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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

x

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

 

For the quarterly period ended September 27, 2009

 

or

 

o

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

 

For the transition period from              to              

 

Commission file number 001-11499

 

WATTS WATER TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

04-2916536

(State or Other Jurisdiction of Incorporation or
Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

815 Chestnut Street, North Andover, MA

 

01845

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (978) 688-1811

 

 

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

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at October 23, 2009

 

Class A Common Stock, $0.10 par value

 

29,489,765

 

 

 

 

 

Class B Common Stock, $0.10 par value

 

7,193,880

 

 

 

 



Table of Contents

 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

 

INDEX

 

Part I. Financial Information

 

 

 

Item 1. Financial Statements

 

 

 

 

 

Consolidated Balance Sheets at September 27, 2009 and December 31, 2008 (unaudited)

 

 

 

 

 

Consolidated Statements of Operations for the Third Quarters Ended September 27, 2009 and September 28, 2008 (unaudited)

 

 

 

 

 

Consolidated Statements of Operations for the Nine Months Ended September 27, 2009 and September 28, 2008 (unaudited)

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 27, 2009 and September 28, 2008 (unaudited)

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

 

 

Item 2.

 

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

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

Item 4.

 

Controls and Procedures

 

 

 

Part II. Other Information

 

 

 

Item 1.

 

Legal Proceedings

 

 

 

Item 1A.

 

Risk Factors

 

 

 

Item 6.

 

Exhibits

 

 

 

Signatures

 

 

 

 

 

Exhibit Index

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share information)

(Unaudited)

 

 

 

September 27,

 

December 31,

 

 

 

2009

 

2008

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

233.3

 

$

165.6

 

Short-term investment securities

 

6.5

 

 

Trade accounts receivable, less allowance for doubtful accounts of $8.3 at September 27, 2009 and $12.2 at December 31, 2008

 

200.0

 

221.3

 

Inventories, net:

 

 

 

 

 

Raw materials

 

94.3

 

107.4

 

Work in process

 

35.3

 

44.9

 

Finished goods

 

148.8

 

186.7

 

Total Inventories

 

278.4

 

339.0

 

Prepaid expenses and other assets

 

13.4

 

14.6

 

Deferred income taxes

 

49.6

 

47.5

 

Assets of discontinued operations

 

27.3

 

11.6

 

Total Current Assets

 

808.5

 

799.6

 

PROPERTY, PLANT AND EQUIPMENT:

 

 

 

 

 

Property, plant and equipment, at cost

 

474.7

 

465.4

 

Accumulated depreciation

 

(252.2

)

(228.0

)

Property, plant and equipment, net

 

222.5

 

237.4

 

OTHER ASSETS:

 

 

 

 

 

Goodwill

 

429.7

 

431.3

 

Long-term investment securities

 

 

8.3

 

Intangible assets, net

 

160.7

 

174.6

 

Other, net

 

9.2

 

8.9

 

TOTAL ASSETS

 

$

1,630.6

 

$

1,660.1

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

88.7

 

$

115.2

 

Accrued expenses and other liabilities

 

116.0

 

103.9

 

Accrued compensation and benefits

 

44.4

 

41.6

 

Current portion of long-term debt

 

50.9

 

4.5

 

Liabilities of discontinued operations

 

39.7

 

29.7

 

Total Current Liabilities

 

339.7

 

294.9

 

LONG-TERM DEBT, NET OF CURRENT PORTION

 

304.5

 

409.8

 

DEFERRED INCOME TAXES

 

39.7

 

42.4

 

OTHER NONCURRENT LIABILITIES

 

70.3

 

70.6

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

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

 

 

 

Class A Common Stock, $0.10 par value; 80,000,000 shares authorized; 1 vote per share; issued and outstanding, 29,484,964 shares at September 27, 2009 and 29,250,175 shares at December 31, 2008

 

2.9

 

2.9

 

Class B Common Stock, $0.10 par value; 25,000,000 shares authorized; 10 votes per share; issued and outstanding, 7,193,880 shares at September 27, 2009 and 7,293,880 at December 31, 2008

 

0.7

 

0.7

 

Additional paid-in capital

 

392.1

 

386.9

 

Retained earnings

 

441.9

 

451.7

 

Accumulated other comprehensive income

 

38.8

 

0.2

 

Total Stockholders’ Equity

 

876.4

 

842.4

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

1,630.6

 

$

1,660.1

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in millions, except per share information)

(Unaudited)

 

 

 

Third Quarter Ended

 

 

 

September 27,
2009

 

September 28,
2008

 

Net sales

 

$

303.8

 

$

372.0

 

Cost of goods sold

 

194.4

 

249.6

 

GROSS PROFIT

 

109.4

 

122.4

 

Selling, general & administrative expenses

 

78.8

 

91.4

 

Restructuring and other charges

 

6.3

 

0.8

 

OPERATING INCOME

 

24.3

 

30.2

 

Other (income) expense:

 

 

 

 

 

Interest income

 

(0.3

)

(0.8

)

Interest expense

 

5.5

 

6.6

 

Other

 

(0.5

)

0.8

 

Total other expense

 

4.7

 

6.6

 

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND NONCONTROLLING INTEREST

 

19.6

 

23.6

 

Provision for income taxes

 

8.0

 

7.3

 

INCOME FROM CONTINUING OPERATIONS

 

11.6

 

16.3

 

Income (loss) from discontinued operations, net of taxes

 

(8.2

)

0.4

 

NET INCOME BEFORE NONCONTROLLING INTEREST

 

3.4

 

16.7

 

Plus: Net loss attributable to the noncontrolling interest

 

 

 

NET INCOME ATTRIBUTABLE TO WATTS WATER TECHNOLOGIES, INC.

 

$

3.4

 

$

16.7

 

Net income from continuing operations attributable to Watts Water Technologies, Inc.

 

$

11.6

 

$

16.3

 

 

 

 

 

 

 

BASIC EPS

 

 

 

 

 

Income (loss) per share attributable to Watts Water Technologies, Inc.:

 

 

 

 

 

Continuing operations

 

$

0.31

 

$

0.44

 

Discontinued operations

 

(0.22

)

0.01

 

NET INCOME

 

$

0.09

 

$

0.46

 

Weighted average number of shares

 

37.0

 

36.5

 

 

 

 

 

 

 

DILUTED EPS

 

 

 

 

 

Income (loss) per share attributable to Watts Water Technologies, Inc.:

 

 

 

 

 

Continuing operations

 

$

0.31

 

$

0.44

 

Discontinued operations

 

(0.22

)

0.01

 

NET INCOME

 

$

0.09

 

$

0.45

 

Weighted average number of shares

 

37.1

 

36.7

 

 

 

 

 

 

 

Dividends per share

 

$

0.11

 

$

0.11

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in millions, except per share information)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 27,
2009

 

September 28,
2008

 

Net sales

 

$

902.7

 

$

1,089.8

 

Cost of goods sold

 

587.1

 

724.7

 

GROSS PROFIT

 

315.6

 

365.1

 

Selling, general & administrative expenses

 

238.7

 

272.0

 

Restructuring and other charges

 

8.6

 

2.8

 

OPERATING INCOME

 

68.3

 

90.3

 

Other (income) expense:

 

 

 

 

 

Interest income

 

(0.8

)

(4.4

)

Interest expense

 

16.8

 

20.0

 

Other

 

(1.0

)

4.5

 

Total other expense

 

15.0

 

20.1

 

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND NONCONTROLLING INTEREST

 

53.3

 

70.2

 

Provision for income taxes

 

22.4

 

23.2

 

INCOME FROM CONTINUING OPERATIONS

 

30.9

 

47.0

 

Income (loss) from discontinued operations, net of taxes

 

(27.7

)

1.3

 

NET INCOME BEFORE NONCONTROLLING INTEREST

 

3.2

 

48.3

 

Plus: Net loss attributable to the noncontrolling interest

 

 

1.9

 

NET INCOME ATTRIBUTABLE TO WATTS WATER TECHNOLOGIES, INC.

 

$

3.2

 

$

50.2

 

Net income from continuing operations attributable to Watts Water Technologies, Inc.

 

$

30.9

 

$

48.9

 

 

 

 

 

 

 

BASIC EPS

 

 

 

 

 

Income (loss) per share attributable to Watts Water Technologies, Inc.:

 

 

 

 

 

Continuing operations

 

$

0.84

 

$

1.33

 

Discontinued operations

 

(0.75

)

0.04

 

NET INCOME

 

$

0.09

 

$

1.37

 

Weighted average number of shares

 

37.0

 

36.7

 

 

 

 

 

 

 

DILUTED EPS

 

 

 

 

 

Income (loss) per share attributable to Watts Water Technologies, Inc.:

 

 

 

 

 

Continuing operations

 

$

0.83

 

$

1.32

 

Discontinued operations

 

(0.75

)

0.04

 

NET INCOME

 

$

0.09

 

$

1.36

 

Weighted average number of shares

 

37.1

 

36.9

 

 

 

 

 

 

 

Dividends per share

 

$

0.33

 

$

0.33

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 27,
2009

 

September 28,
2008

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income attributable to Watts Water Technologies, Inc.

 

$

3.2

 

$

50.2

 

Less: Income (loss) from discontinued operations

 

(27.7

)

1.3

 

Income from continuing operations attributable to Watts Water Technologies, Inc.

 

30.9

 

48.9

 

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

 

 

 

 

 

Depreciation

 

24.2

 

23.9

 

Amortization

 

10.2

 

8.8

 

Stock-based compensation

 

3.7

 

4.2

 

Deferred income tax benefit

 

(4.6

)

(14.9

)

Loss on disposal/impairment of property, plant & equipment

 

5.5

 

0.3

 

Other

 

1.3

 

(0.1

)

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

 

 

 

 

 

Accounts receivable

 

19.8

 

(18.0

)

Inventories

 

62.5

 

(4.3

)

Prepaid expenses and other assets

 

1.2

 

6.2

 

Accounts payable, accrued expenses and other liabilities

 

(6.9

)

35.4

 

Net cash provided by continuing operating activities

 

147.8

 

90.4

 

INVESTING ACTIVITIES

 

 

 

 

 

Additions to property, plant and equipment

 

(15.7

)

(20.7

)

Proceeds from the sale of property, plant and equipment

 

0.4

 

0.5

 

Investments in securities

 

 

(2.6

)

Proceeds from sale of securities

 

1.7

 

33.3

 

Proceeds from purchase price settlement

 

1.1

 

 

Increase in other assets

 

(0.3

)

 

Business acquisitions, net of cash acquired

 

(0.3

)

(174.6

)

Net cash used in investing activities

 

(13.1

)

(164.1

)

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from long-term debt

 

1.7

 

19.9

 

Payments of long-term debt

 

(61.1

)

(51.8

)

Payment of capital leases

 

(0.9

)

(1.1

)

Proceeds from share transactions under employee stock plans

 

0.2

 

1.6

 

Tax benefit of stock awards exercised

 

(0.5

)

 

Payments to repurchase common stock

 

 

(44.5

)

Dividends

 

(12.2

)

(12.2

)

Net cash used in financing activities

 

(72.8

)

(88.1

)

Effect of exchange rate changes on cash and cash equivalents

 

6.3

 

0.6

 

Net cash provided by (used in) operating activities of discontinued operations

 

(0.5

)

0.3

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

67.7

 

(160.9

)

Cash and cash equivalents at beginning of year

 

165.6

 

290.3

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

233.3

 

$

129.4

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

Issuance of stock under management stock purchase plan

 

$

1.4

 

$

1.6

 

 

 

 

 

 

 

CASH PAID FOR:

 

 

 

 

 

Interest

 

$

11.6

 

$

15.4

 

Taxes

 

$

27.0

 

$

31.7

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1. Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the Watts Water Technologies, Inc. (the Company) Consolidated Balance Sheet as of September 27, 2009, the Consolidated Statements of Operations for the third quarter and nine months ended September 27, 2009 and the third quarter and nine months ended September 28, 2008, and the Consolidated Statements of Cash Flows for the nine months ended September 27, 2009 and the nine months ended September 28, 2008.

 

The balance sheet at December 31, 2008 has been derived from the audited consolidated financial statements at that date. The accounting policies followed by the Company are described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008. 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, 2008. Operating results for the interim period presented are not necessarily indicative of the results to be expected for the year ending December 31, 2009.

 

The Company operates on a 52-week fiscal year ending on December 31st.  Any third quarter data contained in this Quarterly Report on Form 10-Q generally reflects the results of operations for the 13-week period ended on the Sunday nearest September 30th of the respective year.

 

In preparing the accompanying unaudited consolidated financial statements, the Company has reviewed, as determined necessary by the Company’s management, events that have occurred after September 27, 2009, up until the issuance of the financial statements, which occurred on November 4, 2009.

 

2. Accounting Policies

 

Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Goodwill and Long-Lived Assets

 

The changes in the carrying amount of goodwill by geographic segment from December 31, 2008 to September 27, 2009 are as follows:

 

 

 

North
America

 

Europe

 

China

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Carrying amount at the beginning of period

 

$

188.3

 

$

229.0

 

$

14.0

 

$

431.3

 

Adjustments to goodwill during the period

 

(1.1

)

(8.4

)

(6.1

)

(15.6

)

Effect of change in exchange rates used for translation

 

0.6

 

13.4

 

 

14.0

 

Carrying amount at end of period

 

$

187.8

 

$

234.0

 

$

7.9

 

$

429.7

 

 

In February 2009, the Company reached a settlement with the seller regarding a purchase price adjustment to the Core Industries, Inc. acquisition that resulted in the Company receiving $1.1 million.  In May 2009, the Company deconsolidated TEAM Precision Pipework, Ltd. (TEAM).  As a result of the deconsolidation, the Company reduced goodwill by $8.4 million associated with TEAM.  See Note 3 for additional information relating to the deconsolidation of TEAM.  In September 2009, the Company’s Board of Directors approved a plan to dispose of its investment in Watts Valve (Changsha) Co., Ltd. (CWV), an indirect wholly-owned subsidiary of the Company located in China.  The Company classified the operations of CWV as a discontinued operation and recorded a decrease in the net assets to their estimated fair market value less costs to sell.  As a result, the Company reduced goodwill by $6.1 million associated with CWV.  See Note 3 and Note 10 for additional information relating to CWV.

 

Goodwill is tested for impairment at least annually or more frequently if events or circumstances indicate that it is “more likely than not” that goodwill might be impaired, such as a change in business conditions. The Company performs its annual goodwill impairment assessment in the fourth quarter of each year.

 

In connection with the restructuring plan announced in February 2009, the Company will be closing several facilities to reduce the overall size of the manufacturing footprint.  The Company concluded that it is more likely than not that the carrying amount of certain assets held and used may not be recoverable.  Specifically, the Company identified a long-lived asset group primarily comprised of

 

7



Table of Contents

 

buildings and land use rights in China.  The Company used an undiscounted future cash flow model to test the long-lived asset group based on the primary asset identified, the current economic outlook and the estimated fair value from the ultimate disposition of the asset group.  The inputs used in this analysis are unobservable inputs (level 3).  Based on the analysis performed, the Company recorded a $5.5 million impairment charge for one asset group in China during the quarter ended September 27, 2009. This charge is reported in the restructuring and other charges in the consolidated statements of operations.

 

In connection with the plan to dispose of CWV, certain long-lived assets were reduced by $1.4 million to reflect their estimated fair market value.  This charge was recorded in discontinued operations as part of the $5.9 million loss.

 

Intangible assets include the following at September 27, 2009:

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

 

 

(in millions)

 

 

 

 

 

 

 

Patents

 

$

18.1

 

$

(8.1

)

Customer relationships

 

109.5

 

(32.9

)

Technology

 

7.5

 

(4.0

)

Other

 

14.4

 

(5.5

)

Total amortizable intangibles

 

149.5

 

(50.5

)

Intangible assets not subject to amortization

 

61.7

 

 

Total

 

$

211.2

 

$

(50.5

)

 

Aggregate amortization expense for amortized intangible assets for the third quarters of 2009 and 2008 was $3.4 million and $3.7 million, respectively, and for the nine-month periods of 2009 and 2008 was $10.2 million and $8.8 million, respectively. Additionally, future amortization expense on amortizable intangible assets is approximately $3.1 million for the remainder of 2009, $12.5 million for 2010, $12.2 million for 2011, $10.5 million for 2012 and $9.5 million for 2013. Amortization expense is provided 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 10.0 years. Patents, customer relationships, technology and other amortizable intangibles have weighted-average remaining lives of 7.6 years, 9.3 years, 4.5 years and 18.5 years, respectively. Intangible assets not subject to amortization primarily include trademarks and unpatented technology.

 

Stock-Based Compensation

 

The Company maintains three stock incentive plans under which key employees and non-employee members of the Company’s Board of Directors have been granted incentive stock options (ISOs) and nonqualified stock options (NSOs) to purchase the Company’s Class A Common Stock. Only one plan, the 2004 Stock Incentive Plan, is currently available for the grant of new equity awards. Stock options granted under prior plans became exercisable over a five-year period at the rate of 20% per year and expire ten years after the date of grant. Under the 2004 Stock Incentive Plan, options become exercisable over a four-year period at the rate of 25% per year and expire ten years after the grant date. ISOs and NSOs granted under the plans may have exercise prices of not less than 100% and 50% of the fair market value of the Class A Common Stock on the date of grant, respectively. The Company’s current practice is to grant all options at fair market value on the grant date.  The Company issued 213,500 and 202,000 options under the 2004 Stock Incentive Plan in the first nine months of 2009 and 2008, respectively.

 

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

 

 

 

2009

 

2008

 

Expected life (years)

 

6.0

 

6.0

 

Expected stock price volatility

 

41.2

%

35.6

%

Expected dividend yield

 

1.7

%

1.5

%

Risk-free interest rate

 

2.8

%

3.5

%

 

The above assumptions were used to determine the weighted average grant-date fair value of stock options of $9.70 and $10.10 in 2009 and 2008, respectively.

 

The Company also grants shares of restricted stock to key employees and non-employee members of the Company’s Board of Directors under the 2004 Stock Incentive Plan. Shares of restricted stock granted to employees vest over a three-year period at the rate of one-third per year. Stock awards to non-employee members of the Company’s Board of Directors are fully vested at the time of grant. The restricted stock awards are amortized to expense on a straight-line basis over the vesting period. The Company issued 84,535 and 79,597 shares of restricted stock under the 2004 Stock Incentive Plan in the third quarters of 2009 and 2008, respectively.  The Company issued 86,241 and 79,597 shares of restricted stock under the 2004 Stock Incentive Plan in the first nine months of 2009 and 2008, respectively.

 

The Company also has a Management Stock Purchase Plan that allows for the granting of restricted stock units (RSUs) to 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 provides the key employee with the right to purchase a share of Class A Common Stock at 67% of the fair market

 

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value on the date of grant.  RSUs vest annually over a three-year period from the grant date.  An aggregate of 2,000,000 shares of Class A Common Stock may be issued under the Management Stock Purchase Plan.  The Company granted 150,098 RSUs and 60,128 RSUs in the first nine months of 2009 and 2008, respectively.

 

The fair value of each share 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:

 

 

 

2009

 

2008

 

Expected life (years)

 

3.0

 

3.0

 

Expected stock price volatility

 

45.0

%

37.2

%

Expected dividend yield

 

2.2

%

1.5

%

Risk-free interest rate

 

1.4

%

2.2

%

 

The above assumptions were used to determine the weighted average grant-date fair value of RSUs of $8.14 and $11.44 in 2009 and 2008, respectively.

 

A more detailed description of each of these equity incentive plans can be found in Note 13 of notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

Shipping and Handling

 

The Company’s shipping costs included in selling, general and administrative expenses were $8.1 million and $11.0 million for the third quarters of 2009 and 2008, respectively, and were $23.2 million and $29.5 million for the first nine months of 2009 and 2008, respectively.

 

Research and Development

 

Research and development costs included in selling, general and administrative expenses were $4.2 million and $4.0 million for the third quarters of 2009 and 2008, respectively, and were $12.9 million and $13.2 million for the first nine months of 2009 and 2008, respectively.

 

Taxes, Other than Income Taxes

 

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

 

Income Taxes

 

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

 

New Accounting Standards

 

In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2009-1, which amended the FASB Accounting Standards Codifiction (ASC) for the issuance of FASB Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162”(ASU No. 2009-1).  ASU No. 2009-1 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).  This standard also establishes the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of non-governmental financial statements. ASU No. 2009-1 is effective for all interim and annual financial statements issued after September 15, 2009.  The adoption of ASU No. 2009-1 did not have a material impact on the Company’s consolidated financial statements.

 

In June 2009, FASB issued FAS No. 167, “Amendments to FASB Interpretation No. 46(R)”(FAS No. 167).  FAS No. 167 amends certain requirements of FASB Interpretation No. 46(R) to require an entity to perform an analysis to determine whether the variable interest or interests give it a controlling financial interest.  This statement also requires an entity to regularly reassess whether the entity has a controlling financial interest in the variable interest or interests.  This statement will also expand disclosures on variable interest or interests in the footnotes.  FAS No. 167 is effective for the first annual reporting period beginning after November 15, 2009 as well as the interim period therein.  The Company does not expect the adoption of FAS No. 167 will have a material impact on its consolidated financial statements.

 

In June 2009, FASB issued FAS No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140” (FAS No. 166). This statement eliminates the concept of a qualifying special-purpose entity as defined in FAS No. 140.  This statement also establishes more stringent conditions for reporting a transfer of a portion of a financial asset as a sale and changes the initial measurement of

 

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a transferor’s interest in transferred financial assets.   FAS No. 166 also expands disclosures for interim and annual reports.  This statement is effective for the first annual reporting period beginning after November 15, 2009.  The Company does not expect the adoption of FAS No. 166 will have a material impact on its consolidated financial statements.

 

3. Discontinued Operations

 

In September 2009, the Company’s Board of Directors approved the sale of its investment in CWV.  CWV is a leading manufacturer of large diameter hydraulic-actuated butterfly valves for thermo-power and hydro-power plants, water distribution projects and water works projects in China.  Management determined the CWV business no longer fit strategically with the Company.  The Company has engaged the services of an investment bank to assist in the disposition.  See Note 10 for further information related to CWV.

 

The Company evaluated the classification of CWV and concluded that the net assets qualified as discontinued operations.  The Company evaluated the fair value of the net assets of CWV and recorded an estimated pre-tax loss of approximately $5.9 million.  The Company estimated the fair value of the net assets based on the likely proceeds to be received in the sale process.  The Company estimated the likely proceeds based on recent comparable transactions .  In addition to examining recent transactions, the Company also estimated the fair value of the business using a discounted cash flow model.  The inputs used in this analysis are unobservable inputs (level 3).  The final loss may be different from the estimate as the actual loss will be dependent on the actual proceeds received.  In addition, the Company recorded $1.4 million for income taxes, including a charge to pay for previously recognized tax benefits associated with tax holidays which will no longer be realized as a result of the disposition.    The Company concluded that the future cash flows associated with CWV will be completely eliminated from the continuing operations of the Company.  As such, the Company classified CWV’s result of operations and the estimated loss from the disposition as discontinued operations for all periods presented.

 

In May 2009, the Company liquidated its TEAM business, located in Ammanford, U.K. TEAM custom designed and manufactured manipulated pipe and hose tubing assemblies and served the heating, ventilation and air conditioning and automotive markets in Western Europe.  Management determined the business no longer fit strategically with the Company.  On May 22, 2009, the Company appointed an administrator for TEAM under the United Kingdom Insolvency Act of 1986.  During the administration process, the administrator has sole control over, and responsibility for, TEAM’s operations, assets and liabilities.   The Company deconsolidated TEAM when the administrator obtained control of TEAM.  The deconsolidation resulted in the recognition of a $18.8 million non-cash loss in the quarter ended June 28, 2009.  During the quarter ended September 27, 2009, the Company was informed that the administrator completed the sale of TEAM’s assets for funds sufficient to pay all creditors.  The Company evaluated the operations of TEAM and determined that it will not have a continuing involvement in TEAM’s operations and cash flows.  As a result of the loss of control, TEAM’s cash flows and operations have been completely eliminated from the continuing operations of the Company.  As such, the Company has classified TEAM’s results of operations and the loss from deconsolidation as discontinued operations for all periods presented.

 

In September 1996, the Company divested its Municipal Water Group businesses, which included Henry Pratt, James Jones Company and Edward Barber and Company Ltd.  The discontinued operating expense for the third quarters and first nine months of 2009 and 2008 are related to the operations and write-off of TEAM, operations and write down of the net assets of CWV and legal costs, net of reserve adjustments, associated with the James Jones Litigation, which is described in Part I, Item 1, “Business - Product Liability, Environmental and Other Litigation Matters” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

Condensed operating statements for discontinued operations are summarized below:

 

 

 

Third Quarter Ended

 

 

 

September 27,
2009

 

September 28,
2008

 

 

 

(in millions)

 

Operating income (loss) — CWV

 

$

(0.9

)

$

0.7

 

Costs and expenses - Municipal Water Group

 

 

(0.3

)

Write down of net assets — CWV

 

(5.9

)

 

Income (loss) before income taxes

 

(6.8

)

0.4

 

Income tax expense

 

1.4

 

 

Income (loss) from discontinued operations, net of taxes

 

$

(8.2

)

$

0.4

 

 

 

 

Nine Months Ended

 

 

 

September 27,
2009

 

September 28,
2008

 

 

 

(in millions)

 

Operating income (loss) — TEAM

 

$

(0.3

)

$

0.8

 

Operating income (loss) — CWV

 

(1.3

)

1.4

 

Costs and expenses - Municipal Water Group

 

(0.2

)

(0.8

)

Write down of net assets — CWV

 

(5.9

)

 

Loss on disposal — TEAM

 

(18.8

)

 

Income (loss) before income taxes

 

(26.5

)

1.4

 

Income tax expense

 

1.2

 

0.1

 

Income (loss) from discontinued operations, net of taxes

 

$

(27.7

)

$

1.3

 

 

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The Company did not recognize any tax benefits on the write down of CWV and the disposal of TEAM as the Company does not believe that it is more likely than not that the tax benefits would be realized.

 

Revenues reported in discontinued operations are as follows:

 

 

 

Third Quarter Ended

 

 

 

September 27,
2009

 

September 28,
2008

 

 

 

(in millions)

 

Revenues — CWV

 

$

3.4

 

$

3.9

 

Revenues — TEAM

 

 

3.4

 

Total revenues — discontinued operations

 

$

3.4

 

$

7.3

 

 

 

 

Nine Months Ended

 

 

 

September 27,
2009

 

September 28,
2008

 

 

 

(in millions)

 

Revenues — CWV

 

$

10.4

 

$

10.7

 

Revenues — TEAM

 

2.6

 

11.8

 

Total revenues — discontinued operations

 

$

13.0

 

$

22.5

 

 

The carrying amounts of major classes of assets and liabilities at September 27, 2009 and December 31, 2008 associated with the Municipal Water Group, relating primarily to reserves for the James Jones Litigation, are as follows:

 

 

 

September 27,
2009

 

December 31,
2008

 

 

 

(in millions)

 

Prepaid expenses and other assets

 

$

1.2

 

$

0.8

 

Deferred income taxes

 

10.5

 

10.8

 

Assets of discontinued operations

 

$

11.7

 

$

11.6

 

Accrued expenses and other liabilities

 

$

29.9

 

$

29.7

 

Liabilities of discontinued operations

 

$

29.9

 

$

29.7

 

 

The major classes of assets and liabilities associated with the operations of CWV at September 27, 2009 are as follows:

 

 

 

September 27,
2009

 

 

 

 

 

(in millions)

 

 

 

Accounts receivable

 

$

5.9

 

 

 

Inventories

 

3.4

 

 

 

Prepaid expenses and other assets

 

1.0

 

 

 

Property, plant & equipment, net

 

2.5

 

 

 

Intangible assets

 

2.8

 

 

 

Assets of discontinued operations

 

$

15.6

 

 

 

Accounts payable

 

$

2.6

 

 

 

Accrued expenses and other liabilities

 

6.6

 

 

 

Deferred taxes payable

 

0.6

 

 

 

Liabilities of discontinued operations

 

$

9.8

 

 

 

 

The major classes of assets and liabilities associated with the operations of CWV and TEAM at December 31, 2008 are as follows:

 

 

 

December 31,
2008

 

 

 

 

 

(in millions)

 

 

 

Accounts receivable

 

$

5.9

 

 

 

Inventories

 

5.3

 

 

 

Prepaid expenses and other assets

 

1.0

 

 

 

Property, plant & equipment, net

 

6.4

 

 

 

Intangible assets

 

8.6

 

 

 

Goodwill

 

13.8

 

 

 

Total Assets

 

$

41.0

 

 

 

Accounts payable

 

$

2.7

 

 

 

Accrued expenses and other liabilities

 

3.0

 

 

 

Deferred taxes payable

 

2.1

 

 

 

Total Liabilities

 

$

7.8

 

 

 

 

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Table of Contents

 

4. Financial Instruments and Derivatives Instruments

 

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including auction rate securities, foreign currency derivatives, deferred compensation plan assets and related liability, and metal derivatives. The fair value of these certain financial assets and liabilities was determined using the following inputs at September 27, 2009:

 

 

 

Fair Value Measurements at Reporting Date Using:

 

 

 

 

 

Quoted Prices in Active
Markets for Identical
Assets

 

Significant Other Observable
Inputs

 

Significant Unobservable
Inputs

 

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

(in millions)  

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Trading securities (1)

 

$

6.5

 

$

 

$

 

$

6.5

 

Plan asset for deferred compensation(2)

 

3.5

 

3.5

 

 

 

Total assets

 

$

10.0

 

$

3.5

 

$

 

$

6.5

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Foreign currency derivatives (3)

 

$

1.3

 

$

 

$

1.3

 

$

 

Plan liability for deferred compensation(4)

 

3.5

 

3.5

 

 

 

Total liabilities

 

$

4.8

 

$

3.5

 

$

1.3

 

$

 

 


(1) Included in short-term investment securities on the Company’s consolidated balance sheet.

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

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

(4) Included in other noncurrent liabilities on the Company’s consolidated balance sheet.

 

The table below provides a summary of the changes in fair value of all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period December 31, 2008 to September 27, 2009.

 

 

 

Balance

 

Purchases,

 

Total realized and unrealized gains
(losses) included in:

 

Balance

 

 

 

December 31,
2008

 

sales,
settlements, net

 

Earnings

 

Comprehensive
income

 

September 27,
2009

 

 

 

(in millions)

 

Trading securities

 

$

8.3

 

$

(1.7

)

$

(0.1

)

$

 

$

6.5

 

 

Trading securities comprise auction rate securities and rights issued by UBS, AG (UBS).  The Company holds a variety of interest bearing auction rate securities, or ARS, including $4.6 million in municipal bonds and $0.7 million in student loans at September 27, 2009. These ARS investments are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or sell their interests at par. The recent uncertainties in the credit markets have affected all of the Company’s holdings in ARS investments, and auctions for the Company’s investments in these securities have failed on their respective auction dates. Consequently, the investments are not currently liquid and the Company will not be able to access these funds until a future auction of these investments is successful or a buyer is found outside of the auction process. Maturity dates for these ARS investments range from 2027 to 2036.

 

During the fourth quarter of 2008, the Company and its investment advisor elected to participate in a settlement offer from UBS for all of the outstanding ARS investments.  Under the terms of the settlement offer, the Company through its investment advisor was issued rights by UBS entitling the holder to require UBS to purchase the underlying ARS at par value during the period from June 30, 2010, through July 2, 2012.  The rights, valued at $1.2 million at September 27, 2009, also entitle UBS to purchase or sell the ARS at any time from the settlement date, in which case UBS would be required to pay par value for the ARS.

 

While the Company continues to earn interest on its ARS investments, these investments are not currently trading and therefore do not currently have a readily determinable market value.

 

The Company used a discounted cash flow model to determine the estimated fair value of its investment in ARS and investments in UBS rights as of September 27, 2009. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit quality of the ARS issuer, timing and amount of cash flows, government guarantees related to student loans and the expected holding periods of the ARS.  Based on this assessment of fair value, the Company recorded a credit of approximately $0.3 million to other income in the consolidated statement of operations for its investment in ARS in the first nine months of 2009.  To determine the fair value of the rights issued by UBS in connection with the settlement, the Company used a discounted cash flow model for the period up to the first date which the Company can exercise the rights.   Based on this assessment of fair value, the Company recorded a charge of approximately $0.4 million to other expense in the first nine months of 2009.

 

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Table of Contents

 

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

 

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

 

The Company has exposure to a number of foreign currency rates, including the Canadian Dollar, the Euro, the Chinese Yuan and the British Pound.  To manage this risk, the Company generally uses a layering methodology whereby at the end of any quarter, the Company has generally entered into forward exchange contracts which hedge approximately 50% of the projected intercompany purchase transactions for the next twelve months.  The Company uses this strategy for the purchases between Canada and the U.S., for purchases between the Euro zone and the U.S., and for purchases between the Euro zone and the United Kingdom.  The average volume of contracts can vary but generally approximates $10 to $12 million in open contracts at the end of any given quarter.  At September 27, 2009, the Company had contracts for notional amounts aggregating approximately $13.0 million to buy various currencies and $4.5 million to sell various currencies.   The Company accounts for the forward exchange contracts as an economic hedge.  Realized and unrealized gains and losses on the contracts are recognized in other (income) expense in the consolidated statement of operations. These contracts do not subject the Company to significant market risk from exchange movement because they offset gains and losses on the related foreign currency denominated transactions.

 

From time to time, the Company enters into contracts to limit the volatility associated with the purchase of metals, such as copper.  The Company typically structures the terms of these financial instruments to coincide with purchases made throughout the year.  During the quarter ended September 28, 2008, the Company entered into a series of copper swaps to fix the price per pound for copper from October 2008 through September 2009 for 1 million pounds to be delivered over 12 months for one customer.  The Company has determined that these copper swaps do not qualify for hedge accounting and accounts for these financial instruments as an economic hedge.  Therefore, any changes in the fair value of the copper swaps are recorded immediately in the consolidated statement of operations.  The Company believes that the use of swap contracts to fix the purchase price of copper allows the Company the ability to provide firm pricing to that one customer.  The Company does not enter into swap or forward contracts for speculative purposes.

 

The following table discloses the fair values of derivative instruments on the Company’s balance sheet as of September 27, 2009 (in millions):

 

Liability Derivatives

 

Balance Sheet Location

 

Fair Value

 

 

 

 

 

 

 

Foreign currency derivatives

 

Accrued expenses and other liabilities

 

$

1.3

 

 

The following table discloses the impact of derivative instruments on the Company’s financial operations for the quarter ended September 27, 2009 (in millions):

 

Derivatives

 

Location of Gain or (Loss) Recognized in
Income on Derivatives

 

Amount of Gain or (Loss) Recognized in
Income on Derivatives

 

 

 

 

 

 

 

Foreign currency derivatives

 

Other income (expense)

 

$

(0.3

)

 

The following table discloses the impact of derivative instruments on the Company’s financial operations for the nine months ended September 27, 2009 (in millions):

 

Derivatives

 

Location of Gain or (Loss) Recognized in
Income on Derivatives

 

Amount of Gain or (Loss) Recognized in
Income on Derivatives

 

 

 

 

 

 

 

Foreign currency derivatives

 

Other income (expense)

 

$

(1.2

)

Copper swap

 

Other income (expense)

 

0.3

 

Total

 

 

 

$

(0.9

)

 

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Table of Contents

 

Fair Value

 

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

 

The fair value of the Company’s 4.87% senior notes due 2010, 5.47% senior notes due 2013 and 5.85% senior notes due 2016 is based on a discounted cash flow model using like industrial companies, the Company’s credit metrics, the Company’s size, as well as, current market demand. The fair value of the Company’s variable rate debt approximates its carrying value. The carrying amount and the estimated fair market value of the Company’s long-term debt, including the current portion, are as follows:

 

 

 

September 27,

 

December 31,

 

 

 

2009

 

2008

 

 

 

(in millions)

 

Carrying amount

 

$

355.4

 

$

414.3

 

Estimated fair value

 

$

355.1

 

$

339.4

 

 

5. Restructuring and Other Charges

 

The Company’s Board of Directors approves all major restructuring programs that involve the discontinuance of product lines or the shut down of facilities.  From time to time, the Company takes additional restructuring actions including involuntary terminations that are not part of a major program.  The Company accounts for these costs in the period that the individual employees are notified or the liability is incurred.  These costs are included in restructuring and other charges in the Company’s consolidated statements of operations.  The Company also includes as part of other charges costs associated with asset impairments.

 

During the third quarter and first nine months of 2009, the Company recorded net pre-tax restructuring and other charges in its business segments totaling $6.3 million and $8.6 million, respectively, as follows:

 

 

 

Third Quarter
Ended

 

Nine Months
Ended

 

 

 

September 27,
2009

 

September 27,
2009

 

 

 

(in millions)

 

North America

 

$

0.7

 

$

1.7

 

Europe

 

0.4

 

1.6

 

China

 

5.2

 

5.3

 

Total

 

$

6.3

 

$

8.6

 

 

The third-quarter charges of $6.3 million include $1.1 million in restructuring expenses and $5.2 million in other charges, principally $5.8 million in impairment charges for certain long-lived assets and $0.5 million of relocation costs associated with the 2009 actions described below, offset by a $1.1 million gain from the disposition of Tianjin Tanggu Watts Valve Co. Ltd. (TWT). The TWT gain was deferred from the year ended December 31, 2008 until all local government approvals were finalized. The $1.1 million in restructuring costs relate to involuntary termination benefits of which $1.0 million was associated with the 2009 actions described below. In addition there was $0.1 million of costs related primarily to involuntary termination benefits incurred by the Europe segment associated with the 2007 actions described below.

 

The first nine-month charges include $2.8 million in restructuring expenses and $5.8 million other charges, principally $6.3 million impairment charges for certain long-lived assets and $0.6 million of relocation costs, offset by a $1.1 million gain from the disposition of TWT.  Of the $2.8 million in restructuring costs, approximately $1.2 million relates to involuntary termination benefits incurred during the first nine months of 2009 which were not part of a previously announced restructuring plan,  $1.1 million were associated with the 2009 actions described below and $0.5 million related primarily to involuntary termination benefits and relocation expenses associated with the 2007 actions described below.

 

During the first quarter of 2009, the Company also recorded a tax charge of $3.9 million related to previously realized tax benefits, which the Company expects will be recaptured as a result of the Company’s decision to restructure its operations in 2009.  This tax charge is part of the 2009 actions.

 

The following information outlines the Company’s current restructuring plans.

 

2007 Actions

 

During 2007, the Company undertook a review of certain product lines and its overall manufacturing capacity.  Based on that review, the Company initiated a global restructuring program that was approved by the Company’s Board of Directors on October 30, 2007. The Company also discontinued certain product lines.  This program included the shutdown of several manufacturing facilities and the right-sizing of another facility.  The restructuring program and charges for certain product line discontinuances was expected to

 

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include pre-tax charges totaling approximately $12.9 million. Charges were primarily for asset write-downs and expected net losses on asset disposals, severance costs and facility exit and other costs.  The product lines that were discontinued and accelerated depreciation resulted in a pre-tax charge of $4.3 million during 2007.  Annual cash savings, net of tax, are estimated to be $1.9 million, which are expected to be fully realized by 2010.

 

The Company is reviewing the remaining activities associated with the 2007 actions associated with Europe and has concluded that no further charges will be incurred under this program.  The Company is currently examining alternatives and expects a new program for Europe to be launched in the fourth quarter of 2009 that will include some of the components identified in the 2007 actions.  The following table presents the total pre-tax charges incurred for the global restructuring program and product line discontinuances initiated in 2007 by the Company’s reportable segments:

 

Reportable Segment

 

Total Expected
Costs

 

Incurred through
September 27, 2009

 

 

 

(in millions)

 

North America

 

$

5.7

 

$

6.3

 

Europe

 

3.9

 

0.7

 

China

 

3.3

 

2.9

 

Total

 

$

12.9

 

$

9.9

 

 

Details of the Company’s manufacturing restructuring plans through September 27, 2009 are as follows:

 

 

 

Severance

 

Asset write-
downs

 

Facility exit and
other

 

Total

 

 

 

(in millions)

 

Restructuring accruals at December 31, 2008

 

$

 

$

 

$

 

$

 

Net pre-tax restructuring charges

 

0.3

 

 

0.2

 

0.5

 

Utilization

 

(0.3

)

 

(0.2

)

(0.5

)

Balance at March 29, 2009

 

 

 

 

 

Net pre-tax restructuring charges

 

0.1

 

 

 

0.1

 

Utilization

 

(0.1

)

 

 

(0.1

)

Balance at June 28, 2009

 

 

 

 

 

Net pre-tax restructuring charges

 

0.1

 

0.3

 

 

0.4

 

Utilization

 

(0.1

)

(0.3

)

 

(0.4

)

Balance at September 27, 2009

 

$

 

$

 

$

 

$

 

 

The following table summarizes the incurred cost for 2007 restructuring actions by type:

 

 

 

Severance

 

Asset write-
downs

 

Facility exit and
other

 

Total

 

 

 

(in millions)

 

Costs incurred — through December 31, 2008

 

$

2.3

 

$

4.9

 

$

1.7

 

$

8.9

 

Costs incurred — quarter ended March 29, 2009

 

0.3

 

 

0.2

 

0.5

 

Costs incurred — quarter ended June 28, 2009

 

0.1

 

 

 

0.1

 

Costs incurred — quarter ended September 27, 2009

 

0.1

 

0.3

 

 

0.4

 

Total costs at September 27, 2009

 

$

2.8

 

$

5.2

 

$

1.9

 

$

9.9

 

 

Other consists primarily of relocation costs.

 

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Table of Contents

 

The following table summarizes incurred cost for 2007 restructuring actions by segment:

 

 

 

Costs incurred
through
December 31,
2008

 

Costs incurred
quarter ended
March 29,
2009

 

Costs incurred
quarter ended
June 28,

2009

 

Costs incurred
quarter ended
Sept. 27,

2009

 

 

 

(in millions)

 

North America

 

$

5.8

 

$

0.5

 

$

 

$

 

Europe

 

0.2

 

 

0.1

 

0.4

 

China

 

2.9

 

 

 

 

Total

 

$

8.9

 

$

0.5

 

$

0.1

 

$

0.4

 

 

2008 Actions

 

In the fourth quarter of 2008, the Company announced a reduction-in-force in its United States workforce. The severance charge of $2.2 million, recorded in 2008, was included in restructuring and other charges related to its North America segment and was substantially spent by the end of 2008.

 

2009 Actions

 

On February 10, 2009, the Board of Directors approved a plan to expand the Company’s program to consolidate the Company’s manufacturing footprint in North America and China.  The plan provides for the closure of three additional plants, with those operations being moved to existing facilities in either North America or China or relocated to a new central facility in the United States.

 

The footprint consolidation pre-tax charge will be approximately $11.7 million, including severance charges of approximately $3.2 million, relocation costs of approximately $3.3 million and asset write-downs of approximately $5.2 million. One-time tax charges of approximately $3.9 million are also expected to be incurred as part of the relocations.  The Company may incur an additional one-time tax charge in connection with the restructuring activities that could range from $0 to $4.4 million, depending on the Company’s final plans.  Approximately 400 positions will be eliminated by this consolidation.  The net after-tax charge for this manufacturing consolidation program is expected to range from $12.8 to $17.2 million ($4.4 million non cash), with costs being incurred in fiscal 2009 and 2010.  The Company expects to spend approximately $4.8 million in capital expenditures to consolidate operations.

 

The following table presents the total estimated pre-tax charges to be incurred for the footprint consolidation-restructuring program initiated in 2009 by the Company’s reportable segments:

 

Reportable Segment

 

Total

 

Incurred through
Sept. 27, 2009

 

 

 

(in millions)

 

North America

 

$

2.7

 

$

0.6

 

China

 

9.0

 

6.4

 

Total

 

$

11.7

 

$

7.0

 

 

Details of the Company’s footprint consolidation-restructuring program through September 27, 2009 are as follows:

 

 

 

Severance

 

Asset write-
downs

 

Facility exit and
other

 

Total

 

 

 

(in millions)

 

Restructuring accruals at March 29, 2009

 

 

 

 

 

Net pre-tax restructuring charges

 

 

 

 

 

Utilization

 

 

 

 

 

Balance at June 28, 2009

 

 

 

 

 

Net pre-tax restructuring charges

 

1.1

 

5.5

 

0.4

 

7.0

 

Utilization

 

(1.1

)

(5.5

)

(0.4

)

(7.0

)

Balance at September 27, 2009

 

$

 

$

 

$

 

$

 

 

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Table of Contents

 

The following table summarizes expected, incurred and remaining cost for 2009 restructuring actions by type:

 

 

 

Severance

 

Asset write-
downs

 

Facility exit and
other

 

Total

 

 

 

(in millions)

 

Expected costs

 

$

3.2

 

$

5.2

 

$

3.3

 

$

11.7

 

Costs incurred — quarter ended March 29, 2009

 

 

 

 

 

Costs incurred — quarter ended June 28, 2009

 

 

 

 

 

Costs incurred — quarter ended September 27, 2009

 

1.1

 

5.5

 

0.4

 

7.0

 

Remaining costs at September 27, 2009

 

$

2.1

 

$

(0.3

)

$

2.9

 

$

4.7

 

 

The following table summarizes expected, incurred and remaining cost for 2009 restructuring actions by segment:

 

 

 

Expected
costs

 

Costs incurred
quarter ended
March 29,
2009

 

Costs incurred
quarter ended
June 28,

2009

 

Costs incurred
quarter ended
Sept. 27,

2009

 

Remaining
costs Sept. 27,

2009

 

 

 

(in millions)

 

North America

 

$

2.7

 

$

 

$

 

$

0.6

 

$

2.1

 

China

 

9.0

 

 

 

6.4

 

2.6

 

Total

 

$

11.7

 

$

 

$

 

$

7.0

 

$

4.7

 

 

6. Earnings per Share

 

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

 

 

 

For the Third Quarter Ended September 27, 2009

 

 

 

Income (loss)
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

 

 

(amounts in millions, except per share amounts)

 

Basic EPS

 

 

 

 

 

 

 

Income (loss) per share attributable to Watts Water Technologies, Inc.:

 

 

 

 

 

 

 

Continuing operations

 

$

11.6

 

37.0

 

$

0.31

 

Discontinued operations

 

(8.2

)

 

 

(0.22

)

Net income

 

$

3.4

 

 

 

$

0.09

 

Effect of dilutive securities

 

 

 

 

 

 

 

Common stock equivalents

 

 

 

0.1

 

 

 

Diluted EPS

 

 

 

 

 

 

 

Income (loss) per share attributable to Watts Water Technologies, Inc.:

 

 

 

 

 

 

 

Continuing operations

 

$

11.6

 

 

 

$

0.31

 

Discontinued operations

 

(8.2

)

 

 

(0.22

)

Net income

 

$

3.4

 

37.1

 

$

0.09

 

 

 

 

For the Third Quarter Ended September 28, 2008

 

 

 

Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

 

 

(amounts in millions, except per share amounts)

 

Basic EPS

 

 

 

 

 

 

 

Income per share attributable to Watts Water Technologies, Inc.:

 

 

 

 

 

 

 

Continuing operations

 

$

16.3

 

36.5

 

$

0.44

 

Discontinued operations

 

0.4

 

 

 

0.01

 

Net income

 

$

16.7

 

 

 

$

0.46

 

Effect of dilutive securities

 

 

 

 

 

 

 

Common stock equivalents

 

 

 

0.2

 

 

 

Diluted EPS

 

 

 

 

 

 

 

Income per share attributable to Watts Water Technologies, Inc.:

 

 

 

 

 

 

 

Continuing operations

 

$

16.3

 

 

 

$

0.44

 

Discontinued operations

 

0.4

 

 

 

0.01

 

Net income

 

$

16.7

 

36.7

 

$

0.45

 

 

Options to purchase 0.8 million shares of Class A Common Stock were outstanding during the third quarter of 2009 but were not included in the computation of diluted EPS because to do so would be anti-dilutive.

 

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Table of Contents

 

 

 

For the Nine Months Ended September 27, 2009

 

 

 

Income (loss)
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

 

 

(amounts in millions, except per share amounts)

 

Basic EPS

 

 

 

 

 

 

 

Income (loss) per share attributable to Watts Water Technologies, Inc.:

 

 

 

 

 

 

 

Continuing operations

 

$

30.9

 

37.0

 

$

0.84

 

Discontinued operations

 

(27.7

)

 

 

(0.75

)

Net income

 

$

3.2

 

 

 

$

0.09

 

Effect of dilutive securities

 

 

 

 

 

 

 

Common stock equivalents

 

 

 

0.1

 

 

 

Diluted EPS

 

 

 

 

 

 

 

Income (loss) per share attributable to Watts Water Technologies, Inc.:

 

 

 

 

 

 

 

Continuing operations

 

$

30.9

 

 

 

$

0.83

 

Discontinued operations

 

(27.7

)

 

 

(0.75

)

Net income

 

$

3.2

 

37.1

 

$

0.09

 

 

 

 

For the Nine Months Ended September 28, 2008

 

 

 

Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

 

 

(amounts in millions, except per share amounts)

 

Basic EPS

 

 

 

 

 

 

 

Income per share attributable to Watts Water Technologies, Inc.:

 

 

 

 

 

 

 

Continuing operations

 

$

48.9

 

36.7

 

$

1.33

 

Discontinued operations

 

1.3

 

 

 

0.04

 

Net income

 

$

50.2

 

 

 

$

1.37

 

Effect of dilutive securities

 

 

 

 

 

 

 

Common stock equivalents

 

 

 

0.2

 

 

 

Diluted EPS

 

 

 

 

 

 

 

Income per share attributable to Watts Water Technologies, Inc.:

 

 

 

 

 

 

 

Continuing operations

 

$

48.9

 

 

 

$

1.32

 

Discontinued operations

 

1.3

 

 

 

0.04

 

Net income

 

$

50.2

 

36.9

 

$

1.36

 

 

Options to purchase 0.9 million shares of Class A Common Stock were outstanding during the first nine months of 2009 but were not included in the computation of diluted EPS because to do so would be anti-dilutive.

 

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Table of Contents

 

7. Segment Information

 

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

 

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

 

 

 

Third Quarter Ended

 

 

 

September
27, 2009

 

September 28,
2008

 

 

 

(in millions)

 

Net Sales

 

 

 

 

 

North America

 

$

182.6

 

$

218.5

 

Europe

 

116.4

 

144.6

 

China

 

4.8

 

8.9

 

Consolidated net sales

 

$

303.8

 

$

372.0

 

 

 

 

 

 

 

Operating income (loss)

 

 

 

 

 

North America

 

$

22.3

 

$

23.4

 

Europe

 

14.9

 

16.6

 

China

 

(4.5

)

(3.1

)

Subtotal reportable segments

 

32.7

 

36.9

 

 

 

 

 

 

 

Corporate (*)

 

(8.4

)

(6.7

)

Consolidated operating income

 

24.3

 

30.2

 

 

 

 

 

 

 

Interest income

 

0.3

 

0.8

 

Interest expense

 

(5.5

)

(6.6

)

Other

 

0.5

 

(0.8

)

Income from continuing operations before income taxes and noncontrolling interest

 

$

19.6

 

$

23.6

 

 

 

 

 

 

 

Capital Expenditures

 

 

 

 

 

North America

 

$

2.0

 

$

2.4

 

Europe

 

4.8

 

3.4

 

China

 

 

0.3

 

Consolidated capital expenditures

 

$

6.8

 

$

6.1

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

 

 

 

North America

 

$

4.4

 

$

4.9

 

Europe

 

6.1

 

6.0

 

China

 

1.1

 

1.1

 

Consolidated depreciation and amortization

 

$

11.6

 

$

12.0

 

 

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Table of Contents

 

 

 

Nine Months Ended

 

 

 

September 27,
2009

 

September 28,
2008

 

 

 

(in millions)

 

Net Sales

 

 

 

 

 

North America

 

$

554.5

 

$

664.5

 

Europe

 

333.7

 

398.1

 

China

 

14.5

 

27.2

 

Consolidated net sales

 

$

902.7

 

$

1,089.8

 

 

 

 

 

 

 

Operating income (loss)

 

 

 

 

 

North America

 

$

55.9

 

$

71.5

 

Europe

 

36.8

 

48.1

 

China

 

(3.7

)

(8.0

)

Subtotal reportable segments

 

89.0

 

111.6

 

Corporate (*)

 

(20.7

)

(21.3

)

Consolidated operating income

 

68.3

 

90.3

 

 

 

 

 

 

 

Interest income

 

0.8