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 June 28, 2015
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 |
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04-2916536 |
(State or Other Jurisdiction of Incorporation or |
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(I.R.S. Employer Identification No.) |
815 Chestnut Street, North Andover, MA |
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01845 |
(Address of Principal Executive Offices) |
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(Zip Code) |
Registrants 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). Yes x 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 |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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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 issuers classes of common stock, as of the latest practicable date.
Class |
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Outstanding at August 3, 2015 |
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Class A Common Stock, $0.10 par value |
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28,226,645 |
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Class B Common Stock, $0.10 par value |
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6,479,290 |
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WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
3 | |||
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3 | ||
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Consolidated Balance Sheets at June 28, 2015 and December 31, 2014 (unaudited) |
3 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
22 | |
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34 | ||
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34 | ||
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35 | ||
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35 | ||
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36 | ||
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37 | ||
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38 |
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
(Amounts in millions, except share information)
(Unaudited)
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June 28, |
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December 31, |
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2015 |
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2014 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
284.6 |
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$ |
301.1 |
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Trade accounts receivable, less allowance for doubtful accounts of $10.2 million at June 28, 2015 and $10.6 million at December 31, 2014 |
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229.0 |
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207.8 |
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Inventories, net: |
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Raw materials |
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99.1 |
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104.8 |
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Work in process |
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17.7 |
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16.7 |
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Finished goods |
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137.7 |
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170.1 |
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Total Inventories |
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254.5 |
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291.6 |
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Prepaid expenses and other assets |
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28.8 |
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27.4 |
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Deferred income taxes |
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48.4 |
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45.3 |
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Assets held for sale |
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34.6 |
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1.1 |
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Total Current Assets |
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879.9 |
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874.3 |
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PROPERTY, PLANT AND EQUIPMENT: |
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Property, plant and equipment, at cost |
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492.7 |
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526.7 |
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Accumulated depreciation |
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(306.1 |
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(323.4 |
) | ||
Property, plant and equipment, net |
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186.6 |
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203.3 |
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OTHER ASSETS: |
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Goodwill |
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614.5 |
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639.0 |
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Intangible assets, net |
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195.7 |
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210.1 |
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Deferred income taxes |
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4.5 |
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4.7 |
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Other, net |
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12.1 |
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16.6 |
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TOTAL ASSETS |
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$ |
1,893.3 |
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$ |
1,948.0 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
111.0 |
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$ |
120.8 |
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Accrued expenses and other liabilities |
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139.4 |
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138.8 |
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Accrued pension plan settlements |
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40.8 |
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40.0 |
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Accrued compensation and benefits |
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45.8 |
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44.2 |
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Current portion of long-term debt |
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226.6 |
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1.9 |
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Total Current Liabilities |
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563.6 |
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345.7 |
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LONG-TERM DEBT, NET OF CURRENT PORTION |
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351.9 |
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577.8 |
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DEFERRED INCOME TAXES |
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73.8 |
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77.4 |
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OTHER NONCURRENT LIABILITIES |
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31.5 |
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34.7 |
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STOCKHOLDERS EQUITY: |
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Preferred Stock, $0.10 par value; 5,000,000 shares authorized; no shares issued or outstanding |
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Class A Common Stock, $0.10 par value; 80,000,000 shares authorized; 1 vote per share; issued and outstanding 28,288,685 shares at June 28, 2015 and 28,552,065 shares at December 31, 2014 |
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2.8 |
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2.9 |
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Class B Common Stock, $0.10 par value; 25,000,000 shares authorized; 10 votes per share; issued and outstanding, 6,479,290 shares at June 28, 2015 and December 31, 2014 |
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0.6 |
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0.6 |
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Additional paid-in capital |
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504.6 |
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497.4 |
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Retained earnings |
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499.9 |
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500.6 |
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Accumulated other comprehensive loss |
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(135.4 |
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(89.1 |
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Total Stockholders Equity |
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872.5 |
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912.4 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
1,893.3 |
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$ |
1,948.0 |
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See accompanying notes to consolidated financial statements.
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in millions, except per share information)
(Unaudited)
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Second Quarter Ended |
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Six Months Ended |
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June 28, |
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June 29, |
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June 28, |
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June 29, |
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Net sales |
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$ |
386.9 |
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$ |
396.0 |
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$ |
743.1 |
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$ |
761.2 |
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Cost of goods sold |
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241.1 |
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257.0 |
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466.8 |
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488.9 |
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GROSS PROFIT |
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145.8 |
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139.0 |
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276.3 |
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272.3 |
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Selling, general and administrative expenses |
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106.3 |
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99.8 |
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212.0 |
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203.1 |
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Restructuring and other charges, net |
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4.7 |
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2.6 |
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6.7 |
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6.8 |
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OPERATING INCOME |
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34.8 |
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36.6 |
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57.6 |
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62.4 |
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Other (income) expense: |
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Interest income |
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(0.2 |
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(0.2 |
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(0.4 |
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(0.3 |
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Interest expense |
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5.9 |
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4.9 |
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11.8 |
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9.8 |
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Other expense (income), net |
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(0.4 |
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(0.1 |
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(0.6 |
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0.3 |
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Total other expense |
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5.3 |
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4.6 |
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10.8 |
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9.8 |
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
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29.5 |
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32.0 |
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46.8 |
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52.6 |
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Provision for income taxes |
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10.2 |
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10.7 |
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15.9 |
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17.2 |
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NET INCOME |
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$ |
19.3 |
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$ |
21.3 |
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$ |
30.9 |
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$ |
35.4 |
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BASIC EPS |
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Net income per share: |
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NET INCOME |
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$ |
0.55 |
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$ |
0.60 |
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$ |
0.88 |
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$ |
1.00 |
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Weighted average number of shares |
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35.0 |
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35.3 |
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35.1 |
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35.3 |
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DILUTED EPS |
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Net income per share: |
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NET INCOME |
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$ |
0.55 |
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$ |
0.60 |
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$ |
0.88 |
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$ |
1.00 |
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Weighted average number of shares |
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35.1 |
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35.4 |
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35.1 |
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35.4 |
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Dividends per share |
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$ |
0.17 |
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$ |
0.15 |
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$ |
0.32 |
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$ |
0.28 |
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See accompanying notes to consolidated financial statements.
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in millions)
(Unaudited)
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Second Quarter Ended |
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Six Months Ended |
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June 28, |
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June 29, |
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June 28, |
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June 29, |
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Net income |
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$ |
19.3 |
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$ |
21.3 |
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$ |
30.9 |
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$ |
35.4 |
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Other comprehensive income (loss): |
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Foreign currency translation adjustments |
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18.4 |
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(4.3 |
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(46.7 |
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(8.6 |
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Defined benefit pension plans, net of tax: |
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Amortization of net losses included in net periodic pension cost |
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0.2 |
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0.1 |
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0.4 |
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0.3 |
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Other comprehensive income (loss) |
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18.6 |
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(4.2 |
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(46.3 |
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(8.3 |
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Comprehensive income (loss) |
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$ |
37.9 |
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$ |
17.1 |
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$ |
(15.4 |
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$ |
27.1 |
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See accompanying notes to consolidated financial statements.
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
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Six Months Ended |
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June 28, |
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June 29, |
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OPERATING ACTIVITIES |
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Net income from continuing operations |
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$ |
30.9 |
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$ |
35.4 |
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Adjustments to reconcile net income from continuing operations to net cash provided by continuing operating activities: |
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Depreciation |
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15.6 |
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16.6 |
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Amortization of intangibles |
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10.3 |
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7.4 |
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Loss on disposal and impairment of goodwill, property, plant and equipment and other |
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1.3 |
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Stock-based compensation |
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5.1 |
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3.4 |
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Deferred income tax benefit |
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(4.4 |
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(1.3 |
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Changes in operating assets and liabilities, net of effects from business acquisitions and divestures: |
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Accounts receivable |
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(27.3 |
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(23.2 |
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Inventories |
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9.3 |
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(10.7 |
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Prepaid expenses and other assets |
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(1.5 |
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2.5 |
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Accounts payable, accrued expenses and other liabilities |
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2.6 |
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(11.7 |
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Net cash provided by continuing operations |
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41.9 |
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18.4 |
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INVESTING ACTIVITIES |
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Additions to property, plant and equipment |
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(12.5 |
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(10.6 |
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Proceeds from the sale of property, plant and equipment |
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0.1 |
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0.2 |
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Business acquisitions, net of cash acquired |
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0.7 |
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Net cash used in investing activities |
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(11.7 |
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(10.4 |
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FINANCING ACTIVITIES |
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Payments of long-term debt |
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(0.8 |
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(0.9 |
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Payment of capital leases and other |
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(2.9 |
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(2.5 |
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Proceeds from share transactions under employee stock plans |
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1.2 |
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4.7 |
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Tax benefit of stock awards exercised |
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0.1 |
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1.3 |
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Payments to repurchase common stock |
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(19.5 |
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(20.0 |
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Debt issue costs |
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(2.0 |
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Dividends |
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(11.3 |
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(9.9 |
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Net cash used in financing activities |
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(33.2 |
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(29.3 |
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Effect of exchange rate changes on cash and cash equivalents |
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(13.5 |
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(2.3 |
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DECREASE IN CASH AND CASH EQUIVALENTS |
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(16.5 |
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(23.6 |
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Cash and cash equivalents at beginning of year |
|
301.1 |
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267.9 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
284.6 |
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$ |
244.3 |
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NON-CASH INVESTING AND FINANCING ACTIVITIES |
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Acquisition of businesses: |
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Fair value of assets acquired |
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$ |
(0.3 |
) |
$ |
|
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Cash paid, net of cash acquired |
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(0.7 |
) |
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Liabilities assumed |
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$ |
0.4 |
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$ |
|
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Acquisitions of fixed assets under financing agreement |
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$ |
0.2 |
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$ |
|
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Issuance of stock under management stock purchase plan |
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$ |
0.3 |
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$ |
0.2 |
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CASH PAID FOR: |
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Interest |
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$ |
11.0 |
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$ |
9.5 |
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Income taxes |
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$ |
12.6 |
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$ |
15.5 |
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See accompanying notes to consolidated financial statements.
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 June 28, 2015, the Consolidated Statements of Operations for the second quarters and six months ended June 28, 2015 and June 29, 2014, the Consolidated Statements of Comprehensive Income (Loss) for the second quarters and six months ended June 28, 2015 and June 29, 2014, and the Consolidated Statements of Cash Flows for the six months ended June 28, 2015 and June 29, 2014.
The consolidated balance sheet at December 31, 2014 has been derived from the audited consolidated financial statements at that date. The accounting policies followed by the Company are described in the Companys Annual Report on Form 10-K for the year ended December 31, 2014. 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, 2014. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2015.
The Company operates on a 52-week fiscal year ending on December 31st. Any quarterly data contained in this Quarterly Report on Form 10-Q generally reflect the results of operations for a 13-week period or 26-week period, respectively.
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
During the second quarter of 2015, $4.1 million of goodwill in the Americas segment was reclassified to assets held for sale. Refer to Note 6 Assets Held for Sale for further discussion. Also during the second quarter of 2015, the working capital adjustment relating to the AERCO International, Inc. (AERCO) acquisition was finalized resulting in a $0.7 million reduction in the purchase price and goodwill recorded in the Americas segment. The final purchase price after the adjustment was $271.5 million.
The changes in the carrying amount of goodwill by geographic segment are as follows:
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June 28, 2015 |
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Gross Balance |
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Accumulated Impairment Losses |
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Net Goodwill |
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Balance |
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Acquired |
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Foreign |
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Balance |
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Balance |
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Impairment |
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Balance |
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June 28, |
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(in millions ) |
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Americas |
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$ |
398.0 |
|
$ |
|
|
$ |
(5.7 |
) |
$ |
392.3 |
|
$ |
(24.5 |
) |
$ |
|
|
$ |
(24.5 |
) |
$ |
367.8 |
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Europe, Middle East and Africa (EMEA) |
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265.5 |
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(18.8 |
) |
246.7 |
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|
246.7 |
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Asia-Pacific |
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12.9 |
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12.9 |
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(12.9 |
) |
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(12.9 |
) |
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Total |
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$ |
676.4 |
|
$ |
|
|
$ |
(24.5 |
) |
$ |
651.9 |
|
$ |
(37.4 |
) |
$ |
|
|
$ |
(37.4 |
) |
$ |
614.5 |
|
|
|
June 29, 2014 |
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Gross Balance |
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Accumulated Impairment Losses |
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Net Goodwill |
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Balance |
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Acquired |
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Foreign |
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Balance |
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Balance |
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Impairment |
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Balance |
|
June 29, |
| ||||||||
|
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(in millions) |
| ||||||||||||||||||||||
Americas |
|
$ |
224.7 |
|
$ |
|
|
$ |
(0.1 |
) |
$ |
224.6 |
|
$ |
(24.5 |
) |
$ |
|
|
$ |
(24.5 |
) |
$ |
200.1 |
|
EMEA |
|
301.3 |
|
|
|
(2.8 |
) |
298.5 |
|
|
|
|
|
|
|
298.5 |
| ||||||||
Asia-Pacific |
|
13.3 |
|
|
|
(0.4 |
) |
12.9 |
|
|
|
|
|
|
|
12.9 |
| ||||||||
Total |
|
$ |
539.3 |
|
$ |
|
|
$ |
(3.3 |
) |
$ |
536.0 |
|
$ |
(24.5 |
) |
$ |
|
|
$ |
(24.5 |
) |
$ |
511.5 |
|
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 goodwill and indefinite-lived intangible assets impairment assessment in the fourth quarter of each year.
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:
|
|
June 28, 2015 |
|
December 31, 2014 |
| ||||||||||||||
|
|
Gross |
|
Accumulated |
|
Net |
|
Gross |
|
Accumulated |
|
Net |
| ||||||
|
|
(in millions) |
| ||||||||||||||||
Patents |
|
$ |
16.2 |
|
$ |
(13.7 |
) |
$ |
2.5 |
|
$ |
16.2 |
|
$ |
(13.3 |
) |
$ |
2.9 |
|
Customer relationships |
|
204.4 |
|
(94.7 |
) |
109.7 |
|
206.7 |
|
(87.5 |
) |
119.2 |
| ||||||
Technology |
|
41.9 |
|
(14.6 |
) |
27.3 |
|
42.1 |
|
(12.9 |
) |
29.2 |
| ||||||
Trade Names |
|
20.4 |
|
(5.1 |
) |
15.3 |
|
20.6 |
|
(4.2 |
) |
16.4 |
| ||||||
Other |
|
9.5 |
|
(5.8 |
) |
3.7 |
|
9.5 |
|
(5.7 |
) |
3.8 |
| ||||||
Total amortizable intangibles |
|
292.4 |
|
(133.9 |
) |
158.5 |
|
295.1 |
|
(123.6 |
) |
171.5 |
| ||||||
Indefinite-lived intangible assets |
|
37.2 |
|
|
|
37.2 |
|
38.6 |
|
|
|
38.6 |
| ||||||
Total |
|
$ |
329.6 |
|
$ |
(133.9 |
) |
$ |
195.7 |
|
$ |
333.7 |
|
$ |
(123.6 |
) |
$ |
210.1 |
|
Aggregate amortization expense for amortizable intangible assets for the second quarters of 2015 and 2014 was $5.2 million and $3.7 million, respectively, and for the first six months of 2015 and 2014 was $10.3 million and $7.4 million, respectively. Additionally, future amortization expense for the next five years on amortizable intangible assets is expected to be approximately $10.3 million for the remainder of 2015, $19.1 million for 2016, $18.8 million for 2017, $15.6 million for 2018 and $11.8 million for 2019. 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 12.1 years. Patents, customer relationships, technology, trade names and other amortizable intangibles have weighted-average remaining lives of 4.7 years, 11.8 years, 10.0 years, 14.2 years and 33.0 years, respectively. Indefinite-lived intangible assets primarily include trademarks and trade names.
Stock-Based Compensation
The Company maintains one stock incentive plan, the Second Amended and Restated 2004 Stock Incentive Plan (the 2004 Stock Incentive Plan). Under this plan, key employees have been granted nonqualified stock options to purchase the Companys Class A common stock. Options typically become exercisable over a four-year period at the rate of 25% per year and expire ten years after the grant date. However, with the introduction in 2014 of performance stock units discussed below, most options granted in 2014 become exercisable over a three-year period at the rate of one-third per year. Options granted under the plan may have exercise prices of not less than 100% of the fair market value of the Class A common stock on the date of grant. The Companys practice has been to grant all options at fair market value on the grant date. The Company did not issue any stock options in the first six months of 2015 and issued 4,808 stock options during the first six months of 2014.
The Company grants shares of restricted stock and deferred shares to key employees and stock awards to non-employee members of the Companys Board of Directors under the 2004 Stock Incentive Plan. Stock awards to non-employee members of the Companys Board of Directors are fully vested upon grant. Employees restricted stock awards and deferred shares typically vest over a three-year period at the rate of one-third per year. However, with the introduction in 2014 of performance stock units discussed below, most restricted stock awards and deferred shares granted in 2014 vest over a two-year period at the rate of 50% per year. The restricted stock awards and deferred shares are amortized to expense on a straight-line basis over the vesting period. The Company issued 60,278 and 41,885 shares of restricted stock in the first six months of 2015 and 2014, respectively.
Beginning in 2014, the Company also granted performance stock units to key employees under the 2004 Stock Incentive Plan. Performance stock units vest at the end of the performance period set by the Compensation Committee of our Board of Directors at the
time of grant. Upon vesting, the number of shares of the Companys Class A common stock awarded to each performance stock unit recipient will be determined based on the Companys performance relative to certain performance goals set at the time the performance stock units were granted. The recipient of a performance stock unit award may earn from no shares to twice the number of target shares awarded to such recipient. The performance stock units are amortized to expense over the vesting period, and based on the Companys performance relative to the performance goals, may be adjusted. If the performance goals are not met, no awards are earned and previously recognized compensation expense is reversed. The Company awarded 631 performance stock units in the first six months of 2015, and did not award any performance stock units in the first six months of 2014.
The Company 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 Companys Class A common stock on the date of grant. RSUs vest either annually over a three-year period from the grant date or upon the third anniversary of 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 59,995 RSUs and 30,561 RSUs in the first six months of 2015 and 2014, 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:
|
|
2015 |
|
2014 |
|
Expected life (years) |
|
3.0 |
|
3.0 |
|
Expected stock price volatility |
|
23.4 |
% |
31.2 |
% |
Expected dividend yield |
|
1.2 |
% |
0.9 |
% |
Risk-free interest rate |
|
1.1 |
% |
0.7 |
% |
The above assumptions were used to determine the RSUs weighted average grant-date fair value of $19.04 and $22.57 in 2015 and 2014, respectively.
A more detailed description of each of these plans can be found in Note 12 of Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2014.
Shipping and Handling
The Companys shipping and handling costs included in selling, general and administrative expenses were $13.8 million and $15.8 million for the second quarters of 2015 and 2014, respectively, and were $28.2 million and $30.5 million for the first six months of 2015 and 2014, respectively.
Research and Development
Research and development costs included in selling, general and administrative expenses were $6.3 million and $5.6 million for the second quarters of 2015 and 2014, respectively, and were $12.7 million and $11.9 million for the first six months of 2015 and 2014, 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 Companys 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 April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03, Interest Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. Under ASU 2015-03, debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The cost of issuing debt will no longer be recorded as a separate asset, except when incurred before receipt of the funding from the associated debt liability. ASU 2015-03 is effective in the first quarter of 2016 for public companies with calendar year ends, with early adoption permitted. The ASU requires retrospective application to all prior periods presented in the financial statements. The adoption of this guidance is not expected to have a material impact on the Companys financial statements.
In January 2015, the FASB issued ASU 2015-01, Income StatementExtraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU 2015-01 eliminates from U.S. GAAP the concept of extraordinary items as part of its initiative to reduce complexity in accounting standards. ASU 2015-01 is effective in the first quarter of 2016 for public companies with calendar year ends, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The ASU may be applied prospectively or retrospectively to all prior periods presented. The adoption of this guidance is not expected to have a material impact on the Companys financial statements.
3. Acquisitions
On December 1, 2014, the Company completed the acquisition of AERCO in a share purchase transaction. The aggregate purchase price was $271.5 million and was financed from a borrowing under the Companys Credit Agreement. During the second quarter of 2015, the working capital adjustment was finalized resulting in a $0.7 million reduction in the final purchase price.
The Company accounted for the transaction as a business combination. The Company completed a purchase price allocation that resulted in the recognition of $173.3 million in goodwill and $102.4 million in intangible assets. The goodwill balance was reduced during the second quarter of 2015 primarily related to the finalization of the working capital adjustment. Intangible assets consist primarily of customer relationships valued at $78.5 million with estimated lives of 16 years, developed technology valued at $15.8 million with estimated lives of 10 years and trade name valued at $7.4 million with a 20 year life. The goodwill is attributable to the workforce of AERCO and the strategic platform adjacency that will allow Watts to extend its product offerings as a result of the acquisition. Approximately $19.4 million of the goodwill is deductible for tax purposes. The following table summarizes the value of the assets and liabilities acquired (in millions):
Accounts receivable |
|
$ |
17.2 |
|
Inventory |
|
16.3 |
| |
Fixed assets |
|
7.7 |
| |
Deferred tax assets |
|
8.2 |
| |
Other assets |
|
7.6 |
| |
Intangible assets |
|
102.4 |
| |
Goodwill |
|
173.3 |
| |
Accounts payable |
|
(6.8 |
) | |
Accrued expenses and other |
|
(18.4 |
) | |
Deferred tax liability |
|
(36.0 |
) | |
Purchase price |
|
$ |
271.5 |
|
The consolidated statement of operations for the second quarter and the six months ended June 28, 2015 includes the results of AERCO. The second quarter and the six months ended June 28, 2015 results include $32.4 million and $54.6 million of revenues, respectively, and $6.1 million and $7.3 million of operating income, respectively, attributable to AERCO. The six months ended June 28, 2015 operating income of AERCO includes $0.9 million of purchase accounting charges.
Supplemental pro-forma information
Had the acquisition of AERCO been completed at the beginning of 2014, the Companys consolidated net sales, net income from continuing operations and earnings per share from continuing operations would have been as follows:
|
|
Second Quarter Ended |
|
Six Months Ended |
| ||||||||
Amounts in millions (except per share information) |
|
June 28, 2015 |
|
June 29, 2014 |
|
June 28, 2015 |
|
June 29, 2014 |
| ||||
Net sales |
|
$ |
386.9 |
|
$ |
426.1 |
|
$ |
743.1 |
|
$ |
809.8 |
|
Net income from continuing operations |
|
$ |
19.3 |
|
$ |
24.4 |
|
$ |
31.6 |
|
$ |
37.7 |
|
Net income per share: |
|
|
|
|
|
|
|
|
| ||||
Basic EPScontinuing operations |
|
$ |
0.55 |
|
$ |
0.69 |
|
$ |
0.90 |
|
$ |
1.07 |
|
Diluted EPScontinuing operations |
|
$ |
0.55 |
|
$ |
0.69 |
|
$ |
0.90 |
|
$ |
1.07 |
|
Net income from continuing operations for the second quarter and six months ended June 29, 2014 was adjusted to include $0.9 million and $1.6 million, respectively, of net interest expense related to the financing of the acquisition and $1.1 million and $2.2 million, respectively, of net amortization expense resulting from the estimated allocation of purchase price to amortizable tangible and intangible assets. Net income from continuing operations for the six months ended June 28, 2015 was also adjusted to exclude $0.7 million of net acquisition-related charges.
4. Financial Instruments and Derivative Instruments
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including deferred compensation plan assets and related liability, and contingent consideration. There were no designated cash flow hedges as of June 28, 2015 and December 31, 2014. The fair values of these certain financial assets and liabilities were determined using the following inputs at June 28, 2015 and December 31, 2014:
|
|
Fair Value Measurements at June 28, 2015 Using: |
| ||||||||||
|
|
|
|
Quoted Prices in |
|
Significant Other |
|
Significant |
| ||||
|
|
Total |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
|
|
(in millions) |
| ||||||||||
Assets |
|
|
|
|
|
|
|
|
| ||||
Plan asset for deferred compensation(1) |
|
$ |
3.6 |
|
$ |
3.6 |
|
$ |
|
|
$ |
|
|
Total assets |
|
$ |
3.6 |
|
$ |
3.6 |
|
$ |
|
|
$ |
|
|
Liabilities |
|
|
|
|
|
|
|
|
| ||||
Plan liability for deferred compensation(2) |
|
$ |
3.6 |
|
$ |
3.6 |
|
$ |
|
|
$ |
|
|
Total liabilities |
|
$ |
3.6 |
|
$ |
3.6 |
|
$ |
|
|
$ |
|
|
|
|
Fair Value Measurements at December 31, 2014 Using: |
| ||||||||||
|
|
|
|
Quoted Prices in |
|
Significant Other |
|
Significant |
| ||||
|
|
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) |
|
2.5 |
|
|
|
|
|
2.5 |
| ||||
Total liabilities |
|
$ |
6.5 |
|
$ |
4.0 |
|
$ |
|
|
$ |
2.5 |
|
(1) Included on the Companys consolidated balance sheet in other assets (other, net).
(2) Included on the Companys consolidated balance sheet in accrued compensation and benefits.
(3) Included on the Companys consolidated balance sheet in accrued expenses and other liabilities as of December 31, 2014.
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, 2014 to June 28, 2015.
|
|
Balance |
|
|
|
Total realized and |
|
Balance |
| |||||||
|
|
December 31, |
|
Settlements |
|
Net earnings |
|
Comprehensive |
|
June 28, |
| |||||
|
|
(in millions) |
| |||||||||||||
Contingent consideration |
|
$ |
2.5 |
|
$ |
2.3 |
|
$ |
|
|
$ |
0.2 |
|
$ |
|
|
The $2.5 million contingent consideration liability balance at December 31, 2014 related to the tekmar Control Systems acquisition in 2012. 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. The final contingent consideration payment of $2.3 million was made in the second quarter of 2015.
Fair Value
The carrying amounts of cash and cash equivalents, trade receivables and trade payables approximate fair value because of the short maturity of these financial instruments.
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 fair value of the Companys 5.85% senior notes due 2016 and 5.05% senior notes due 2020 is based on quoted market prices of similar notes (level 2). The fair value of the Companys borrowings outstanding under the Credit Agreement and the Companys variable rate debt approximates its carrying value. The carrying amount and the estimated fair market value of the Companys long-term debt, including the current portion, are as follows:
|
|
June 28, |
|
December 31, |
| ||
|
|
2015 |
|
2014 |
| ||
|
|
(in millions) |
| ||||
Carrying amount |
|
$ |
578.5 |
|
$ |
579.7 |
|
Estimated fair value |
|
$ |
591.5 |
|
$ |
599.3 |
|
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 Companys 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 Companys 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 sterling. 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 presently does not have any open forward exchange contracts.
5. Restructuring and Other Charges, Net
The Companys Board of Directors approves all major restructuring programs that may involve the discontinuance of significant product lines or the shutdown of significant 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 Companys consolidated statements of operations.
A summary of the pre-tax cost by restructuring program is as follows:
|
|
Second Quarter Ended |
|
Six Months Ended |
| ||||||||
|
|
June 28, |
|
June 29, |
|
June 28, |
|
June 29, |
| ||||
|
|
(in millions) |
| ||||||||||
Restructuring costs: |
|
|
|
|
|
|
|
|
| ||||
2015 Actions |
|
$ |
4.0 |
|
$ |
|
|
$ |
5.3 |
|
$ |
|
|
2013 Actions |
|
|
|
2.1 |
|
0.5 |
|
2.5 |
| ||||
Other Actions |
|
0.7 |
|
0.5 |
|
0.9 |
|
4.3 |
| ||||
Total restructuring and other charges, net |
|
$ |
4.7 |
|
$ |
2.6 |
|
$ |
6.7 |
|
$ |
6.8 |
|
The Company recorded pre-tax restructuring and other charges, net in its business segments as follows:
|
|
Second Quarter Ended |
|
Six Months Ended |
| ||||||||
|
|
June 28, |
|
June 29, |
|
June 28, |
|
June 29, |
| ||||
|
|
(in millions) |
| ||||||||||
Americas |
|
$ |
0.7 |
|
$ |
0.4 |
|
$ |
2.0 |
|
$ |
2.3 |
|
EMEA |
|
0.7 |
|
2.2 |
|
1.5 |
|
3.7 |
| ||||
Asia-Pacific |
|
3.3 |
|
|
|
3.3 |
|
|
| ||||
Corporate |
|
|
|
|
|
(0.1 |
) |
0.8 |
| ||||
Total |
|
$ |
4.7 |
|
$ |
2.6 |
|
$ |
6.7 |
|
$ |
6.8 |
|
2015 Actions
On February 17, 2015, the Board of Directors of the Company approved the initial phase of a restructuring program relating to the transformation of the Companys Americas and Asia-Pacific businesses, which primarily involves product line rationalization efforts relating to non-core products. The Company expects to ultimately eliminate between $175 million to $200 million of the combined Americas and Asia-Pacific net sales primarily within the Companys do-it-yourself (DIY) distribution channel (the program).
On July 29, 2015, the Company entered into a definitive agreement with Sioux Chief Mfg. Co., Inc. (Sioux Chief) to sell the Companys fittings, brass & tubular and vinyl tubing product lines and associated assets in the Americas. The Company estimates that the total pre-tax program cost will approximate the mid-point of the $27 million to $50 million range previously disclosed in the first quarter of 2015. The total non-cash charges for this program are expected to be $17 million to $25 million, and the net after-tax charge is expected to be $22 million to $40 million. As of June 28, 2015, the assets associated with the product lines in the Americas have been classified as Held for Sale as all of the required criteria had been met. Refer to Note 6 Assets Held for Sale for further discussion.
During the second quarter ended June 28, 2015, the Company recorded a $3.7 million pre-tax restructuring charge and liability relating to severance costs in the Americas and Asia-Pacific, $0.3 million pre-tax restructuring charge relating to accelerated depreciation and amortization of long-lived assets in the Americas and other transformation and deployment costs in SG&A of $1.9 million.
During the first quarter ended March 29, 2015, the Company recorded a $1.3 million pre-tax restructuring charge and liability relating to facility site clean-up costs at one of the affected locations in the Americas and other transformation and deployment costs in SG&A of $1.5 million.
During the fourth quarter and year ended December 31, 2014, the Company recorded a $15.2 million pre-tax charge relating to the program, consisting of goodwill impairment of $12.9 million, an indefinite-lived intangible asset impairment of $0.5 million, and other transformation and deployment costs of $1.8 million recorded in SG&A. The goodwill impairment charge was based on a quantitative assessment of the Asia-Pacific reporting unit goodwill performed as a result of it being more likely than not that the Asia-Pacific reporting units third party and intersegment net sales would be significantly reduced as a result of the program.
The total pre-tax program costs incurred to date are $23.9 million, including restructuring costs of $5.3 million, goodwill and intangible asset impairments of $13.4 million and other transformation and deployment costs of $5.2 million. The other transformation and deployment costs include consulting fees and other associated costs. The following table summarizes total expected, incurred and remaining pre-tax restructuring costs for the Companys initial phase of the Americas and Asia-Pacific 2015 transformation program by type:
|
|
Severance |
|
Legal and |
|
Asset |
|
Facility |
|
Total |
| |||||
|
|
(in millions) |
| |||||||||||||
Expected costs |
|
$ |
5.4 |
|
$ |
0.4 |
|
$ |
1.7 |
|
$ |
3.5 |
|
$ |
11.0 |
|
Costs incurredfirst quarter 2015 |
|
|
|
|
|
|
|
(1.3 |
) |
(1.3 |
) | |||||
Costs incurredsecond quarter 2015 |
|
(3.7 |
) |
|
|
(0.3 |
) |
|
|
(4.0 |
) | |||||
Remaining costs at June 28, 2015 |
|
$ |
1.7 |
|
$ |
0.4 |
|
$ |
1.4 |
|
$ |
2.2 |
|
$ |
5.7 |
|
The following table summarizes total incurred, incurred to date and expected pre-tax restructuring costs by business segment for the Companys initial phase of the Americas and Asia-Pacific 2015 transformation program:
|
|
Second Quarter |
|
Six Months Ended |
|
|
|
|
| ||||
|
|
June 28, |
|
June 28, |
|
Incurred |
|
Total |
| ||||
|
|
(in millions) |
| ||||||||||
Asia-Pacific |
|
$ |
3.3 |
|
$ |
3.3 |
|
$ |
3.3 |
|
$ |
5.4 |
|
Americas |
|
0.7 |
|
2.0 |
|
2.0 |
|
5.6 |
| ||||
Total restructuring costs |
|
$ |
4.0 |
|
$ |
5.3 |
|
$ |
5.3 |
|
$ |
11.0 |
|
Details of the restructuring reserve activity for the Companys initial phase of the Americas and Asia-Pacific 2015 transformation program for the six months ended June 28, 2015 are as follows:
|
|
Severance |
|
Asset |
|
Facility |
|
Total |
| ||||
|
|
(in millions) |
| ||||||||||
Balance at December 31, 2014 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Net pre-tax restructuring charges |
|
|
|
|
|
1.3 |
|
1.3 |
| ||||
Utilization and foreign currency impact |
|
|
|
|
|
|
|
|
| ||||
Balance at March 29, 2015 |
|
$ |
|
|
$ |
|
|
$ |
1.3 |
|
$ |
1.3 |
|
Net pre-tax restructuring charges |
|
3.7 |
|
0.3 |
|
|
|
4.0 |
| ||||
Utilization and foreign currency impact |
|
|
|
(0.3 |
) |
|
|
(0.3 |
) | ||||
Balance at June 28, 2015 |
|
$ |
3.7 |
|
$ |
|
|
$ |
1.3 |
|
$ |
5.0 |
|
2013 Actions
On July 30, 2013, the Board of Directors authorized a restructuring program with respect to the Companys EMEA segment to reduce its European manufacturing footprint, improve organizational and operational efficiency and better align costs with expected revenues in response to changing market conditions. Total pre-tax costs for the program were $8.4 million and were incurred from the third quarter of 2013 to the first quarter of 2015. The total charges for this program included costs for severance benefits, relocation, site clean-up, professional fees and certain asset write-downs. The total net after-tax charge for the restructuring program was approximately $5.9 million. The net after-tax charges incurred in the first six months of 2015 and 2014 were $0.4 million and $1.7 million, respectively.
Other Actions
The Company also periodically initiates other actions which are not part of a major program. In the fourth quarter of 2014, management initiated certain restructuring actions and strategic initiatives with respect to the Companys EMEA segment in response to the ongoing economic challenges in Europe and additional product rationalization. The restructuring actions primarily include expected severance benefits and limited costs relating to asset write offs, professional fees and relocation. The total pre-tax charge for these restructuring initiatives is expected to be approximately $9.9 million, of which approximately $7.7 million were incurred as of June 28, 2015 for the program to date. The remaining expected costs relate to severance, asset write-offs and relocation costs and are
expected to be completed by the end of the fourth quarter of fiscal 2016. The restructuring reserve for these actions as of June 28, 2015 relates to the severance recorded in the prior year.
The following table summarizes total expected, incurred and remaining pre-tax restructuring costs for the EMEA 2014 restructuring actions:
|
|
Severance |
|
Legal and |
|
Asset |
|
Facility |
|
Total |
| |||||
|
|
(in millions) |
| |||||||||||||
Expected costs |
|
$ |
8.8 |
|
$ |
0.2 |
|
$ |
0.8 |
|
$ |
0.1 |
|
$ |
9.9 |
|
Costs incurred2014 |
|
(6.9 |
) |
|
|
|
|
|
|
(6.9 |
) | |||||
Costs incurredfirst quarter 2015 |
|
|
|
(0.2 |
) |
(0.1 |
) |
|
|
(0.3 |
) | |||||
Costs incurredsecond quarter 2015 |
|
(0.5 |
) |
|
|
|
|
|
|
(0.5 |
) | |||||
Remaining costs at June 28, 2015 |
|
$ |
1.4 |
|
$ |
|
|
$ |
0.7 |
|
$ |
0.1 |
|
$ |
2.2 |
|
Details of the Companys EMEA 2014 restructuring reserve activity for the six months ended June 28, 2015 are as follows:
|
|
Severance |
|
Legal and |
|
Asset |
|
Total |
| ||||
|
|
(in millions) |
| ||||||||||
Balance at December 31, 2014 |
|
$ |
6.9 |
|
$ |
|
|
$ |
|
|
$ |
6.9 |
|
Net pre-tax restructuring charges |
|
|
|
0.2 |
|
0.1 |
|
0.3 |
| ||||
Utilization and foreign currency impact |
|
(0.8 |
) |
(0.2 |
) |
(0.1 |
) |
(1.1 |
) | ||||
Balance at March 29, 2015 |
|
$ |
6.1 |
|
$ |
|
|
$ |
|
|
$ |
6.1 |
|
Net pre-tax restructuring charges |
|
0.5 |
|
|
|
|
|
0.5 |
| ||||
Utilization and foreign currency impact |
|
(0.2 |
) |
|
|
|
|
(0.2 |
) | ||||
Balance at June 28, 2015 |
|
$ |
6.4 |
|
$ |
|
|
$ |
|
|
$ |
6.4 |
|
In 2014, the Company initiated restructuring activities in the Americas and Corporate to reduce costs through reductions-in-force. Total pre-tax restructuring expense of $2.7 million was incurred in the first quarter of 2014 relating to these initiatives and the related restructuring reserves have been fully utilized.
6. Assets Held for Sale
Sale of Certain Americas Product lines
During the second quarter of 2015, the Company classified certain assets related to the Americas product lines being rationalized as part of the 2015 Actions referred to in Note 5, as assets held for sale. The carrying amounts of the assets presented in the June 28, 2015 Consolidated Balance Sheet as assets held for sale relating to the 2015 Actions were as follows:
|
|
June 28, |
| |
|
|
2015 |
| |
|
|
(in millions) |
| |
Inventories, net |
|
$ |
20.5 |
|
Other assets |
|
3.1 |
| |
Property, plant and equipment, net |
|
4.7 |
| |
Goodwill |
|
4.1 |
| |
Assets held for sale |
|
$ |
32.4 |
|
On July 29, 2015, the Company entered into a definitive agreement with Sioux Chief to sell the Companys brass fittings, brass & tubular and vinyl tubing product lines and the associated held for sale assets in the Americas. The selling price will be approximately $35.5 million, and the transaction is expected to result in a minimal gain on sale. The sale is expected to close by the end of the third quarter of 2015, and is subject to customary closing conditions.
Assets held for sale in the June 28, 2015 Consolidated Balance Sheet of $34.6 million also includes two buildings in EMEA with a combined carrying amount of $2.2 million.
7. Earnings per Share
The following tables set forth the reconciliation of the calculation of earnings per share:
|
|
For the Second Quarter Ended June 28, 2015 |
|
For the Second Quarter Ended June 29, 2014 |
| ||||||||||||
|
|
Income |
|
Shares |
|
Per Share |
|
Income |
|
Shares |
|
Per Share |
| ||||
|
|
(amounts in millions, except per share amounts) |
| ||||||||||||||
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
$ |
19.3 |
|
35.0 |
|
$ |
0.55 |
|
$ |
21.3 |
|
35.3 |
|
$ |
0.60 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common stock equivalents |
|
|
|
0.1 |
|
|
|
|
|
0.1 |
|
|
| ||||
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
$ |
19.3 |
|
35.1 |
|
$ |
0.55 |
|
$ |
21.3 |
|
35.4 |
|
$ |
0.60 |
|
Options to purchase 0.3 million shares of Class A common stock were outstanding during the second quarters of 2015 and 2014, respectively, but were not included in the computation of diluted EPS because to do so would be anti-dilutive.
|
|
For the First Six Months Ended June 28, 2015 |
|
For the First Six Months Ended June 29, 2014 |
| ||||||||||||
|
|
Income |
|
Shares |
|
Per Share |
|
Income |
|
Shares |
|
Per Share |
| ||||
|
|
(amounts in millions, except per share amounts) |
| ||||||||||||||
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
$ |
30.9 |
|
35.1 |
|
$ |
0.88 |
|
$ |
35.4 |
|
35.3 |
|
$ |
1.00 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common stock equivalents |
|
|
|
|
|
|
|
|
|
0.1 |
|
|
| ||||
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
$ |
30.9 |
|
35.1 |
|
$ |
0.88 |
|
$ |
35.4 |
|
35.4 |
|
$ |
1.00 |
|
Options to purchase 0.3 million shares of Class A common stock were outstanding during the first six months of 2015 and 2014, respectively, but were not included in the computation of diluted EPS because to do so would be anti-dilutive.
On April 30, 2013, the Companys Board of Directors authorized the repurchase of up to $90 million of the Companys Class A common stock from time to time on the open market or in privately negotiated transactions. In connection with this repurchase program, the Company entered into a Rule 10b5-1 plan, which permits shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The repurchase program may be suspended or discontinued at any time, subject to the terms of the Rule 10b5-1 plan with respect to the repurchase program. During the second quarter ended June 28, 2015, the Company repurchased approximately 185,000 shares of Class A common stock at a cost of approximately $10.1 million. During the first six months of 2015, the Company repurchased approximately 349,000 shares of Class A common stock at a cost of approximately $19.5 million. During the second quarter ended June 29, 2014, the Company repurchased approximately 186,000 shares of Class A common stock at a cost of approximately $10.6 million. During the six months ended June 29, 2014, the Company repurchased approximately 347,000 shares of Class A common stock at a cost of approximately $20.0 million. As of June 28, 2015, there was approximately $8 million remaining authorized for share repurchase under this program.
On July 27, 2015, the Companys Board of Directors authorized the repurchase of up to $100 million of the Companys Class A common stock from time to time on the open market or in privately negotiated transactions. The timing and number of shares repurchased will be determined by the Companys management based on its evaluation of market conditions and other factors. Repurchases may also be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The repurchase program may be suspended or discontinued at any time, subject to the terms of any Rule 10b5-1 plan the Company may enter into with respect to the repurchase program. The Company plans to complete repurchases under the previously existing stock repurchase program before initiating any purchases under the new program.
8. Segment Information
The Company operates in three geographic segments: Americas, EMEA, and Asia-Pacific. AERCO is included in the Americas segment results for the second quarter and the first six months ended June 28, 2015. Each of these segments is managed separately and has separate financial results that are reviewed by the Companys 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 Companys significant accounts and balances by segment, reconciled to the consolidated totals:
|
|
Second Quarter Ended |
|
Six Months Ended |
| ||||||||
|
|
June 28, |
|
June 29, |
|
June 28, |
|
June 29, |
| ||||
|
|
(in millions) |
| ||||||||||
Net sales |
|
|
|
|
|
|
|
|
| ||||
Americas |
|
$ |
262.8 |
|
$ |
241.8 |
|
$ |
500.2 |
|
$ |
460.9 |
|
EMEA |
|
112.2 |
|
143.9 |
|
221.2 |
|
283.0 |
| ||||
Asia-Pacific |
|
11.9 |
|
10.3 |
|
21.7 |
|
17.3 |
| ||||
Consolidated net sales |
|
$ |
386.9 |
|
$ |
396.0 |
|
$ |
743.1 |
|
$ |
761.2 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income (loss) |
|
|
|
|
|
|
|
|
| ||||
Americas |
|
$ |
36.1 |
|
$ |
29.0 |
|
$ |
60.3 |
|
$ |
51.6 |
|
EMEA |
|
9.4 |
|
13.1 |
|
14.8 |
|
22.0 |
| ||||
Asia-Pacific |
|
(1.8 |
) |
2.1 |
|
(0.3 |
) |
3.0 |
| ||||
Subtotal reportable segments |
|
43.7 |
|
44.2 |
|
74.8 |
|
76.6 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Corporate (*) |
|
(8.9 |
) |
(7.6 |
) |
(17.2 |
) |
(14.2 |
) | ||||
Consolidated operating income |
|
34.8 |
|
36.6 |
|
57.6 |
|
62.4 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest income |
|
0.2 |
|
0.2 |
|
0.4 |
|
0.3 |
| ||||
Interest expense |
|
(5.9 |
) |
(4.9 |
) |
(11.8 |
) |
(9.8 |
) | ||||
Other income (expense), net |
|
0.4 |
|
0.1 |
|
0.6 |
|
(0.3 |
) | ||||
Income from continuing operations before income taxes |
|
$ |
29.5 |
|
$ |
32.0 |
|
$ |
46.8 |
|
$ |
52.6 |
|
Capital expenditures |
|
|
|
|
|
|
|
|
| ||||
Americas |
|
$ |
4.1 |
|
$ |
2.7 |
|
$ |
8.2 |
|
$ |
4.9 |
|
EMEA |
|
2.6 |
|
2.6 |
|
3.8 |
|
5.1 |
| ||||
Asia-Pacific |
|
0.2 |
|
0.3 |
|
0.5 |
|
0.6 |
| ||||
Consolidated capital expenditures |
|
$ |
6.9 |
|
$ |
5.6 |
|
$ |
12.5 |
|
$ |
10.6 |
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
|
|
|
|
|
|
|
|
| ||||
Americas |
|
$ |
7.1 |
|
$ |
4.9 |
|
$ |
14.1 |
|
$ |
9.7 |
|
EMEA |
|
5.2 |
|
6.8 |
|
10.6 |
|
13.4 |
| ||||
Asia-Pacific |
|
0.6 |
|
0.4 |
|
1.2 |
|
0.9 |
| ||||
Consolidated depreciation and amortization |
|
$ |
12.9 |
|
$ |
12.1 |
|
$ |
25.9 |
|
$ |
24.0 |
|
|
|
|
|
|
|
|
|
|
| ||||
Identifiable assets (at end of period) |
|
|
|
|
|
|
|
|
| ||||
Americas |
|
|
|
|
|
$ |
1,071.9 |
|
$ |
768.2 |
| ||
EMEA |
|
|
|
|
|
737.0 |
|
877.9 |
| ||||
Asia-Pacific |
|
|
|
|
|
84.4 |
|
80.6 |
| ||||
Consolidated identifiable assets |
|
|
|
|
|
$ |
1,893.3 |
|
$ |
1,726.7 |
| ||
|
|
|
|
|
|
|
|
|
| ||||
Property, plant and equipment, net (at end of period) |
|
|
|
|
|
|
|
|
| ||||
Americas |
|
|
|
|
|
$ |
85.8 |
|
$ |
84.0 |
| ||
EMEA |
|
|
|
|
|
88.4 |
|
114.7 |
| ||||
Asia-Pacific |
|
|
|
|
|
12.4 |
|
13.6 |
| ||||
Consolidated property, plant and equipment, net |
|
|
|
|
|
$ |
186.6 |
|
$ |
212.3 |
|
* Corporate expenses are primarily for administrative compensation expense, internal controls costs, professional fees, including corporate-related legal and audit expenses, shareholder services and benefit administration costs.
The above operating segments are presented on a basis consistent with the presentation included in the Companys December 31, 2014 consolidated financial statements included in its Annual Report on Form 10-K. The EMEA segment was significantly impacted by foreign currency translation in the first six months of 2015 compared to the first six months of 2014.
The U.S. property, plant and equipment of the Companys Americas segment was $82.0 million and $79.5 million at June 28, 2015 and June 29, 2014, respectively. The following includes U.S. net sales of the Companys Americas segment:
|
|
Second Quarter Ended |
|
Six Months Ended |
| ||||||||
|
|
June 28, |
|
June 29, |
|
June 28, |
|
June 29, |
| ||||
|
|
(in millions) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
U.S. net sales |
|
$ |
244.4 |
|
$ |
222.1 |
|
$ |
465.8 |
|
$ |
423.7 |
|
The following includes intersegment sales for Americas, EMEA and Asia-Pacific:
|
|
Second Quarter Ended |
|
Six Months Ended |
| ||||||||
|
|
June 28, |
|
June 29, |
|
June 28, |
|
June 29, |
| ||||
|
|
(in millions) |
| ||||||||||
Intersegment Sales |
|
|
|
|
|
|
|
|
| ||||
Americas |
|
$ |
1.9 |
|
$ |
1.9 |
|
$ |
3.7 |
|
$ |
3.1 |
|
EMEA |
|
2.8 |
|
3.8 |
|
5.5 |
|
7.4 |
| ||||
Asia-Pacific |
|
32.6 |
|
41.4 |
|
63.1 |
|
80.4 |
| ||||
Intersegment sales |
|
$ |
37.3 |
|
$ |
47.1 |
|
$ |
72.3 |
|
$ |
90.9 |
|
9. Accumulated Other Comprehensive (Loss) Income
Accumulated other comprehensive (loss) income consists of the following:
|
|
Foreign |
|
Pension |
|
Accumulated Other |
| |||
|
|
(in millions) |
| |||||||
|
|
|
|
|
|
|
| |||
Balance December 31, 2014 |
|
$ |
(53.0 |
) |
$ |
(36.1 |
) |
$ |
(89.1 |
) |
Change in period |
|
(65.1 |
) |
0.2 |
|
(64.9 |
) | |||
Balance March 29, 2015 |
|
$ |
(118.1 |
) |
$ |
(35.9 |
) |
$ |
(154.0 |
) |
Change in period |
|
18.4 |
|
0.2 |
|
18.6 |
| |||
Balance June 28, 2015 |
|
$ |
(99.7 |
) |
$ |
(35.7 |
) |
$ |
(135.4 |
) |
|
|
|
|
|
|
|
| |||
Balance December 31, 2013 |
|
$ |
37.9 |
|
$ |
(25.9 |
) |
$ |
12.0 |
|
Change in period |
|
(4.3 |
) |
0.2 |
|
(4.1 |
) | |||
Balance March 30, 2014 |
|
$ |
33.6 |
|
$ |
(25.7 |
) |
$ |
7.9 |
|
Change in period |
|
(4.3 |
) |
0.1 |
|
(4.2 |
) | |||
Balance June 29, 2014 |
|
$ |
29.3 |
|
$ |
(25.6 |
) |
$ |
3.7 |
|
10. Debt
On February 18, 2014, the Company terminated its prior credit agreement and entered into a new Credit Agreement (the Credit Agreement) among the Company, certain subsidiaries of the Company who become borrowers under the Credit Agreement, JPMorgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender and Letter of Credit Issuer, and the other lenders referred to therein. The Credit Agreement provides for a $500 million, five-year, senior unsecured revolving credit facility which may be increased by an additional $500 million under certain circumstances and subject to the terms of the Credit Agreement. The Credit Agreement has a sublimit of up to $100 million in letters of credit. The Credit Agreement matures on February 18, 2019.
Borrowings outstanding under the Credit Agreement bear interest at a fluctuating rate per annum equal to an applicable percentage equal to (1) in the case of Eurocurrency rate loans, the British Bankers Association LIBOR rate plus an applicable percentage, ranging from 0.975% to 1.45%, determined by reference to the Companys consolidated leverage ratio, or (2) in the case of base rate loans and swing line loans, the highest of (a) the federal funds rate plus 0.5%, (b) the rate of interest in effect for such day as announced by JPMorgan Chase Bank, N.A. as its prime rate, and (c) the British Bankers Association LIBOR rate plus 1.0%, plus an applicable percentage, ranging from 0.00% to 0.45%, determined by reference to the Companys consolidated leverage ratio. In addition to
paying interest under the Credit Agreement, the Company is also required to pay certain fees in connection with the credit facility, including, but not limited to, an unused facility fee and letter of credit fees. Under the Credit Agreement, the Company is required to satisfy and maintain specified financial ratios and other financial condition tests. The Company may repay loans outstanding under the Credit Agreement from time to time without premium or penalty, other than customary breakage costs, if any, and subject to the terms of the Credit Agreement. As of June 28, 2015, the Company was in compliance with all covenants related to the Credit Agreement and had $200.2 million of unused and available credit under the Credit Agreement and $24.8 million of stand-by letters of credit outstanding on the Credit Agreement. The Company had $275 million of borrowings outstanding under the Credit Agreement at June 28, 2015.
The Company is a party to several note agreements as further detailed in Note 10 of Notes to Consolidated Financial Statements of the Annual Report on Form 10-K for the year ended December 31, 2014. The Company reclassified $225.0 million of 5.85% senior unsecured notes due April 2016 from long-term debt to current portion of long-term debt on the balance sheet as of June 28, 2015. These note agreements require the Company to maintain a fixed charge coverage ratio of consolidated EBITDA plus consolidated rent expense during the period to consolidated fixed charges. Consolidated fixed charges are the sum of consolidated interest expense for the period and consolidated rent expense. As of June 28, 2015, the Company was in compliance with all covenants regarding these note agreements.
11. Contingencies and Environmental Remediation
Accrual and Disclosure Policy
The Company is a defendant in numerous legal matters arising from its ordinary course of operations, including those involving product liability, environmental matters and commercial disputes.
The Company reviews its lawsuits and other legal proceedings on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for matters when the Company assesses that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Companys assessment of whether a loss is probable is based on its assessment of the ultimate outcome of the matter following all appeals.
Under the FASB-issued ASC 450 Contingencies, an event is reasonably possible if the chance of the future event or events occurring is more than remote but less than likely and an event is remote if the chance of the future event or events occurring is slight. Thus, references to the upper end of the range of reasonably possible loss for cases in which the Company is able to estimate a range of reasonably possible loss mean the upper end of the range of loss for cases for which the Company believes the risk of loss is more than slight.
There may continue to be exposure to loss in excess of any amount accrued. When it is possible to estimate the reasonably possible loss or range of loss above the amount accrued for the matters disclosed, that estimate is aggregated and disclosed. The Company records legal costs associated with its legal contingencies as incurred, except for legal costs associated with product liability claims which are included in the actuarial estimates used in determining the product liability accrual.
As of June 28, 2015, the Company estimates that the aggregate amount of reasonably possible loss in excess of the amount accrued for its legal contingencies is approximately $4.5 million pre-tax. With respect to the estimate of reasonably possible loss, management has estimated the upper end of the range of reasonably possible loss based on (i) the amount of money damages claimed, where applicable, (ii) the allegations and factual development to date, (iii) available defenses based on the allegations, and/or (iv) other potentially liable parties. This estimate is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimate will change from time to time, and actual results may vary significantly from the current estimate. In the event of an unfavorable outcome in one or more of the matters described below, the ultimate liability may be in excess of amounts currently accrued, if any, and may be material to the Companys operating results or cash flows for a particular quarterly or annual period. However, based on information currently known to it, management believes that the ultimate outcome of all matters, as they are resolved over time, is not likely to have a material adverse effect on the financial condition of the Company, though the outcome could be material to the Companys operating results for any particular period depending, in part, upon the operating results for such period.
Connector Class Actions
In November and December 2014, Watts Water Technologies, Inc. and Watts Regulator Co. were named as defendants in three separate putative nationwide class action complaints (Meyers v. Watts Water Technologies, Inc., United States District Court for the Southern District of Ohio; Ponzo v. Watts Regulator Co., United States District Court for the District of Massachusetts; Sharp v. Watts Regulator Co., United States District Court for the District of Massachusetts) seeking to recover damages and other relief based on the alleged failure of water heater connectors. On June 26, 2015, plaintiffs in the three actions filed a consolidated amended complaint, Ponzo v. Watts Regulator Co., in the United States District Court for the District of Massachusetts. The complaint seeks among other items, damages in an unspecified amount, replacement costs, injunctive relief, declaratory relief, and attorneys fees and costs.
In February 2015, Watts Water Technologies, Inc. and Watts Regulator Co. were named as defendants in a putative nationwide class action complaint (Klug v. Watts Water Technologies, Inc., et al., United States District Court for the District of Nebraska) seeking to recover damages and other relief based on the alleged failure of the Companys Floodsafe connectors. On June 26, 2015, the Company filed a partial motion to dismiss the complaint. In response, on July 17, 2015, plaintiff filed an amended complaint, Klug v. Watts Water Technologies, Inc., et al., United States District Court for the District of Nebraska. The complaint seeks among other items, damages in an unspecified amount, injunctive relief, declaratory relief, and attorneys fees and costs.
The Company is unable to estimate a range of reasonably possible loss for the above matters in which damages have not been specified because: (i) the proceedings are in the early stages; (ii) there is uncertainty as to the likelihood of a class being certified or the ultimate size of the class; (iii) there is uncertainty as to the resolution of certain legal and procedural motions; (iv) there are significant factual issues to be resolved; and (v) there are novel legal issues presented.
Product Liability
The Company is subject to a variety of potential liabilities in connection with product liability cases. The Company maintains high-deductible product liability and other insurance coverage, which the Company believes to be generally in accordance with industry practices. For product liability cases in the U.S., management establishes its product liability accrual, which includes legal costs associated with accrued claims, by utilizing third-party actuarial valuations which incorporate historical trend factors and the Companys specific claims experience derived from loss reports provided by third-party claims administrators.
Changes in the nature of product liability claims, legal costs, or the actual settlement amounts could affect the adequacy of the estimates and require changes to the accrual. Because the liability is an estimate, the ultimate liability may be more or less than reported.
Environmental Remediation
The Company has been named as a potentially responsible party with respect to a limited number of identified contaminated sites. The levels of contamination vary significantly from site to site as do the related levels of remediation efforts. Environmental liabilities are recorded based on the most probable cost, if known, or on the estimated minimum cost of remediation. Accruals are not discounted to their present value, unless the amount and timing of expenditures are fixed and reliably determinable. The Company accrues estimated environmental liabilities based on assumptions, which are subject to a number of factors and uncertainties. Circumstances that can affect the reliability and precision of these estimates include identification of additional sites, environmental regulations, level of clean-up required, technologies available, number and financial condition of other contributors to remediation and the time period over which remediation may occur. The Company recognizes changes in estimates as new remediation requirements are defined or as new information becomes available.
Asbestos Litigation
The Company is defending approximately 280 lawsuits in different jurisdictions, alleging injury or death as a result of exposure to asbestos. The complaints in these cases typically name a large number of defendants and do not identify any particular Company products as a source of asbestos exposure. To date, discovery has failed to yield evidence of substantial exposure to any Company products and no judgments have been entered against the Company.
Other Litigation
Other lawsuits and proceedings or claims, arising from the ordinary course of operations, are also pending or threatened against the Company.
12. Defined Benefit Plans
For the majority of its U.S. employees, the Company sponsors a funded non-contributory defined benefit pension plan, the Watts Water Technologies, Inc. Pension Plan (the Pension Plan), and an unfunded non-contributory defined benefit pension plan, the Watts Water Technologies, Inc. Supplemental Employees Retirement Plan (the SERP). Benefits are based primarily on years of service and employees compensation. The funding policy of the Company for these plans is to contribute an annual amount that meets the Pension Plans minimum funding requirements and does not exceed the maximum amount that can be deducted for federal income tax purposes. On October 31, 2011, the Companys Board of Directors voted to cease accruals effective December 31, 2011 under both the Companys Pension Plan and the SERP. On April 28, 2014, the Companys Board of Directors voted to terminate the Companys Pension Plan and the SERP. The Board of Directors authorized the Company to make such contributions to the Pension Plan and SERP as may be necessary to make the plans sufficient to settle all plan liabilities.
The Pension Plan was terminated effective July 31, 2014, and on June 4, 2015 the Company received the Internal Revenue Service (IRS) favorable determination letter for terminating the Pension Plan. The Pension Plan is now moving through the distribution phase of the plan termination process and the Company expects all plan assets to be fully distributed by the end of the third quarter of 2015. Except for retirees receiving payments under the Pension Plan (or in pay status), participants in the Pension Plan will have the choice of receiving either a single lump sum payment or an annuity. Retirees in pay status will continue to receive payments of their
pension plan benefits pursuant to their current annuity elections. The Company will purchase annuity contracts from an insurance company for all retirees and participants that choose annuities as a payment option under the Pension Plan.
The SERP was terminated effective May 15, 2014. The Company will settle all liabilities under the SERP in accordance with Section 409A of the Internal Revenue Code by paying lump sums to plan participants. The Company expects all payments to be made by the end of the third quarter of 2015.
The components of net periodic benefit cost are as follows:
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|
Second Quarter Ended |
|
Six Months Ended |
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|
|
June 28, |
|
June 29, |
|
June 28, |
|
June 29, |
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|
|
(in millions) |
| ||||||||||
Service cost administrative costs |
|
$ |
0.4 |
|
$ |
0.1 |
|
$ |
0.8 |
|
$ |
0.3 |
|
Interest costs on benefits obligation |
|
1.4 |
|
1.5 |
|
2.8 |
|
3.0 |
| ||||
Expected return on assets |
|
(1.2 |
) |
(1.5 |
) |
(2.4 |
) |
(3.0 |
) | ||||
Net actuarial loss amortization |
|
0.4 |
|
0.2 |
|