments of long-term debt (17,090) (256) Cash dividends (1,852) (1,622) _________ _________ NET CASH USED IN FINANCING ACTIVITIES (1,398) (1,594) Effect of exchange rates on cash and cash equivalents 242 119 _________ _________ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,257) 2,235 Cash and cash equivalents at beginning of period 4,257 6,231 _________ _________ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 0 $ 8,466 ========= ========= See accompanying notes to condensed consolidated financial statements. WATTS INDUSTRIES, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) 1. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all necessary adjustments, consisting only of adjustments of a normal recurring nature, to present fairly Watts Industries, Inc.'s Condensed Consolidated Balance Sheet as of September 30, 1995, the Condensed Consolidated Statements of Earnings for the three months ended September 30, 1995 and September 30, 1994, and the Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 1995 and September 30, 1994. The balance sheet at June 30, 1995 has been derived from the audited financial statements at that date. The accounting policies followed by the Company are described in the June 30, 1995 financial statements which are contained in the Company's 1995 Annual Report. It is suggested that these financial statements be read in conjunction with the financial statements and notes included in the 1995 Annual Report to stockholders. 2. On July 28, 1994, a wholly owned subsidiary of the Company purchased Jameco Industries, Inc. ("Jameco") of Wyandanch, New York. Jameco is a manufacturer of metal and plastic water supply products, including valves, tubular products and sink strainers that are sold primarily to residential construction and home repair and remodeling markets in the United States and overseas. Jameco had net sales of approximately $65,000,000 for the twelve months ended June 30, 1995. In August of 1994, a wholly owned subsidiary of the Company entered into a joint venture with Tanggu Valve Company in Tianjin, Peoples Republic of China. The Company's investment represents a 60% interest in the joint venture. On November 18, 1994, a wholly owned subsidiary of the Company purchased Pibiviesse S.p.A. ("PBVS") located in Nerviano, Italy. PBVS manufactures a complete range of trunnion mounted ball valves with manufacturing capabilities up through 60 inch diameter and inclusive of Class 2500 pressure ratings to meet the demanding requirements of international pipeline projects. PBVS has annual net sales of approximately $25,000,000. In August and December of 1994, a wholly owned subsidiary of the Company acquired two product lines. One product line is a line of cryogenic valves used in industrial applications. The other product line is check and relief valves used in aerospace and military applications. On March 1, 1995, a wholly owned subsidiary of the Company purchased Anderson-Barrows Metals Corporation ("Anderson-Barrows") of Palmdale, California. Anderson- Barrows is a manufacturer of compression and flare fittings, plastic tubing and braided metal hose connectors which are sold primarily to the domestic residential construction and home repair and remodeling markets. Anderson-Barrows had net sales of approximately $21,000,000 for the twelve months ended December 31, 1994. In July of 1995, a wholly owned subsidiary of the Company entered into a joint venture with Suzhou Valve Factory (SUFA) in Suzhou, Peoples Republic of China, to manufacture ball valves for the industrial and oil and gas markets. The Company has invested $2,000,000, as of September 30, 1995; the Company's total commitment of $6,000,000 represents a 60% interest in the joint venture. On August 28, 1995, a wholly owned subsidiary of the Company purchased Societe des Etablissements Rene Trubert ("Trubert") of Chartres, France. Trubert is a manufacturer of thermostatic mixing valves sold primarily to commercial and industrial applications to accurately control the temperature of water for human safety and process control. Trubert had net sales of approximately $8,000,000 for the twelve months ended June 30, 1995. On September 1, 1995, a wholly owned subsidiary of the Company acquired the Keane product line from Keane Controls Corp. This product line consists of solenoid valves and regulators used in high pressure applications. The annual sales of these products are approximately $1,500,000. On September 29, 1995, a wholly owned subsidiary acquired the Kieley Mueller Control Valve product line from International Valve Corporation. This product line consists of linear and rotary control valves sold primarily for industrial process applications to accurately control the pressure, flow, and temperature of steam and process fluids. The annual sales of these products are approximately $2,800,000. The aggregate purchase price for these investments was $98,500,000 after certain adjustments, plus acquired debt of $33,701,000. The Company has repaid $20,015,680 of debt acquired with three of the companies. 3. Certain of the Company's operations generate solid and hazardous wastes, which are disposed of elsewhere by arrangement with the owners or operators of disposal sites or with transporters of such waste. The Company's foundry and other operations are subject to various federal, state and local laws and regulations relating to environmental quality. Compliance with these laws and regulations requires the Company to incur expenses and monitor its operations on an ongoing basis. The Company cannot predict the effect of future requirements on its capital expenditures, earnings or competitive position due to any changes in either federal, state or local environmental laws, regulations or ordinances. The Company is currently a party to or otherwise involved with various administrative or legal proceedings under federal, state or local environmental laws or regulations involving a number of sites, in some cases as a participant in a group of potentially responsible parties. Four of these sites, the Sharkey and Combe Landfills in New Jersey, the San Gabriel Valley/El Monte, California water basin matter, and the Jack's Creek/Sitkin Smelting Superfund site in Pennsylvania, are listed on the National Priorities List. With respect to the Sharkey Landfill, the Company has been allocated .75% of the remediation costs, an amount which is not material to the Company. Based on certain developments, the Company elected not to enter into the de minimis settlement proposal with respect to the Sharkey Landfill site and instead decided to participate in the remediation as a participating party. No allocations have been made to date with respect to the Combe Landfill or San Gabriel Valley sites. The EPA has formally notified several entities that they have been identified as being potentially responsible parties with respect to the San Gabriel Valley site. As the Company was not included in this group, its potential involvement in this matter is uncertain at this point given that either the PRPs named to date or the EPA could seek to expand the list of potentially responsible parties. With respect to the Jack's Creek site, the Company has recently made a payment to the EPA as part of a de minimis settlement, the amount of which is not material to the Company. In addition to the foregoing, the Solvent Recovery Service of New England site and the Old Southington landfill site, both in Connecticut, are on the National Priorities List but, with respect thereto, the Company has resort to indemnification from third parties and based on currently available information, the Company believes it will be entitled to participate in a de minimis capacity. With respect to the Combe Landfill, the Company is one of approximately 30 potentially responsible parties. The Company and all other PRP's received a Supplemental Directive from the New Jersey Department of Environmental Protection & Energy in 1994 seeking to recover approximately $9 million in the aggregate for the operation, maintenance, and monitoring of the implemented remedial action taken up to that time in connection with the Combe Landfill North site. The Company and the remaining PRPs have recently received a formal demand from the U.S. Environmental Protection Agency to recover approximately $17 million expended to date in the remediation of this site. Given the number of parties involved in most environmental sites, the multiplicity of possible solutions, the evolving technology and the years of remedial activity required, it is difficult to estimate with certainty the total cost of remediation, the timing and extent of remedial actions which may be required, and the amount of liability, if any, of the Company alone or in relation to that of other responsible parties. Based on facts presently known to it, the Company does not believe that the outcome of these proceedings will have a material adverse effect on its financial condition, results of operations, or its liquidity. The Company has established balance sheet accruals which it currently believes are adequate in light of the potential exposure of pending and threatened environmental litigation and proceedings of which it has knowledge. In this regard, with respect to certain of these matters, the Company has resort either to some degree of insurance coverage or indemnifications from third parties which are expected to defray to some extent the effect thereof. With respect to insurance, coverage of some of these claims has been disputed by the carriers based on standard reservations and, therefore, recovery is questionable, a factor which has been considered in the Company's evaluation of these matters. Although difficult to quantify based on the complexity of the issues and the limitation on available information, the Company believes that its accruals for the estimated costs associated with such matters adequately provide for the Company's estimated foreseeable liability for these sites, however, given the nature and scope of the Company's manufacturing operations, there can be no assurance that the Company will not become subject to other environmental proceedings and liabilities in the future which may be material to the Company. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Quarter Ended September 30, 1995 Compared to Quarter Ended September 30, 1994 Net sales increased $22,627,000 (14.8%) to $175,304,000. This increase was attributable to the inclusion of the net sales of acquired companies and the Company's Chinese joint venture located in Tianjin, Peoples Republic of China. These acquisitions principally included Anderson-Barrows Metals Corporation ("Anderson-Barrows") acquired in March 1995, located in California, Pibiviesse S.p.A. ("PBVS") acquired in November 1994, located in Italy, Jameco Industries, Inc. ("Jameco") acquired in July 1994, located in New York, and Societe des Etablissements Rene Trubert ("Trubert") acquired in August of 1995, located in Chartres, France. The Company had increased unit shipments of industrial valves and municipal water valves which were partially offset by decreased unit shipments of steam valves. The Company had increased sales in Europe of $3,100,000 of which approximately forty percent was due to the strength of certain foreign currencies relative to the U.S. dollar. The Company intends to maintain its strategy of seeking acquisition opportunities as well as expanding its existing market position to achieve sales growth. Gross profit increased $6,173,000 (11.1%) to $61,856,000 and decreased as a percentage of net sales from 36.5% to 35.3%. This decreased percentage was primarily attributable to the inclusion of certain acquired companies which operate at a lower gross margin than the rest of the Company. Gross profit was also adversely affected by increased raw material costs of bronze ingot and brass rod which, due to competitive pricing pressures, could not be completely recovered through price increases. Selling, general and administrative expenses increased $4,193,000 (12%) to $39,042,000. This increase in spending was primarily attributable to the inclusion of the expenses of acquired companies, and increased selling expenses associated with international and drain products sales, partially offset by decreased general and administrative expenses corporate wide. Interest income decreased $429,000 (57.2%) to $321,000. This decrease was attributable to lower levels of cash and short-term investments. Interest expense increased $436,000 (18.1%) to $2,846,000. This increase was attributable to the inclusion of the debt of certain acquired companies in the consolidated balance sheet of the Company. Net earnings increased $744,000 (6.5%) to $12,134,000. The Company's return on investment for the period ended September 30, 1995 was 11.4%. The change in foreign exchange rates had an immaterial impact on the net results of operations. The weighted average number of common shares outstanding on September 30, 1995, increased to 29,792,386 from 29,698,391 at September 30, 1994, for primary earnings per share. Primary and fully diluted earnings per share were $ .41 for the quarter ended September 30, 1995 compared to $ .38 for the quarter ended September 30, 1994. Liquidity and Capital Resources During the quarter ended September 30, 1995, the Company invested in three acquisitions and one joint venture. In August of 1995, a wholly owned subsidiary of the Company purchased Societe des Etablissements Rene Trubert of Chartres, France. Trubert is a manufacturer of thermostatic mixing valves sold primarily for commercial and industrial applications to accurately control the temperature of water for human safety and process control. Trubert had net sales of approximately $8,000,000 for the twelve months ended June 30, 1995. Also, in August of 1995, a wholly owned subsidiary of the Company invested an initial $2,000,000 in the Suzhou Watts Valve Co., Ltd. joint venture located in Suzhou, Peoples Republic of China. This joint venture was established to manufacture ball valves for the industrial and oil and gas markets. The Company's investment will total $6,000,000 and represent a 60% interest in the joint venture. In September 1995, a wholly owned subsidiary acquired the Keane product line from Keane Controls Corp. This product line consists of solenoid valves and regulators used in high pressure applications. The annual sales of these products are approximately $1,500,000. Also, in September 1995, a wholly owned subsidiary acquired the Kieley Mueller Control Valve product line from International Valve Corporation. This product line consists of linear and rotary control valves sold primarily for industrial process applications to accurately control the pressure, flow, and temperature of steam and process fluids. The annual sales of these products are approximately $2,800,000. The aggregate purchase price for these investments was $17,500,000. During the quarter ended September 30, 1995, the Company spent $5,114,000 on capital expenditures, primarily manufacturing machinery and equipment, as part of its commitment to continuously improve its manufacturing capabilities. Working capital at September 30, 1995 was $240,637,000 compared to $242,023,000 at June 30, 1995. Cash and short-term investments were zero at September 30, 1995 compared to $8,740,000 at June 30, 1995. The Company utilized overdraft facilities with certain banks during the quarter ended September 30, 1995, to minimize borrowings under its line of credit. The ratio of current assets to current liabilities was 2.9 to 1 at September 30, 1995 compared to 3.1 to 1 at June 30, 1995. Debt as a percentage of total capital employed was 25.8% at September 30, 1995 compared to 26.3% at June 30, 1995. In order to support the Company's acquisition program, working capital requirements from acquisitions, and for general corporate purposes, the Company entered into a five-year commitment for an unsecured line of credit for $125,000,000 expiring on August 31, 1999. As of September 30, 1995, there was $33,000,000 outstanding under this credit facility. The Company from time to time is involved with environmental proceedings and incurs costs on an ongoing basis related to environmental matters. The Company has been named a potentially responsible party with respect to currently identified contaminated sites, which are in various stages of the remediation process. The Company has evaluated its potential exposure based on all currently available information and has recorded its estimate of its liability for environmental matters. The ultimate outcome of these environmental matters cannot be determined. The Company currently anticipates that it will not incur significant expenditures in fiscal 1996 in connection with any of these environmentally contaminated sites. Please see Note 3 to the accompanying condensed consolidated financial statements. The Company anticipates that available funds and those funds provided from current operations will be sufficient to meet current operating requirements and anticipated capital expenditures for at least the next 24 months. Part II. Other Information Item 6. Exhibits and Reports on Form 8-K There were no reports filed on Form 8-K for the quarter ended September 30, 1995. 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: November 10, 1995 By: /s/Timothy P. Horne Timothy P. Horne President Date: November 10, 1995 By: /s/Kenneth J. McAvoy Kenneth J. McAvoy Chief Financial Officer and Treasurer EXHIBIT INDEX Listed and indexed below are all Exhibits filed as part of this report. Exhibit No. Description 11 Computation of earnings per share 27 Financial Data Schedule