Table of Contents

 

 

 

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 September 30, 2012

 

or

 

o  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 x   No o

 

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).    Yesx   No  o

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

 

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 November 1, 2012

Class A Common Stock, $0.10 par value

 

28,404,158

 

 

 

Class B Common Stock, $0.10 par value

 

6,588,680

 

 

 



Table of Contents

 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

 

INDEX

 

Part I. Financial Information

 

Item 1. Financial Statements

 

 

 

 

 

Consolidated Balance Sheets at September 30, 2012 and December 31, 2011 (unaudited)

 

 

 

 

 

Consolidated Statements of Operations for the Third Quarters and Nine Months Ended September 30, 2012 and October 2, 2011 (unaudited)

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Third Quarters and Nine Months Ended September 30, 2012 and October 2, 2011 (unaudited)

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and October 2, 2011 (unaudited)

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

 

 

Item 2.

 

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

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

Item 4.

 

Controls and Procedures

 

 

 

Part II. Other Information

 

 

 

Item 1.

 

Legal Proceedings

 

 

 

Item 1A.

 

Risk Factors

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

Item 6.

 

Exhibits

 

 

 

Signatures

 

 

Exhibit Index

 

2


 


Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share information)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

209.5

 

$

250.6

 

Short-term investment securities

 

2.1

 

4.1

 

Trade accounts receivable, less allowance for doubtful accounts of $10.5 million at September 30, 2012 and $9.1 million at December 31, 2011

 

219.4

 

207.1

 

Inventories, net:

 

 

 

 

 

Raw materials

 

109.0

 

107.7

 

Work in process

 

23.9

 

28.7

 

Finished goods

 

166.0

 

147.8

 

Total Inventories

 

298.9

 

284.2

 

Prepaid expenses and other assets

 

34.3

 

26.6

 

Deferred income taxes

 

28.1

 

28.3

 

Assets held for sale

 

13.1

 

4.6

 

Total Current Assets

 

805.4

 

805.5

 

PROPERTY, PLANT AND EQUIPMENT:

 

 

 

 

 

Property, plant and equipment, at cost

 

503.2

 

494.8

 

Accumulated depreciation

 

(285.1

)

(268.1

)

Property, plant and equipment, net

 

218.1

 

226.7

 

OTHER ASSETS:

 

 

 

 

 

Goodwill

 

501.0

 

490.4

 

Intangible assets, net

 

149.1

 

154.6

 

Deferred income taxes

 

7.7

 

10.2

 

Other, net

 

9.7

 

10.1

 

TOTAL ASSETS

 

$

1,691.0

 

$

1,697.5

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

128.5

 

$

126.5

 

Accrued expenses and other liabilities

 

129.6

 

109.2

 

Accrued compensation and benefits

 

41.8

 

45.9

 

Current portion of long-term debt

 

77.0

 

2.0

 

Total Current Liabilities

 

376.9

 

283.6

 

LONG-TERM DEBT, NET OF CURRENT PORTION

 

307.8

 

397.4

 

DEFERRED INCOME TAXES

 

55.4

 

58.2

 

OTHER NONCURRENT LIABILITIES

 

38.5

 

38.5

 

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 28,221,643 shares at September 30, 2012 and 29,471,414 shares at December 31, 2011

 

2.8

 

2.9

 

Class B Common Stock, $0.10 par value; 25,000,000 shares authorized; 10 votes per share; issued and outstanding, 6,753,680 shares at September 30, 2012 and 6,953,680 at December 31, 2011

 

0.7

 

0.7

 

Additional paid-in capital

 

438.7

 

420.1

 

Retained earnings

 

486.8

 

515.1

 

Accumulated other comprehensive loss

 

(16.6

)

(19.0

)

Total Stockholders’ Equity

 

912.4

 

919.8

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

1,691.0

 

$

1,697.5

 

 

See accompanying notes to consolidated financial statements.

 

3



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WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in millions, except per share information)

(Unaudited)

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30,
2012

 

October 2,
2011

 

September 30,
2012

 

October 2,
2011

 

Net sales

 

$

361.2

 

$

370.8

 

$

1,096.5

 

$

1,076.4

 

Cost of goods sold

 

231.0

 

235.1

 

704.9

 

689.4

 

GROSS PROFIT

 

130.2

 

135.7

 

391.6

 

387.0

 

Selling, general and administrative expenses

 

93.5

 

92.6

 

291.4

 

287.8

 

Restructuring and other charges, net

 

1.2

 

1.9

 

3.5

 

8.2

 

Goodwill and other long-lived asset impairment charges

 

2.4

 

 

3.0

 

0.3

 

OPERATING INCOME

 

33.1

 

41.2

 

93.7

 

90.7

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

Interest income

 

(0.1

)

(0.2

)

(0.5

)

(0.7

)

Interest expense

 

6.1

 

6.5

 

18.4

 

19.1

 

Other (income) expense, net

 

(0.6

)

(0.3

)

(1.5

)

0.4

 

Total other expense

 

5.4

 

6.0

 

16.4

 

18.8

 

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

 

27.7

 

35.2

 

77.3

 

71.9

 

Provision for income taxes

 

9.0

 

11.6

 

24.4

 

24.3

 

NET INCOME FROM CONTINUING OPERATIONS

 

18.7

 

23.6

 

52.9

 

47.6

 

Income from discontinued operations, net of taxes

 

 

0.1

 

 

1.8

 

NET INCOME

 

$

18.7

 

$

23.7

 

$

52.9

 

$

49.4

 

 

 

 

 

 

 

 

 

 

 

BASIC EPS

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.53

 

$

0.63

 

$

1.46

 

$

1.27

 

Discontinued operations

 

 

 

 

0.05

 

NET INCOME

 

$

0.53

 

$

0.63

 

$

1.46

 

$

1.32

 

Weighted average number of shares

 

35.1

 

37.4

 

36.1

 

37.5

 

 

 

 

 

 

 

 

 

 

 

DILUTED EPS

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.53

 

$

0.63

 

$

1.46

 

$

1.26

 

Discontinued operations

 

 

 

 

0.05

 

NET INCOME

 

$

0.53

 

$

0.63

 

$

1.46

 

$

1.31

 

Weighted average number of shares

 

35.2

 

37.5

 

36.3

 

37.7

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.11

 

$

0.11

 

$

0.33

 

$

0.33

 

 

See accompanying notes to consolidated financial statements.

 

4



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WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in millions)

(Unaudited)

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30,
2012

 

October 2,
2011

 

September 30,
2012

 

October 2,
2011

 

Net income

 

$

18.7

 

$

23.7

 

$

52.9

 

$

49.4

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

25.1

 

(40.1

)

1.9

 

8.6

 

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

Amortization of prior service cost included in net periodic pension cost

 

 

0.1

 

 

0.3

 

Amortization of net losses included in net periodic pension cost

 

0.2

 

0.7

 

0.5

 

2.1

 

Defined benefit pension plans

 

0.2

 

0.8

 

0.5

 

2.4

 

Other comprehensive income (loss), net of tax

 

25.3

 

(39.3

)

2.4

 

11.0

 

Comprehensive income (loss)

 

$

44.0

 

(15.6

)

$

55.3

 

60.4

 

 

See accompanying notes to consolidated financial statements.

 

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WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,
2012

 

October 2,
2011

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

52.9

 

$

49.4

 

Less: Income from discontinued operations, net of taxes

 

 

1.8

 

Net income from continuing operations

 

52.9

 

47.6

 

Adjustments to reconcile net income from continuing operations to net cash provided by continuing operating activities:

 

 

 

 

 

Depreciation

 

25.0

 

24.6

 

Amortization of intangibles

 

12.1

 

13.5

 

Stock-based compensation

 

4.2

 

7.0

 

Deferred income taxes benefit

 

(1.1

)

(2.4

)

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

 

3.5

 

0.1

 

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

 

 

 

 

 

Accounts receivable

 

(12.4

)

(13.5

)

Inventories

 

(16.7

)

(16.8

)

Prepaid expenses and other assets

 

(8.6

)

(2.2

)

Accounts payable, accrued expenses and other liabilities

 

14.8

 

(1.4

)

Net cash provided by continuing operations

 

73.7

 

56.5

 

INVESTING ACTIVITIES

 

 

 

 

 

Additions to property, plant and equipment

 

(18.8

)

(16.4

)

Proceeds from the sale of property, plant and equipment

 

1.1

 

0.6

 

Purchase of short-term investment securities

 

(2.1

)

(4.1

)

Proceeds from the sale of short-term investment securities

 

4.1

 

4.1

 

Other

 

 

(0.3

)

Business acquisitions, net of cash acquired

 

(17.5

)

(162.9

)

Net cash used in investing activities

 

(33.2

)

(179.0

)

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from long-term debt

 

9.2

 

184.0

 

Payments of long-term debt

 

(23.4

)

(116.0

)

Payment of capital leases and other

 

(2.1

)

(1.9

)

Proceeds from share transactions under employee stock plans

 

9.4

 

3.4

 

Tax benefit of stock awards exercised

 

1.6

 

0.5

 

Dividends

 

(12.1

)

(12.3

)

Payments to repurchase common stock

 

(65.8

)

(27.2

)

Net cash provided by (used in) financing activities

 

(83.2

)

30.5

 

Effect of exchange rate changes on cash and cash equivalents

 

1.6

 

8.9

 

Net cash provided in operating activities of discontinued operations

 

 

0.2

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

(41.1

)

(82.9

)

Cash and cash equivalents at beginning of year

 

250.6

 

329.2

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

209.5

 

$

246.3

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

Acquisition of businesses:

 

 

 

 

 

Fair value of assets acquired

 

$

26.8

 

$

219.1

 

Cash paid, net of cash acquired

 

17.5

 

162.9

 

Liabilities assumed

 

$

9.3

 

$

56.2

 

Acquisition of fixed assets under financing agreements

 

$

0.8

 

$

4.3

 

Issuance of stock under management stock purchase plan

 

$

0.7

 

$

0.4

 

 

 

 

 

 

 

CASH PAID FOR:

 

 

 

 

 

Interest

 

$

12.7

 

$

13.2

 

Income taxes

 

$

20.8

 

$

26.2

 

 

See accompanying notes to consolidated financial statements.

 

6


 


Table of Contents

 

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 September 30, 2012, the Consolidated Statements of Operations for the third quarter and nine months ended September 30, 2012 and October 2, 2011, the Consolidated Statements of Comprehensive Income (Loss) for the third quarter and nine months ended September 30, 2012 and October 2, 2011, and the Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and October 2, 2011.

 

The balance sheet at December 31, 2011 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, 2011.  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, 2011. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2012.

 

The Company operates on a 52-week fiscal year ending on December 31st.  Any quarterly or nine-month data contained in this Quarterly Report on Form 10-Q generally reflect the results of operations for a 13-week period or 39-week period, respectively.

 

Certain amounts in the 2011 consolidated financial statements have been reclassified to permit comparison with the 2012 presentation.  These reclassifications had no effect on reported results of operations or stockholders’ equity.

 

2. Accounting Policies

 

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.

 

Goodwill and Long-Lived Assets

 

The changes in the carrying amount of goodwill by geographic segment are as follows:

 

 

 

October 2, 2011

 

 

 

 

 

Gross Balance

 

Accumulated Impairment Losses

 

Net
Goodwill

 

 

 

Balance
January 1,
2011

 

Acquired
During
the
Period

 

Foreign
Currency
Translation
and Other

 

Balance
October 2,
2011

 

Balance
January 1,
2011

 

Impairment
Loss During
the Period

 

Balance
October 2,
2011

 

October 2,
2011

 

 

 

(in millions)

 

North America

 

$

213.8

 

$

4.3

 

$

 

$

218.1

 

$

(22.0

)

$

 

$

(22.0

)

$

196.1

 

Europe, Middle East and Africa (EMEA)

 

228.1

 

65.7

 

(1.8

)

292.0

 

 

 

 

292.0

 

Asia

 

8.1

 

4.3

 

0.3

 

12.7

 

 

 

 

12.7

 

Total

 

$

450.0

 

$

74.3

 

$

(1.5

)

$

522.8

 

$

(22.0

)

$

 

$

(22.0

)

$

500.8

 

 

 

 

September 30, 2012

 

 

 

 

 

Gross Balance

 

Accumulated Impairment Losses

 

Net Goodwill

 

 

 

Balance
January 1,
2012

 

Acquired
During the
Period

 

Foreign
Currency
Translation
and Other

 

Balance
September 30,
2012

 

Balance
January 1,
2012

 

Impairment
Loss During
the Period

 

Balance
September 30,
2012

 

September 30,
2012

 

 

 

(in millions)

 

North America

 

$

215.6

 

$

13.3

 

$

(1.5

)

$

227.4

 

$

(23.2

)

$

(1.0

)

$

(24.2

)

$

203.2

 

EMEA

 

285.3

 

 

(0.2

)

285.1

 

 

 

 

285.1

 

Asia

 

12.7

 

 

 

12.7

 

 

 

 

12.7

 

Total

 

$

513.6

 

$

13.3

 

$

(1.7

)

$

525.2

 

$

(23.2

)

$

(1.0

)

$

(24.2

)

$

501.0

 

 

On January 31, 2012, the Company completed the acquisition of tekmar Control Systems (tekmar) in a share purchase transaction.  A designer and manufacturer of control systems used in heating, ventilation, and air conditioning applications, tekmar is expected to enhance the Company’s hydronic systems product offerings in the U.S. and Canada.  The initial purchase price paid was CAD $18.0 million, with post-closing adjustments related to working capital and an earnout based on the attainment of certain future earnings levels.  The initial purchase price paid was equal to approximately $17.8 million based on the exchange rate of Canadian dollar to U.S.

 

7



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dollar as of January 31, 2012.  The total purchase price will not exceed CAD $26.2 million.  The Company is accounting for the transaction as a business combination.  The Company completed a preliminary purchase price allocation that resulted in the recognition of $13.3 million in goodwill and $10.1 million in intangible assets.  Intangible assets consist primarily of acquired technology with an estimated life of 10 years, distributor relationships with an estimated life of 7 years, and a trade name with an estimated life of 20 years.  The goodwill is not expected to be deductible for tax purposes.

 

The Company has made numerous acquisitions over the years which included the recognition of a significant amount of goodwill and indefinite-lived intangible assets.  Goodwill and indefinite-lived intangible assets are tested for impairment at least annually or more frequently if events or circumstances indicate that it is “more likely than not” that they might be impaired, such as from a change in business conditions. The Company performs its annual impairment assessment of goodwill and indefinite-lived intangible assets in the fourth quarter of each year.  Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, and determination of the fair value of each reporting unit. The Company has determined it has eight reporting units including Residential and Commercial, Dormont, Drains & Water re-use, BRAE, Water Quality, EMEA, Blücher, and Asia.  Our Water Quality reporting unit does not have goodwill.

 

As of October 30, 2011, the annual impairment analysis date, the fair value of the Company’s EMEA reporting unit exceeded the carrying value by approximately 9%.  Operating results for the EMEA reporting unit have been hindered by the downturn in the economic environment in Europe and continued to fall below expectations during the six months ended July 1, 2012, triggering the decision to update the impairment analysis during the second quarter.  As a result of the updated fair value assessment, it was determined that the fair value of the EMEA reporting unit continues to exceed its carrying value, a result of a decrease in discount rate and a reduction of net debt offset by lower short-term projections.  The Company also performed an analysis on the long-lived assets in the EMEA reporting unit as a result of the triggering event and concluded that these assets were not impaired.

 

Although the EMEA reporting unit met expectations during the quarter ended September 30, 2012, should the EMEA reporting unit’s operating results decline further because the European marketplace deteriorates beyond our current expectations or should interest rates increase, then the reporting unit’s goodwill may be at risk for impairment in the future. The EMEA reporting unit’s goodwill balance as of September 30, 2012 was $210.7 million.

 

Operating results for the Blue Ridge Atlantic Enterprises, Inc. (BRAE) reporting unit in North America continued to fall below expectations during the nine months ended September 30, 2012, triggering the decision to update the impairment analysis during the third quarter.  As a result, the Company recorded a pre-tax goodwill impairment charge of $1.0 million.  Because expectations have been lowered, the Company also reviewed the BRAE earnout calculation and recorded a $1.0 million reduction in the contingent earnout liability during the third quarter (see Note 5). The Company estimated the fair value of the reporting unit using the expected present value of future cash flows.  The BRAE reporting unit’s goodwill balance as of September 30, 2012 was $0.3 million.

 

Intangible assets with estimable lives and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of intangible assets with estimable lives and other long-lived assets are measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted pretax cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the impairment loss recognized is the amount by which the carrying amount of the asset or asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future pretax operating cash flows or appraised values, depending on the nature of the asset. The Company determines the discount rate for this analysis based on the weighted average cost of capital based on the market and guideline public companies for the related business, and does not allocate interest charges to the asset or asset group being measured.  Judgment is required to estimate future operating cash flows.

 

Intangible assets include the following:

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

 

 

(in millions)

 

Patents

 

$

16.5

 

$

(11.5

)

$

5.0

 

$

16.5

 

$

(10.8

)

$

5.7

 

Customer relationships

 

133.8

 

(66.5

)

67.3

 

135.8

 

(57.7

)

78.1

 

Technology

 

28.6

 

(8.7

)

19.9

 

19.8

 

(7.1

)

12.7

 

Trade Names

 

13.3

 

(1.7

)

11.6

 

13.4

 

(0.8

)

12.6

 

Other

 

8.6

 

(5.5

)

3.1

 

8.5

 

(5.4

)

3.1

 

Total amortizable intangibles

 

200.8

 

(93.9

)

106.9

 

194.0

 

(81.8

)

112.2

 

Indefinite-lived intangible assets

 

42.2

 

 

42.2

 

42.4

 

 

42.4

 

Total

 

$

243.0

 

$

(93.9

)

$

149.1

 

$

236.4

 

$

(81.8

)

$

154.6

 

 

Aggregate amortization expense for amortizable intangible assets for the third quarters of 2012 and 2011 was $3.7 million and $4.2 million, respectively, and for the first nine months of 2012 and 2011 was $12.1 million and $13.5 million, respectively.  Additionally, future amortization expense for the next five years on amortizable intangible assets is expected to be approximately $3.8 million for the remainder of 2012, $15.0 million for 2013, $14.8 million for 2014, $14.5 million for 2015 and $14.1 million for 2016. Amortization expense is recorded on a straight-line basis over the estimated useful lives of the intangible assets. The weighted-average remaining life of total amortizable intangible assets is 9.7 years. Patents, customer relationships, technology, trade names and other

 

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amortizable intangibles have weighted-average remaining lives of 6.6 years, 6.8 years, 12.0 years, 11.9 years and 41.8 years, respectively. Intangible assets not subject to amortization consist of certain trademarks and trade names.

 

Stock-Based Compensation

 

The Company maintains three stock incentive plans under which key employees and non-employee members of the Company’s Board of Directors have been granted incentive stock options (ISOs) and nonqualified stock options (NSOs) to purchase the Company’s Class A Common Stock. Only one plan, the 2004 Stock Incentive Plan, is currently available for the grant of new stock options, which are currently being granted only to employees.  Under the 2004 Stock Incentive Plan, options become exercisable over a four-year period at the rate of 25% per year and expire ten years after the grant date. ISOs and NSOs granted under the plans may have exercise prices of not less than 100% and 50% of the fair market value of the Class A Common Stock on the date of grant, respectively. The Company’s current practice is to grant all options at fair market value on the grant date. The Company issued 375,800 and 280,000 options to key employees under the 2004 Stock Incentive Plan in the third quarter and in the first nine months of 2012 and 2011, respectively.

 

The fair value of each option issued under the 2004 Stock Incentive Plan is estimated on the date of grant, using the Black-Scholes-Merton Model, based on the following weighted average assumptions:

 

 

 

2012

 

2011

 

Expected life (years)

 

6.0

 

6.0

 

Expected stock price volatility

 

41.2

%

40.9

%

Expected dividend yield

 

1.2

%

1.5

%

Risk-free interest rate

 

0.9

%

1.6

%

 

The above assumptions were used to determine the weighted average grant-date fair value of stock options of $13.49 and $10.19 in 2012 and 2011, respectively.

 

The Company has also granted shares of restricted stock to key employees and stock awards to non-employee members of the Company’s Board of Directors under the 2004 Stock Incentive Plan.  Stock awards to non-employee members of the Company’s Board of Directors vest immediately, and employees restricted stock awards vest over a three-year period at the rate of one-third per year. The restricted stock awards are amortized to expense on a straight-line basis over the vesting period. The Company issued 152,765 and 107,786 shares of restricted stock under the 2004 Stock Incentive Plan in the third quarters of 2012 and 2011, respectively.  The Company issued 152,765 and 109,186 shares of restricted stock under the 2004 Stock Incentive Plan in the first nine months of 2012 and 2011, respectively.  During the third quarter and first nine months of 2012, the Company granted an aggregate of 16,835 of stock awards to non-employee members of the Company’s Board of Directors under the 2004 Stock Incentive Plan, of which 12,025 were deferred pursuant to the Company’s stock deferral program.

 

The Company also has a Management Stock Purchase Plan that allows for the purchase of restricted stock units (RSUs) by key employees.  On an annual basis, key employees may elect to receive a portion of their annual incentive compensation in RSUs instead of cash.  Each RSU represents one share of Class A Common Stock and is purchased by the employee at 67% of the fair market value of the Company’s Class A Common Stock on the date of grant.  RSUs vest annually over a three-year period from the grant date and receipt of the shares underlying RSUs is deferred for a minimum of three years or such greater number of years as is chosen by the employee.  An aggregate of 2,000,000 shares of Class A Common Stock may be issued under the Management Stock Purchase Plan.  The Company granted 63,739 RSUs and 96,454 RSUs in the first nine months of 2012 and 2011, respectively.

 

The fair value of each RSU issued under the Management Stock Purchase Plan is estimated on the date of grant, using the Black-Scholes-Merton Model, based on the following weighted average assumptions:

 

 

 

2012

 

2011

 

Expected life (years)

 

3.0

 

3.0

 

Expected stock price volatility

 

38.3

%

44.9

%

Expected dividend yield

 

1.1

%

1.2

%

Risk-free interest rate

 

0.4

%

1.2

%

 

The above assumptions were used to determine the weighted average grant-date fair value of RSUs of $15.68 and $16.25 in 2012 and 2011, respectively.

 

A more detailed description of each of these stock and stock option plans can be found in Note 12 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

On May 23, 2012, William C. McCartney provided notice of his intention to retire as Chief Financial Officer of the Company.  On

 

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Table of Contents

 

June 14, 2012, the Company entered into a retention agreement with Mr. McCartney.  Pursuant to the retention agreement, Mr. McCartney will continue employment with the Company until December 14, 2012, and will assist the Company in identifying a successor and transitioning his responsibilities and duties to the new Chief Financial Officer. Pursuant to Mr. McCartney fulfilling his duties under the retention agreement, the Company will record a pre-tax charge of approximately $1.5 million over the retention period, consisting of expected cash payments of $0.7 million and a non-cash charge of $0.8 million for the modification of stock options and restricted stock awards.  In addition, Mr. McCartney will receive a performance bonus he would have been entitled to had he been employed by the Company through December 31, 2012 (see Note 13 regarding appointment of new Executive Vice President and Chief Financial Officer).

 

On January 26, 2011, Patrick S. O’Keefe resigned from his positions as Chief Executive Officer, President and Director.  Pursuant to a separation agreement, the Company recorded a charge of $6.3 million, consisting of $3.3 million in expected cash severance and a non-cash charge of $3.0 million for the modification of stock options and restricted stock awards.

 

Shipping and Handling

 

The Company’s shipping costs included in selling, general and administrative expenses were $9.5 million and $9.7 million for the third quarters of 2012 and 2011, respectively, and were $28.3 million and $28.4 million for the first nine months of 2012 and 2011, respectively.

 

Research and Development

 

Research and development costs included in selling, general and administrative expenses were $5.0 million and $5.3 million for the third quarters of 2012 and 2011, respectively, and were $15.7 million and $16.0 million for the first nine months of 2012 and 2011, respectively.

 

Taxes, Other than Income Taxes

 

Taxes assessed by governmental authorities on sale transactions are recorded on a net basis and excluded from sales in the Company’s consolidated statements of operations.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

New Accounting Standards

 

In December 2011, the Financial Accounting Standards Board (FASB) issued an amendment to the accounting guidance for disclosure of offsetting assets and liabilities and related arrangements. The amendment expands the disclosure requirements in that entities will be required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The amendment is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013, and shall be applied retrospectively. The Company does not expect that the adoption of this accounting pronouncement will have a material impact on its financial statements.

 

In July 2012, the FASB issued an amendment to the requirements for indefinite-lived intangible asset impairment testing. The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is more likely than not that the fair value of an indefinite-lived intangible asset is greater than its carrying amount, then performing the impairment test is unnecessary. The Company intends to adopt this new standard effective with its annual impairment testing date of October 30, for the year ending December 31, 2012.

 

3. Discontinued Operations and Assets Held For Sale

 

In the first quarter of 2010, the Company recorded an estimated reserve of $5.3 million in discontinued operations in connection with its investigation of potential violations of the Foreign Corrupt Practices Act (FCPA) at Watts Valve (Changsha) Co., Ltd. (CWV), a former indirect wholly-owned subsidiary of the Company in China. On October 13, 2011, the Company entered into a settlement for $3.8 million with the Securities and Exchange Commission to resolve allegations concerning potential violations of the FCPA at CWV. During the quarter ended July 3, 2011, the Company revised the reserve to $3.8 million based on the settlement.  See Note 3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

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Table of Contents

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30,
2012

 

October 2,
2011

 

September 30,
2012

 

October 2,
2011

 

 

 

(in millions)

 

Reserve release - FCPA matter (CWV)

 

$

 

$

 

$

 

$

1.7

 

Gain on disposal — TEAM

 

 

0.1

 

 

0.4

 

Income before income taxes

 

 

0.1

 

 

2.1

 

Income tax expense

 

 

 

 

0.3

 

Income from discontinued operations, net of taxes

 

$

 

$

0.1

 

$

 

$

1.8

 

 

During the quarter ended July 1, 2012, the Company’s Board of Directors approved the disposal of an operation within the Company’s North America segment.  The Company evaluated the fair value less cost to sell the net assets and determined that the fair value exceeded the carrying value. The Company recorded the net assets of $10.7 million, representing gross assets of $13.6 million less liabilities of $2.9 million, as assets held for sale.  The revenues and results of operations are not material to the Company.  The Company will not have continuing involvement after a sale is completed.

 

4. Financial Instruments and Derivative Instruments

 

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including foreign currency derivatives, deferred compensation plan assets and related liability, and contingent consideration. There were no cash flow hedges as of September 30, 2012 and December 31, 2011.  The fair values of these certain financial assets and liabilities were determined using the following inputs at September 30, 2012 and December 31, 2011:

 

 

 

Fair Value Measurements at September 30, 2012 Using:

 

 

 

 

 

Quoted Prices in
Active
Markets for Identical
Assets

 

Significant Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

Plan asset for deferred compensation(1)

 

$

4.3

 

$

4.3

 

$

 

$

 

Total assets

 

$

4.3

 

$

4.3

 

$

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

Plan liability for deferred compensation(2)

 

$

4.3

 

$

4.3

 

$

 

$

 

Contingent consideration(3)

 

5.4

 

 

 

5.4

 

Total liabilities

 

$

9.7

 

$

4.3

 

$

 

$

5.4

 

 

 

 

Fair Value Measurements at December 31, 2011 Using:

 

 

 

 

 

Quoted Prices in Active
Markets for Identical Assets

 

Significant Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

Plan asset for deferred compensation(1)

 

$

4.0

 

$

4.0

 

$

 

$

 

Total assets

 

$

4.0

 

$

4.0

 

$

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

Plan liability for deferred compensation(2)

 

$

4.0

 

$

4.0

 

$

 

$

 

Contingent consideration(3)

 

1.1

 

 

 

1.1

 

Total liabilities

 

$

5.1

 

$

4.0

 

$

 

$

1.1

 

 


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

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

(3)         Included in other noncurrent liabilities and accrued expenses and other liabilities on the Company’s consolidated balance sheet.

 

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, 2011 to September 30, 2012.

 

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Table of Contents

 

 

 

Balance

 

Purchases,

 

Total realized and
unrealized gains
(losses) included in:

 

Balance

 

 

 

December 31,
2011

 

sales,
settlements, net

 

Earnings

 

Comprehensive
income

 

September 30,
2012

 

 

 

(in millions)

 

Contingent consideration

 

$

1.1

 

$

5.1

 

$

(0.9

)

$

0.1

 

$

5.4

 

 

In 2010, a contingent liability of $1.9 million was recognized as an estimate of the acquisition date fair value of the contingent consideration in the BRAE acquisition. This liability was classified as Level 3 under the fair value hierarchy as it was based on the weighted probability of achievement of a future performance metric as of the date of the acquisition, which was not observable in the market.  During the year ended December 31, 2011, and the nine months ended September 30, 2012, the estimate of the fair value of the contingent consideration was reduced to $1.1 million and subsequently to $0.2 million, based on the revised probability of achievement of the future performance metric.  Failure to meet the performance metric would reduce this liability to zero, while complete achievement would increase this liability to the full remaining purchase price of $4.8 million.

 

In connection with the tekmar Control Systems acquisition in 2012, a contingent liability of $5.1 million was recognized as the estimate of the acquisition date fair value of the contingent consideration (see Note 12). This liability was classified as Level 3 under the fair value hierarchy as it was based on the probability of achievement of a future performance metric as of the date of the acquisition, which was not observable in the market.  Failure to meet the performance metrics would reduce this liability to zero; while complete achievement would increase this liability to the full remaining purchase price of CAD $8.2 million.

 

Short-term investment securities as of September 30, 2012 consist of a certificate of deposit with a remaining maturity of greater than three months at the date of purchase, for which the carrying amount is a reasonable estimate of fair value.

 

Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase and consist primarily of certificates of deposit and money market funds, for which the carrying amount is a reasonable estimate of fair value.

 

The Company uses financial instruments from time to time to enhance its ability to manage risk, including foreign currency and commodity pricing exposures, which exist as part of its ongoing business operations. The use of derivatives exposes the Company to counterparty credit risk for nonperformance and to market risk related to changes in currency exchange rates and commodity prices. The Company manages its exposure to counterparty credit risk through diversification of counterparties. The Company’s counterparties in derivative transactions are substantial commercial banks with significant experience using such derivative instruments. The impact of market risk on the fair value and cash flows of the Company’s derivative instruments is monitored and the Company restricts the use of derivative financial instruments to hedging activities. The Company does not enter into contracts for trading purposes nor does the Company enter into any contracts for speculative purposes. The use of derivative instruments is approved by senior management under written guidelines.

 

The Company has exposure to a number of foreign currency rates, including the Canadian Dollar, the Euro, the Chinese Yuan and the British Pound. To manage this risk, the Company generally uses a layering methodology whereby at the end of any quarter the Company has generally entered into forward exchange contracts which hedge approximately 50% of the projected intercompany purchase transactions for the next twelve months. The Company primarily uses this strategy for the purchases between Canada and the U.S. The average volume of contracts can vary but generally is approximately $2 million to $15 million in open contracts at the end of any given quarter. At September 30, 2012, there were no open contracts.  The Company accounts for the forward exchange contracts as an economic hedge. Realized and unrealized gains and losses on the contracts are recognized in other (income) expense in the consolidated statement of operations. 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 denominated transactions.

 

Fair Value

 

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

 

The fair values of the Company’s 5.47% senior notes due 2013, 5.85% senior notes due 2016, and 5.05% senior notes due 2020, are based on a discounted cash flow model using comparable industrial companies, the Company’s credit metrics, the Company’s size, as well as current market interest rates quoted in active markets and are classified within Level 2 of the valuation hierarchy.  The fair value of 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:

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(in millions)

 

Carrying amount

 

$

384.8

 

$

399.4

 

Estimated fair value

 

$

422.4

 

$

440.5

 

 

12



Table of Contents

 

5. Restructuring and Other Charges, Net

 

The Company’s Board of Directors approves all major restructuring programs that involve the discontinuance of product lines or the shutdown of facilities.  From time to time, the Company takes additional restructuring actions, including involuntary terminations that are not part of a major program.  The Company accounts for these costs in the period that the individual employees are notified or the liability is incurred.  These costs are included in restructuring and other charges in the Company’s consolidated statements of operations.   In April 2011, the Board approved an integration program in association with the acquisition of Danfoss Socla S.A.S. (Socla).  The program was designed to integrate certain operations and management structures of Socla with a total estimated pre-tax cost of $6.4 million with costs being incurred through 2012.  As of September 30, 2012, the Company revised its forecast to $4.4 million due to lower than expected severance costs.

 

The Company also periodically initiates other actions which are not part of a major program.  In 2011, the Company initiated restructuring activities with respect to the Company’s operating facilities in Europe, which included the closure of a facility. The Europe restructuring activities are expected to include pre-tax costs of approximately $2.6 million, including costs for severance and shut-down costs. The total net after-tax charge is $1.8 million with costs being incurred through 2012.  In 2012, the Company commenced restructuring activities in North America to relocate certain production activities, which include the closure of two manufacturing sites occurring through 2013.  Total expected costs are $2.8 million, including severance and shutdown costs.  The net after tax charge of $1.8 million will be incurred through the middle of 2013.  As of September 30, 2012, the Company revised its plans to reduce the expected costs to $1.8 million due to the elimination of a plant closure.

 

In March 2010, in connection with the Company’s manufacturing footprint consolidation, the Company closed the operations of Tianjin Watts Valve Company Ltd. (TWVC) and relocated its manufacturing to other facilities. On April 12, 2010, the Company signed a definitive equity transfer agreement with a third party to sell the Company’s equity ownership and remaining assets of TWVC. The sale was finalized in the fourth quarter of 2011. The Company received net proceeds of approximately $6.1 million from the sale and recorded a receivable for the remaining proceeds.  The Company recognized a net pre-tax gain of $7.7 million and an after-tax gain of approximately $11.4 million relating mainly to the recognition of a cumulative translation adjustment and a tax benefit related to the reversal of a tax claw back in China.  During the quarter ended September 30, 2012, the Company recorded a charge of $1.6 million related to an adjustment to the gain on disposal of TWVC.

 

The Company recorded a credit in restructuring and other charges, net related to the reduction in the contingent liability for the anticipated earnout payment in connection with the BRAE acquisition of $1.0 million.

 

A summary of the pre-tax cost by restructuring program is as follows:

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30,
2012

 

October 2,
2011

 

September 30,
2012

 

October 2,
2011

 

 

 

(in millions)

 

Restructuring costs:

 

 

 

 

 

 

 

 

 

2010 Actions

 

$

0.1

 

$

0.1

 

$

0.2

 

$

2.8

 

2011 Actions

 

 

0.7

 

0.6

 

4.3

 

Other Actions

 

0.5

 

1.1

 

2.1

 

1.1

 

Total restructuring charges

 

0.6

 

1.9

 

2.9

 

8.2

 

Adjustment to gain on sale of TWVC

 

1.6

 

 

1.6

 

 

Adjustment related to contingent liability reduction

 

(1.0

)

 

(1.0

)

 

Total restructuring and other charges, net

 

$

1.2

 

$

1.9

 

$

3.5

 

$

8.2

 

 

The Company recorded net pre-tax restructuring and other charges, net in its business segments as follows:

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30,
2012

 

October 2,
2011

 

September 30,
2012

 

October 2,
2011

 

 

 

(in millions)

 

North America

 

$

(0.8

)

$

1.1

 

$

(0.3

)

$

1.2

 

EMEA

 

0.4

 

0.8

 

2.2

 

6.8

 

Asia

 

1.6

 

 

1.6

 

0.2

 

Total

 

$

1.2

 

$

1.9

 

$

3.5

 

$

8.2

 

 

13



Table of Contents

 

2011 Actions

 

The following table summarizes the total expected, incurred and remaining pre-tax severance costs for the 2011 Socla integration program:

 

Reportable Segment

 

Total Expected
Costs

 

Incurred through
September 30, 2012

 

Remaining Costs at
September 30, 2012

 

 

 

(in millions)

 

EMEA

 

$

4.2

 

$

3.5

 

$

0.7

 

Asia

 

0.2

 

0.2

 

 

Total

 

$

4.4

 

$

3.7

 

$

0.7

 

 

The Company expects to spend the remaining costs by the end of 2012.

 

Details of the Company’s 2011 Socla integration reserves for severance for the nine months ended September 30, 2012 are as follows:

 

 

 

Nine Months Ended

 

 

 

September, 2012

 

 

 

(in millions)

 

Balance at December 31, 2011

 

$

0.4

 

Net pre-tax restructuring charges

 

0.5

 

Utilization and foreign currency impact

 

(0.3

)

Balance at April 1, 2012

 

$

0.6

 

Net pre-tax restructuring charges

 

0.1

 

Utilization and foreign currency impact

 

(0.6

)

Balance at July 1, 2012

 

$

0.1

 

Net pre-tax restructuring charges

 

 

Utilization and foreign currency impact

 

0.1

 

Balance at September 30, 2012

 

$

 

 

The following table summarizes expected, incurred and remaining severance costs for 2011 Socla integration actions:

 

 

 

Incurred through
September 30, 2012

 

 

 

(in millions)

 

Expected costs

 

$

4.4

 

Costs incurred – 2011

 

(3.1

)

Costs incurred – quarter ended April 1, 2012

 

(0.5

)

Costs incurred – quarter ended July 1, 2012

 

(0.1

)

Costs incurred – quarter ended September 30, 2012

 

 

Remaining costs at September 30, 2012

 

$

0.7

 

 

6.             Earnings per Share

 

The following tables set forth the reconciliation of the calculation of earnings per share:

 

 

 

For the Third Quarter Ended September 30, 2012

 

For the Third Quarter Ended October 2, 2011

 

 

 

Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

 

 

(amounts in millions, except per share amounts)

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

18.7

 

35.1

 

$

0.53

 

$

23.6

 

37.4

 

$

0.63

 

Discontinued operations

 

 

 

 

 

0.1

 

 

 

 

Net income

 

$

18.7

 

 

 

$

0.53

 

$

23.7

 

 

 

$

0.63

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock equivalents

 

 

 

0.1

 

 

 

 

 

0.1

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

18.7

 

 

 

$

0.53

 

$

23.6

 

 

 

$

0.63

 

Discontinued operations

 

 

 

 

 

0.1

 

 

 

 

Net income

 

$

18.7

 

35.2

 

$

0.53

 

$

23.7

 

37.5

 

$

0.63

 

 

14



Table of Contents

 

Options to purchase 0.3 million and 0.8 million shares of Class A Common Stock were outstanding during the third quarters of 2012 and 2011, respectively, but were not included in the computation of diluted EPS because to do so would be anti-dilutive.

 

 

 

For the Nine Months Ended October 30, 2012

 

For the Nine Months Ended October 2, 2011

 

 

 

Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

 

 

(amounts in millions, except per share amounts)

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

52.9

 

36.1

 

$

1.46

 

$

47.6

 

37.5

 

$

1.27

 

Discontinued operations

 

 

 

 

 

1.8

 

 

 

0.05

 

Net income

 

$

52.9

 

 

 

$

1.46

 

$

49.4

 

 

 

$

1.32

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock equivalents

 

 

 

0.2

 

 

 

 

 

0.2

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

52.9

 

 

 

$

1.46

 

$

47.6

 

 

 

$

1.26

 

Discontinued operations

 

 

 

 

 

1.8

 

 

 

0.05

 

Net income

 

$

52.9

 

36.3

 

$

1.46

 

$

49.4

 

37.7

 

$

1.31

 

 

Options to purchase 0.3 million and 0.5 million shares of Class A Common Stock were outstanding during the first nine months of 2012 and 2011, respectively, but were not included in the computation of diluted EPS because to do so would be anti-dilutive.

 

On May 16, 2012, the Board of Directors authorized a stock repurchase program of up to two million shares of the Company’s Class A Common Stock.  The stock repurchase program was completed in July 2012, as the Company repurchased the entire 2.0 million shares of Class A common stock at a cost of approximately $65.8 million.

 

7. Segment Information

 

The Company operates in three geographic segments: North America, EMEA, and Asia. Each of these segments is managed separately and has separate financial results that are reviewed by the Company’s chief operating decision-maker. All intercompany sales transactions have been eliminated. Sales by region are based upon location of the entity recording the sale. The accounting policies for each segment are the same as those described in the summary of significant accounting policies.

 

The following is a summary of the Company’s significant accounts and balances by segment, reconciled to the consolidated totals:

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30,
2012

 

October 2,
2011

 

September 30,
2012

 

October 2,
2011

 

 

 

(in millions)

 

Net Sales

 

 

 

 

 

 

 

 

 

North America

 

$

207.4

 

$

205.6

 

$

639.2

 

$

619.7

 

EMEA

 

146.5

 

159.3

 

438.5

 

441.1

 

Asia

 

7.3

 

5.9

 

18.8

 

15.6

 

Consolidated net sales

 

$

361.2

 

$

370.8

 

$

1,096.5

 

$

1,076.4

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

 

 

 

 

 

 

 

North America

 

$

25.9

 

$

31.4

 

$

72.8

 

$

84.4

 

EMEA

 

15.1

 

14.6

 

39.9

 

31.2

 

Asia

 

0.8

 

1.0

 

4.3

 

2.7

 

Subtotal reportable segments

 

41.8

 

47.0

 

117.0

 

118.3

 

 

 

 

 

 

 

 

 

 

 

Corporate (*)

 

(8.7

)

(5.8

)

(23.3

)

(27.6

)

Consolidated operating income

 

33.1

 

41.2

 

93.7

 

90.7

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

0.1

 

0.2

 

0.5

 

0.7

 

Interest expense

 

(6.1

)

(6.5

)

(18.4

)

(19.1

)

Other

 

0.6

 

0.3

 

1.5

 

(0.4

)

Income from continuing operations before income taxes

 

$

27.7

 

$

35.2

 

$

77.3

 

$

71.9

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures

 

 

 

 

 

 

 

 

 

North America

 

$

5.8

 

$

2.0

 

$

10.2

 

$

7.3

 

EMEA

 

2.9

 

2.3

 

7.5

 

8.6

 

Asia

 

0.5

 

0.1

 

1.1

 

0.5

 

Consolidated capital expenditures

 

$

9.2

 

$

4.4

 

$

18.8

 

$

16.4

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

 

 

 

 

 

 

 

North America

 

$

5.1

 

$

4.7

 

$

15.1

 

$

14.3

 

EMEA

 

6.4

 

7.5

 

20.5

 

22.3

 

Asia

 

0.5

 

0.5

 

1.5

 

1.5

 

Consolidated depreciation and amortization

 

$

12.0

 

$

12.7

 

$

37.1

 

$

38.1

 

 

 

 

 

 

 

 

 

 

 

Identifiable Assets (at end of period)

 

 

 

 

 

 

 

 

 

North America

 

 

 

 

 

$

805.3

 

$

822.5

 

EMEA

 

 

 

 

 

794.4

 

876.5

 

Asia

 

 

 

 

 

91.3

 

92.4

 

Discontinued operations

 

 

 

 

 

 

1.4

 

Consolidated identifiable assets

 

 

 

 

 

$

1,691.0

 

$

1,792.8

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net (at end of period)

 

 

 

 

 

 

 

 

 

North America

 

 

 

 

 

$

76.3

 

$

80.9

 

EMEA

 

 

 

 

 

127.2

 

140.9

 

Asia

 

 

 

 

 

14.6

 

15.2

 

Consolidated property, plant and equipment, net

 

 

 

 

 

$

218.1

 

$

237.0

 

 

15



Table of Contents

 


*                      Corporate expenses are primarily for administrative compensation expense, internal controls costs, professional fees, including legal and audit expenses, shareholder services and benefit administration costs. These costs are not allocated to the geographic segments as they are viewed as corporate functions that support all activities.

 

The above operating segments are presented on a basis consistent with the presentation included in the Company’s December 31, 2011 consolidated financial statements included in its Annual Report on Form 10-K.

 

The following includes U.S. net sales and U.S. property, plant and equipment of the Company’s North America segment:

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30,
2012

 

October 2,
2011

 

September 30,
2012

 

October 2,
2011

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

U.S. net sales

 

$

184.8

 

$

185.1

 

$

574.5

 

$

560.6

 

U.S. property, plant and equipment (at end of period)

 

 

 

 

 

$

70.6

 

$

76.0

 

 

The following includes intersegment sales for North America, EMEA and Asia:

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30,
2012

 

October 2,
2011

 

September 30,
2012

 

October 2,
2011

 

 

 

(in millions)

 

Intersegment Sales

 

 

 

 

 

 

 

 

 

North America

 

$

1.3

 

$

0.9

 

$

3.9

 

$

2.6

 

EMEA

 

3.3

 

2.2

 

7.9

 

6.4

 

Asia

 

35.9

 

29.1

 

102.3

 

97.0

 

Intersegment sales

 

$

40.5

 

$

32.2

 

$

114.1

 

$

106.0

 

 

16



Table of Contents

 

The North America segment includes $13.1 million in assets held for sale at September 30, 2012. The North America segment and the Asia segment include $4.6 million and $6.4 million, respectively, in assets held for sale at October 2, 2011.

 

The Company sells its products into various end markets around the world and groups net sales to third parties into four product categories.  Because many of the Company’s sales are through distributors and third-party manufacturers’ representatives, a portion of the product categorization is based on management’s understanding of final product use and, as such, allocations have been made to align sales into a product category.  Net sales to third parties for the four product categories are as follows:

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30,
2012

 

October 2,
2011

 

September 30,
2012

 

October 2,
2011

 

 

 

(in millions)

 

Net Sales

 

 

 

 

 

 

 

 

 

Residential & commercial flow control

 

$

192.2

 

$

200.5

 

$

604.6

 

$

566.1

 

HVAC & gas

 

114.6

 

116.9

 

331.2

 

352.5

 

Drains & water re-use

 

36.7

 

36.1

 

105.5

 

103.8

 

Water quality

 

17.7

 

17.3

 

55.2

 

54.0

 

Consolidated net sales

 

$

361.2

 

$

370.8

 

$

1,096.5

 

$

1,076.4

 

 

8. Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income (loss) consists of the following:

 

 

 

Foreign
Currency
Translation

 

Pension
Adjustment

 

Accumulated Other
Comprehensive
Income (Loss)

 

 

 

(in millions)

 

Balance December 31, 2011

 

$

5.6

 

$

(24.6

)

$

(19.0

)

Change in period

 

16.5

 

0.2

 

16.7

 

Balance April 1, 2012

 

$

22.1

 

$

(24.4

)

$

(2.3

)

Change in period

 

(39.7

)

0.1

 

(39.6

)

Balance July 1, 2012

 

$

(17.6

)

$

(24.3

)

$

(41.9

)

Change in period

 

25.1

 

0.2

 

25.3

 

Balance September 30, 2012

 

$

7.5

 

$

(24.1

)

$

(16.6