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, 2000 or | | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to ____________ Commission file number 0-14787 WATTS INDUSTRIES, INC. ---------------------- (Exact name of registrant as specified in its charter) Delaware 04-2916536 -------- ---------- (State of incorporation) (I.R.S. Employer Identification No.) 815 Chestnut Street, North Andover, MA 01845 - ---------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (978) 688-1811 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at April 28, 2000 ----- ----------------------------- Class A Common, $.10 par value 16,903,484 Class B Common, $.10 par value 9,485,247
WATTS INDUSTRIES, INC. AND SUBSIDIARIES INDEX Part I. Financial Information Page # --------------------- ------ Item 1. Financial Statements Consolidated Balance Sheets at March 31, 2000 and December 31, 1999 3 Consolidated Statements of Income for the Three Months Ended March 31, 2000 and March 31, 1999 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and March 31, 1999 5 Notes to Consolidated Financial Statements 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-13 Part II. Other Information ----------------- Item 1. Legal Proceedings 13-15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 Exhibit Index 17 Exhibit 27 - Financial Data Schedule - March 31, 2000 18
WATTS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands, except share amounts) <TABLE> <CAPTION> (Unaudited) Mar. 31, Dec. 31, 2000 1999 ---------- --------- <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $ 6,534 $ 13,016 Trade accounts receivable, less allowance for doubtful accounts of $6,800 at Mar. 31, 2000 and $6,730 at Dec. 31, 1999 96,556 94,305 Inventories, net: Raw materials 35,772 36,429 Work in process 14,577 10,355 Finished goods 64,691 66,037 --------- --------- Total Inventories 115,040 112,821 Prepaid expenses and other assets 9,819 12,922 Deferred income taxes 20,027 19,774 --------- --------- Total Current Assets 247,976 252,838 --------- --------- PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment, at cost 228,182 226,692 Accumulated depreciation (99,832) (96,461) --------- --------- Property, plant and equipment, net 128,350 130,231 --------- --------- OTHER ASSETS: Goodwill, net of accumulated amortization of $12,655 at Mar. 31, 2000 and $11,997 at Dec. 31, 1999 93,439 95,311 Other 8,489 8,698 --------- --------- TOTAL ASSETS $ 478,254 $ 487,078 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 41,725 $ 46,904 Accrued expenses and other liabilities 48,056 48,629 Accrued compensation and benefits 10,108 9,882 Current portion of long-term debt 5,638 5,683 --------- --------- Total Current Liabilities 105,527 111,098 --------- --------- LONG-TERM DEBT, NET OF CURRENT PORTION 118,447 123,991 DEFERRED INCOME TAXES 13,837 13,630 OTHER NONCURRENT LIABILITIES 10,724 11,150 MINORITY INTEREST 7,395 7,707 STOCKHOLDERS' EQUITY: Preferred Stock, $.10 par value; 5,000,000 shares authorized; no shares issued or outstanding -- -- Class A Common Stock, $.10 par value; 80,000,000 shares authorized; 1 vote per share; issued and outstanding: 16,888,507 shares at Mar. 31, 2000 and 16,888,807 shares at Dec. 31, 1999 1,689 1,689 Class B Common Stock, $.10 par value; 25,000,000 shares authorized; 10 votes per share; issued and outstanding: shares 9,485,247 at Mar. 31, 2000 and 9,485,247 shares at Dec. 31, 1999 949 949 Additional paid-in capital 35,623 35,330 Retained earnings 202,360 196,733 Accumulated other comprehensive income (18,297) (15,199) --------- --------- Total Stockholders' Equity 222,324 219,502 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 478,254 $ 487,078 ========= ========= </TABLE> See accompanying notes to consolidated financial statements. 3
WATTS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands, except per share amounts) <TABLE> <CAPTION> (Unaudited) Three Months Ended ---------------------- March 31, March 31, 2000 1999 --------- --------- <S> <C> <C> Net sales $ 130,770 $ 116,972 Cost of goods sold 84,277 75,084 --------- --------- GROSS PROFIT 46,493 41,888 Selling, general & administrative expenses 31,180 30,035 --------- --------- OPERATING INCOME 15,313 11,853 --------- --------- Other (income) expense: Interest income (178) (169) Interest expense 2,591 1,409 Other, net 473 180 --------- --------- 2,886 1,420 --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 12,427 10,433 Provision for income taxes 4,487 3,528 --------- --------- INCOME FROM CONTINUING OPERATIONS 7,940 6,905 Income from discontinued operations, net of taxes -- -- --------- --------- NET INCOME $ 7,940 $ 6,905 ========= ========= BASIC EARNINGS PER SHARE Continuing Operations $ .30 $ .26 Discontinued Operations -- -- --------- --------- NET INCOME $ .30 $ .26 ========= ========= Weighted average number of shares 26,474 26,649 ========= ========= DILUTED EARNINGS PER SHARE Continuing Operations $ .30 $ .26 Discontinued Operations -- -- --------- --------- NET INCOME $ .30 $ .26 ========= ========= Weighted average number of shares 26,786 26,671 ========= ========= Dividends per common share $ .0875 $ .0875 ========= ========= </TABLE> See accompanying notes to consolidated financial statements. 4
WATTS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands) <TABLE> <CAPTION> (Unaudited) Three Months Ended -------------------- March 31, March 31, 2000 1999 -------- -------- <S> <C> <C> OPERATING ACTIVITIES Net income from continuing operations $ 7,940 $ 6,905 Adjustments to reconcile net income from continuing operations to net cash provided by continuing operating activities: Depreciation 4,304 3,612 Amortization 791 637 Deferred income taxes 61 (391) Gain on disposal of assets (35) (3) Equity in undistributed earnings of affiliates (18) (12) Changes in operating assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable (4,091) 3,166 Inventories (3,434) (328) Prepaid expenses and other assets 3,053 (2,123) Accounts payable, accrued expenses and other liabilities (2,890) 4,397 -------- -------- Net cash provided by continuing operations 5,681 15,860 Net cash provided by (used in) discontinued operations (1,088) 10,976 -------- -------- Net cash provided by operating activities 4,593 26,836 -------- -------- INVESTING ACTIVITIES Additions to property, plant and equipment (4,226) (6,128) Proceeds from sale of assets held for sale 56 2,073 Business acquisitions, net of cash acquired -- (28,488) Increase in other assets (138) (33) Discontinued operations: Business acquisitions, net of cash acquired -- (677) Additions to property, plant and equipment -- (4,073) -------- -------- Net cash used in investing activities (4,308) (37,326) -------- -------- FINANCING ACTIVITIES Proceeds from long-term borrowings 12,000 29,179 Payments of long-term debt (16,381) (5,977) Proceeds from exercise of stock options 293 -- Dividends (2,313) (2,314) Purchase of treasury stock -- (5,544) Discontinued operations: Proceeds from long-term borrowings -- 2,227 Payments of long-term debt -- (2,313) -------- -------- Net cash provided by (used in) financing activities (6,401) 15,258 -------- -------- Effect of exchange rate changes on cash and cash equivalents (366) (2,370) -------- -------- CHANGE IN CASH AND CASH EQUIVALENTS (6,482) 2,398 Cash and cash equivalents at beginning of period 13,016 14,613 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,534 $ 17,011 ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 5
WATTS INDUSTRIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 1. In the opinion of management, the accompanying unaudited, consolidated financial statements contain all necessary adjustments, consisting only of adjustments of a normal recurring nature, to present fairly Watts Industries, Inc.'s Consolidated Balance Sheet as of March 31, 2000, its Consolidated Statements of Income for the three months ended March 31, 2000 and 1999, and its Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999. The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date. The accounting policies followed by the Company are described in the December 31, 1999 financial statements which are contained in the Company's December 31, 1999 Annual Report on Form 10-K. It is suggested that these financial statements be read in conjunction with the financial statements and notes included in the December 31, 1999 Annual Report on Form 10-K. 2. On October 18, 1999 the Company spun off its industrial, oil and gas businesses as a separate publicly traded company, CIRCOR International, Inc. ("CIRCOR"). The spin-off was effected as a tax free distribution whereby owners of Watts common stock received one share of CIRCOR for every two shares of Watts common stock held. Accordingly, the Company is treating historical operating results of CIRCOR as a discontinued operation. The following table summarizes the operating results of the discontinued operations: Three Months Ended March 31 --------------------------- 2000 1999 ---- ---- Sales, Net $ -- $78,893 Costs and Expenses -- 76,106 ------ ------- Income Before Income Taxes -- 2,787 Income Taxes -- 2,787 ------ ------- Income from Discontinued Operations $ -- $ -- ====== ======= 3. On December 2, 1999, the Company announced a restructuring of its operations in Italy to consolidate the warehousing and manufacturing operations of its existing Italian operation into the facilities of its Italian subsidiary, Cazzaniga S.p.A, of Biassono, Italy, which was acquired March 9, 1999. In connection with this restructuring, and in accordance with EITF 94-3, the Company recorded a charge to operating expenses of $1,460,000. The program which will include the termination of 29 employees (primarily manufacturing), began in December of 1999 and is expected to be fully completed by June of 2000. As of March 31, 2000 13 employees have been terminated. 6
Details of the restructuring charge are as follows: <TABLE> <CAPTION> Initial Utilized Utilized Provision during 1999 during 2000 Balance ---------- ----------- ----------- ---------- <S> <C> <C> <C> <C> Severance and related benefits $1,299,000 $ 192,000 $ 112,000 $ 995,000 Lease termination cost 134,000 -- 20,000 114,000 Other exit costs 27,000 -- -- 27,000 ---------- ---------- ---------- ---------- Total $1,460,000 $ 192,000 $ 132,000 $1,136,000 ========== ========== ========== ========== </TABLE> 4. The following tables set forth the reconciliation of the calculation of earnings per share per SFAS 128: <TABLE> <CAPTION> For the Three Months Ended March 31, 2000 ------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ------------------------------------------ <S> <C> <C> <C> Basic EPS - --------- Income from Continuing Operations $7,940,000 26,473,754 $0.30 Income from Discontinued Operations -- -- ---------- ----- Net Income $7,940,000 $0.30 Effect of Dilutive Securities - ----------------------------- Common Stock Equivalents -- 312,220 -- ---------- ---------- ----- Diluted EPS $7,940,000 26,785,974 $0.30 ========== ========== ===== </TABLE> Additional options to purchase 928,174 shares of common stock at prices ranging from $14.30 to $16.40 were outstanding during the three-month period ended March 31, 2000. These options were not included in the related computations of diluted EPS since the exercise price of the options was greater than the average market price of the common shares during the period. <TABLE> <CAPTION> For the Three Months Ended March 31, 1999 ------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ------------------------------------------ <S> <C> <C> <C> Basic EPS - --------- Income from Continuing Operations $6,905,000 26,648,827 $.26 Income from Discontinued Operations -- -- ---------- ---- Net Income $6,905,000 $.26 Effect of Dilutive Securities - ----------------------------- Common Stock Equivalents -- 22,160 -- ---------- ---------- ---- Diluted EPS $6,905,000 26,670,987 $.26 ========== ========== ==== </TABLE> 7
Additional options to purchase 1,581,553 shares of common stock at prices ranging from $18.00 to $25.38 were outstanding during the three-month period ended March 31, 1999. These options were not included in the related computations of diluted EPS since the exercise price of the options was greater than the average market price of the common shares during the period 5. Segment Information - the following table presents certain operating segment information: <TABLE> <CAPTION> North Corporate (Thousand of dollars) America Europe Asia Expenses & Other Consolidated -------- -------- -------- ---------------- ------------ <S> <C> <C> <C> <C> <C> Three months ended March 31, 2000: Net Sales $ 98,460 $ 28,786 $ 3,524 $ -- $130,770 Operating income 14,294 4,117 19 (3,117) 15,313 Three months ended March 31, 1999: Net Sales $ 91,095 $ 22,106 $ 3,771 $ -- $116,972 Operating income 13,184 2,177 179 (3,687) 11,853 </TABLE> The above operating segments are presented on a basis consistent with the presentation included in the Company's December 31, 1999 financial statements. There have been no material changes in the identifiable assets of the individual segments since December 31, 1999. 6. The Company uses foreign currency forward exchange contracts from time to time to reduce the impact of currency fluctuations on certain anticipated purchase transactions that are expected to occur within the fiscal year and other known currency exposures. Related gains and losses are recognized when the contracts expire, which is generally in the same period as the underlying foreign currency denominated transaction. These contracts do not subject the Company to significant market risk from exchange movement because they offset gains and losses on the related foreign currency denomination transactions. At March 31, 2000 the Company had outstanding forward contracts to buy foreign currencies with a notional value of $4.0 million and an immaterial unrealized loss. 7. Accumulated other comprehensive income in the consolidated balance sheets as of March 31, 2000 and December 31, 1999 consists of cumulative translation adjustments. The Company's total comprehensive income during the three-month periods were as follows: 8
Three Months Ended March 31, ---------------------------- 2000 1999 ---- ---- Income from Continuing Operations $ 7,940 $ 6,905 Income from Discontinued Operations -- -- Foreign Currency Translation Adjustments (3,098) (4,389) ----------------------- Total Comprehensive Income $ 4,842 $ 2,516 ======================= 8. Contingencies In April 1998, the Company became aware of a complaint that was filed under seal in the State of California alleging violations of the California False Claims Act. The complaint alleges that a former subsidiary of the Company sold products utilized in municipal water systems which failed to meet contractually specified standards and falsely certified that such standards had been met. The complaint further alleges that the municipal entities have suffered tens of millions of dollars in damages as a result of defective products and seeks treble damages, reimbursement of legal costs and penalties. The Company intends to vigorously contest this matter but cannot presently determine whether any loss will result from it. Other lawsuits and proceedings or claims, arising from the ordinary course of operations, are also pending or threatened against the Company and its subsidiaries. The Company has established reserves which it presently believes are adequate in light of probable and estimable exposure to pending and threatened litigation of which it has knowledge. However, resolution of any such matters during a specific period could have a material effect on quarterly or annual operating results for that period. Also see Part II, Item 1. Item 2. WATTS INDUSTRIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations On December 15, 1998 the Company announced its plan to spin-off its industrial, oil and gas business as a separately traded public company, CIRCOR International, Inc. Under the terms of the spin-off, which was completed on October 18, 1999, the holders of Watts common stock received one share of CIRCOR common stock for every two shares of Watts stock held. The Company's results of operations for the period ended March 31, 1999 have been restated to reflect CIRCOR as discontinued operations. 9
Results of Operations Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999 Net sales for continuing operations increased $13,798,000 (11.8%) to $130,770,000. The increase in net sales is attributable to the following: Internal Growth $ 10,508,000 9.0% Acquisitions $ 6,731,000 5.7% Foreign Exchange ($ 3,441,000) (2.9%) --------------------------------------------------- Total Change $ 13,798,000 11.8% ================================================== This increase in net sales from internal growth is attributable to increased unit shipments of North American and European plumbing and heating valves. The growth in net sales from acquired companies is due to the inclusion of Cazzaniga. Excluding the acquired revenue of Cazzaniga and the impact of foreign exchange, shipments of European plumbing and heating valves were 16.9% higher than last year. The decrease in foreign exchange is principally due to the devaluation of the Euro during the three month period ended March 31, 2000 compared to the comparable prior year period. Watts monitors its net sales in three geographical segments: North America, Europe and Asia. As outlined below, North America, Europe and Asia accounted for 75.3%, 22.0%, and 2.7% of net sales, respectively, in the three months ended March 31, 2000 compared to 77.9%, 18.9%, and 3.2% respectively in the three months ended March 31, 1999. The Company's net sales in these groups for the three months ended March 31, 2000 and 1999 were as follows: 3/31/00 3/31/99 Change ------------- ------------ ------------ North America $98,460,000 $91,095,000 $7,365,000 Europe 28,786,000 22,106,000 6,680,000 Asia 3,524,000 3,771,000 (247,000) ------------- ------------ ------------ Total $130,770,000 $116,972,000 $13,798,000 ============= ============ ============ The increase in North America is due to increased unit sales. The increase in Europe is due to the Cazzaniga acquisition and increased unit sales, which were partially offset by the devaluation of the Euro. Gross profit increased $4,605,000 (11.0%), but decreased as a percentage of net sales from 35.8% to 35.6%. This percentage reduction is attributable to costs associated with relocating certain manufacturing equipment and increased freight expenses, partially offset by increased gross margins on net sales in Europe. Selling, general and administrative expenses increased $1,145,000 (3.8%) to $31,180,000 and decreased as a percentage of sales from 25.7% to 23.8%. This increase is attributable to the inclusion of selling, general and administrative expenses of Cazzaniga and increased variable selling 10
expenses. These were partially offset by the Euro's devaluation and reductions in corporate headquarters expenses. Operating income in the three months ended March 31, 2000 increased $3,460,000 (29.2%) to $15,313,000 due to the increased gross profit and decreased selling, general and administrative expenses on a percentage of sales basis. The Company's operating income by segment for the three months ended March 31, 2000 and 1999 were as follows: 3/31/00 3/31/99 Change ------------ ------------ ------------ North America $ 14,294,000 $ 13,184,000 1,110,000 Europe 4,117,000 2,177,000 1,940,000 Asia 19,000 179,000 (160,000) Corporate Expenses and All Other (3,117,000) (3,687,000) 570,000 ------------ ------------ ------------ Total $ 15,313,000 $ 11,853,000 $ 3,460,000 ============ ============ ============ The increase in North America is due to increased gross profit. The increase in Europe is primarily due to increased net sales and the Cazzaniga acquisition. Interest expense increased $1,182,000 in the quarter ended March 31, 2000, primarily due to the increased effective rate of borrowing and increased borrowings to finance the Cazzaniga acquisition. The Company's effective tax rate for continuing operations increased from 33.8% to 36.1%. The increase is primarily attributable to acquired companies operating in higher tax rate jurisdictions than the rest of the Company, tax planning strategies favorably impacting prior periods and a revised tax structure required to execute the spin-off of the industrial, oil and gas businesses. Net income for the three months ended March 31, 2000 increased $1,035,000 (15.0%) to $7,940,000 or $ .30 per common share on a diluted basis compared to $.26 per common share for the three months ended March 31, 1999 on a diluted basis. The impact of foreign exchange, primarily due to the devaluation of the Euro, decreased net income $.01 per common share on a diluted basis in the period ended March 31, 2000. Liquidity and Capital Resources During the three-month period ended March 31, 2000, the Company generated $5,681,000 in cash flow, from continuing operations, which was used to fund the purchase of $4,226,000 in capital equipment and pay cash dividends to common shareholders. Capital expenditures were primarily for manufacturing machinery and equipment as part of the Company's commitment to continuously improve its manufacturing capabilities. The Company's capital expenditure budget for the twelve months ended December 31, 2000 is $17,500,000. The Company also reduced long term debt through the use of existing cash balances. 11
During the year ended December 31, 1999, the Company maintained a $125,000,000 line of credit which was amended coincident with the spin off of CIRCOR. The Company's amended facility in effect as of March 31, 2000 is an unsecured $100,000,000 line of credit to support the Company's acquisition program, working capital requirements of acquired companies, and for general corporate purposes. At March 31, 2000, the Company had $20,000,000 outstanding on the line of credit and was in compliance with all banking covenants related to this facility. As of March 31, 2000, the Company maintained a syndicated credit facility with a group of European banks in the amount of 40,000,000 Euros. This credit facility has several tranches which provide credit to the Company for a period up to five (5) years. The purpose of this credit facility is to fund acquisitions in Europe, support the working capital requirements of acquired companies, and for general corporate purposes. As of March 31, 2000, 20,142,000 Euros ($19,284,000) were borrowed under this line of credit. Working capital at March 31, 2000 was $142,449,000 compared to $141,740,000 at December 31, 1999. The ratio of current assets to current liabilities was 2.4 to 1 at March 31, 2000 and 2.3 to 1 at December 31, 1999. Cash and cash equivalents were $6,534,000 at March 31, 2000, compared to $13,016,000 at December 31, 1999. Debt as a percentage of total capital employed was 35.8% at March 31, 2000 compared to 37.4% at December 31, 1999. The Company anticipates that available funds and those funds provided from current operations will be sufficient to meet current operating requirements and anticipated capital expenditures for at least the next 24 months. The Company from time to time is involved with environmental proceedings and other litigation proceedings and incurs costs on an ongoing basis related to these matters. The Company has not incurred material expenditures in fiscal 2000 in connection with any of these matters. See Part II, Item 1, Legal Proceedings. YEAR 2000 COMPLIANCE The Company's comprehensive program to address potential exposures to the Year 2000 issues is complete. Since January 1, 2000 the Company has had no business interruptions due to the Year 2000 issues. The Company is not aware of any incidents or events caused by the Year 2000 issue that have had or could have a material adverse effect on the results of operations or financial condition. CONVERSION TO THE EURO On January 1, 1999, 11 of the 15 member countries of the European Union adopted the Euro as their common legal currency and established fixed conversion rates between their existing sovereign currencies and the Euro. The Euro trades on currency exchanges and is available for non-cash transactions. The introduction of the Euro will affect the Company as the Company has manufacturing and distribution facilities in several of the member countries and trades extensively 12
across Europe. The long-term competitive implications of the conversion are currently being assessed by the Company, however, the Company will experience an immediate reduction in the risks associated with foreign exchange. At this time, the Company is not anticipating that any significant costs will be incurred due to the introduction and conversion to the Euro. The Company is in the process of implementing systems to receive and make payments in Euros. The Company anticipates these systems will be in place by January 1, 2002. OTHER Certain statements contained herein are forward looking. Many factors could cause actual results to differ from these statements, including loss of market share through competition; introduction of competing products by other companies; pressure on prices from competitors, suppliers, and/or customers; regulatory obstacles; lack of acceptance of new products; changes in the plumbing and heating and water quality markets; changes in global demand for the Company's products; changes in distribution of the Company's products; interest rates; foreign exchange fluctuations; cyclical nature of industries in which the Company markets certain of its products and general and economic factors in markets where the Company's products are sold, manufactured or marketed; and other factors discussed in the Company's reports filed with the Securities and Exchange Commission. In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The Company will adopt SFAS 133 on January 1, 2001. Its impact on the combined financial statements is still being evaluated, but is not expected to be material. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition." An amendment in March 2000 delayed the effective date until the second quarter of 2000. The Company is reviewing the requirements of this standard, but does not expect it will have material impact on the consolidated financial statements. PART II Item 1. Legal Proceedings Environmental and Other Litigation Matters The Company, like other worldwide manufacturing companies, is subject to a variety of potential liabilities connected with its business operations, including potential liabilities and expenses associated with possible product defects or failures and compliance with environmental laws. The Company maintains product liability and other insurance coverage which it believes to be generally in accordance with industry practices. Nonetheless, such insurance coverage may not be adequate to protect the Company fully against substantial damage claims which may arise from product defects and failures. 13
James Jones Litigation On June 25, 1997, Nora Armenta sued James Jones Company, Mueller Co. and Tyco International (U.S.) Inc., the parent companies of James Jones, and Watts Industries, Inc., which formerly owned James Jones, in the California Superior Court for Los Angeles County with a complaint that sought tens of millions of dollars in damages. By this complaint and an amended complaint filed on November 4, 1998 ("First Amended Complaint"), Armenta, a former employee of James Jones, sued on behalf of 34 municipalities as a qui tam plaintiff under the California False Claims Act. Late in 1998, the Los Angeles Department of Water and Power ("DWP") intervened. Of the remaining 33 named municipalities, four (Burbank, Pomona, Santa Monica and South Gate) chose to intervene shortly before the Court-imposed deadline of July 15, 1999. The municipality of South Gate has withdrawn its intervention and will participate as a non-intervening city. The case will now go forward with the municipalities that have intervened. The First Amended Complaint alleges that the Company's former subsidiary (James Jones Company) sold products that did not meet contractually specified standards used by the named municipalities for their water systems and falsely certified that such standards had been met. Armenta claims that these municipalities were damaged by their purchase of these products, and seeks treble damages, legal costs, attorneys' fees and civil penalties under the False Claims Act. The DWP's intervention filed on December 9, 1998 adopted the First Amended Complaint and added claims for breach of contract, fraud and deceit, negligent misrepresentation, and unjust enrichment. The DWP seeks past and future reimbursement costs, punitive damages, contract difference in value damages, treble damages, civil penalties under the False Claims Act and costs of the suit. One of the First Amended Complaint's allegations is the suggestion that because some of the purchased James Jones products are out of specification and contain more lead than the `85 bronze specified, a risk to public health might exist. This contention is predicated on the average difference of about 2% lead content in `81 bronze (6% to 8% lead) and `85 bronze (4% to 6% lead) alloys and the assumption that this would mean increased consumable lead in public drinking water. The evidence and discovery available to date indicate that this is not the case. In addition, bronze that does not contain more than 8% lead, like '81 bronze, is approved for home plumbing fixtures by the City of Los Angeles, and the Federal Environmental Protection Agency defines metal for pipe fittings with no more than 8% lead as "lead free" under Section 1417 of the Federal Safe Drinking Water Act. The Company intends to contest this matter vigorously, and discovery is currently under way. Presently, the Company cannot determine whether any loss will result from this litigation. See Note 8 of the Notes to the Consolidated Financial Statements. 14
Environmental Certain of the Company's operations generate solid and hazardous wastes, which are disposed of elsewhere by arrangement with the owners or operators of disposal sites or with transporters of such waste. The Company's foundry and other operations are subject to various federal, state and local laws and regulations relating to environmental quality. Compliance with these laws and regulations requires the Company to incur expenses and monitor its operations on an ongoing basis. The Company cannot predict the effect of future requirements on its capital expenditures, earnings or competitive position due to any changes in federal, state or local environmental laws, regulations or ordinances. The Company is currently a party to or otherwise involved in various administrative or legal proceedings under federal, state or local environmental laws or regulations involving a number of sites. During the quarter ending March 31, 1998, the Company received an administrative order from the New Hampshire Department of Environmental Services (the "NHDES") with respect to management and storage of process wastes and various recordkeeping and permit renewal rules at its Franklin, New Hampshire operation. The NHDES has acknowledged compliance with its administrative order and has agreed by a proposed consent order filed on May 1, 2000 to a monetary assessment of $215,126.00 and a supplemental environmental project of at least $350,000.00. Based on facts presently known to it, the Company does not believe that the outcome of these environmental proceedings will have a material adverse effect on its financial condition or results of operations. Given the nature and scope of the Company's manufacturing operations, there can be no assurance that the Company will not become subject to other environmental proceedings and liabilities in the future which may be material to the Company. See Note 8 of the Notes to the Consolidated Financial Statements. Other Litigation Other lawsuits and proceedings or claims, arising from the ordinary course of operations, are also pending or threatened against the Company and its subsidiaries. Based on the facts currently known to it, the Company does not believe that the ultimate outcome of these other litigation matters will have a material adverse effect on its financial condition or results of operation. See Note 8 of the Notes to the Consolidated Financial Statements. Item 6. Exhibits and Reports on Form 8-K. (a) The exhibits are furnished elsewhere in this report. (b) There were no reports filed on Form 8-K during the quarter ended March 31, 2000. 15
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 10, 2000 By:/s/ Timothy P. Horne ------------ ---------------- Timothy P. Horne Chairman and Chief Executive Officer Date: May 10, 2000 By:/s/ William C. McCartney ------------ -------------------- William C. McCartney Chief Financial Officer and Treasurer March -10Q 16
EXHIBIT INDEX Listed and indexed below are all Exhibits filed as part of this report. Exhibit No. Description - ----------- ----------- 3.1 Restated Certificate of Incorporation, as amended. (1) 3.2 Amended and Restated By-Laws, as amended May 11, 1999 (2) 11 Computation of Earnings per Share (3) 27 Financial Data Schedule - March 31, 2000 (1) Incorporated by reference to the relevant exhibit to the Registrant's Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 28, 1995. (2) Incorporated by reference to the relevant exhibit to the Registrant's Form 10-Q for the quarter ended March 31, 1999. (3) Incorporated by reference to the Notes to Consolidated Financial Statements, Note 4, of this Report. *Filed herewith. 17