10-Q 1 wts-20180930x10q.htm 10-Q wts_Current_Folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2018

 

or

 

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

 

For the transition period from              to             

 

Commission file number 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)

                                                                        (978) 688-1811

(Registrant’s Telephone Number, Including Area Code) 

 

(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 ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes ☒   No ☐

 

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

 

 

 

 

Large accelerated filer  ☒

 

Accelerated filer  ☐

 

 

 

Non-accelerated filer  ☐

 

Smaller reporting company  ☐

 

Emerging growth company  ☐

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

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

 

 

 

 

Class

 

Outstanding at October 28, 2018

Class A Common Stock, $0.10 par value

 

27,764,919

 

 

 

Class B Common Stock, $0.10 par value

 

6,329,290

 

 

 

 

 

 


 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

 

INDEX

 

 

 

 

 

Part I. Financial Information 

    

3

 

 

 

 

Item 1. 

Financial Statements

 

3

 

 

 

 

 

Consolidated Balance Sheets at September 30, 2018 and December 31, 2017 (unaudited)

 

3

 

 

 

 

 

Consolidated Statements of Operations for the Three Months and Nine Months ended September 30, 2018 and October 1, 2017 (unaudited)

 

4

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three Months and Nine Months ended September 30, 2018 and October 1, 2017 (unaudited)

 

5

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2018 and October 1, 2017 (unaudited)

 

6

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

Item 2. 

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

 

24

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

 

 

 

Item 4. 

Controls and Procedures

 

33

 

 

 

 

Part II. Other Information 

 

34

 

 

 

 

Item 1. 

Legal Proceedings

 

34

 

 

 

 

Item 1A. 

Risk Factors

 

34

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

34

 

 

 

 

Item 6. 

Exhibits

 

35

 

 

 

 

Signatures 

 

36

 

 

 

 

 

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share information)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2018

    

2017

 

ASSETS

 

 

    

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

156.8

 

$

280.2

 

Trade accounts receivable, less allowance for doubtful accounts of $15.1 million at September 30, 2018 and $14.3 million at December 31, 2017

 

 

231.3

 

 

216.1

 

Inventories, net

 

 

 

 

 

 

 

    Raw materials

 

 

93.2

 

 

81.8

 

    Work in process

 

 

20.5

 

 

17.5

 

    Finished goods

 

 

176.5

 

 

159.8

 

Total Inventories

 

 

290.2

 

 

259.1

 

Prepaid expenses and other current assets

 

 

31.1

 

 

26.7

 

Assets held for sale

 

 

1.4

 

 

1.5

 

Total Current Assets

 

 

710.8

 

 

783.6

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

 

 

 

 

Property, plant and equipment, at cost

 

 

536.8

 

 

525.8

 

Accumulated depreciation

 

 

(338.3)

 

 

(327.3)

 

Property, plant and equipment, net

 

 

198.5

 

 

198.5

 

OTHER ASSETS:

 

 

 

 

 

 

 

Goodwill

 

 

547.6

 

 

550.5

 

Intangible assets, net

 

 

170.0

 

 

185.2

 

Deferred income taxes

 

 

2.0

 

 

1.6

 

Other, net

 

 

20.7

 

 

17.1

 

TOTAL ASSETS

 

$

1,649.6

 

$

1,736.5

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable

 

$

115.0

 

$

123.8

 

Accrued expenses and other liabilities

 

 

121.9

 

 

125.8

 

Accrued compensation and benefits

 

 

52.4

 

 

55.3

 

Current portion of long-term debt

 

 

28.1

 

 

22.5

 

Total Current Liabilities

 

 

317.4

 

 

327.4

 

LONG-TERM DEBT, NET OF CURRENT PORTION

 

 

350.7

 

 

474.6

 

DEFERRED INCOME TAXES

 

 

50.9

 

 

55.2

 

OTHER NONCURRENT LIABILITIES

 

 

46.4

 

 

50.3

 

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, 27,781,427 shares at September 30, 2018 and 27,724,192 shares at December 31, 2017

 

 

2.8

 

 

2.8

 

Class B common stock, $0.10 par value; 25,000,000 shares authorized; 10 votes per share; issued and outstanding, 6,329,290 shares at September 30, 2018 and 6,379,290 shares at December 31, 2017

 

 

0.6

 

 

0.6

 

Additional paid-in capital

 

 

564.5

 

 

551.8

 

Retained earnings

 

 

426.1

 

 

372.9

 

Accumulated other comprehensive loss

 

 

(109.8)

 

 

(99.1)

 

Total Stockholders’ Equity

 

 

884.2

 

 

829.0

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

1,649.6

 

$

1,736.5

 

 

See accompanying notes to consolidated financial statements.

3


 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in millions, except per share information)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

October 1,

 

September 30,

 

October 1,

 

    

2018

    

2017

    

2018

    

2017

Net sales

 

$

390.9

 

$

364.7

 

$

1,177.3

 

$

1,090.4

Cost of goods sold

 

 

226.4

 

 

212.0

 

 

686.7

 

 

637.2

GROSS PROFIT

 

 

164.5

 

 

152.7

 

 

490.6

 

 

453.2

Selling, general and administrative expenses

 

 

114.2

 

 

107.0

 

 

344.2

 

 

324.8

Restructuring

 

 

3.4

 

 

1.4

 

 

3.4

 

 

3.6

OPERATING INCOME

 

 

46.9

 

 

44.3

 

 

143.0

 

 

124.8

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

(0.1)

 

 

(0.2)

 

 

(0.6)

 

 

(0.6)

Interest expense

 

 

3.9

 

 

4.7

 

 

12.6

 

 

14.5

Other (income) expense, net

 

 

(0.9)

 

 

0.3

 

 

(2.0)

 

 

0.8

Total other expense

 

 

2.9

 

 

4.8

 

 

10.0

 

 

14.7

INCOME BEFORE INCOME TAXES

 

 

44.0

 

 

39.5

 

 

133.0

 

 

110.1

Provision for income taxes

 

 

12.5

 

 

13.0

 

 

37.3

 

 

34.7

NET INCOME

 

$

31.5

 

$

26.5

 

$

95.7

 

$

75.4

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER SHARE

 

$

0.92

 

$

0.77

 

$

2.79

 

$

2.19

Weighted average number of shares

 

 

34.3

 

 

34.4

 

 

34.3

 

 

34.4

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER SHARE

 

$

0.92

 

$

0.77

 

$

2.78

 

$

2.19

Weighted average number of shares

 

 

34.4

 

 

34.4

 

 

34.4

 

 

34.5

Dividends declared per share

 

$

0.21

 

$

0.19

 

$

0.61

 

$

0.56

 

See accompanying notes to consolidated financial statements.

4


 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Nine Months Ended

 

 

September 30,

 

October 1,

 

September 30,

 

October 1,

 

    

2018

    

2017

    

2018

    

2017

Net income

 

$

31.5

 

$

26.5

 

$

95.7

 

$

75.4

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

2.5

 

 

15.4

 

 

(14.4)

 

 

44.8

Cash flow hedges

 

 

(0.1)

 

 

0.1

 

 

3.7

 

 

(0.5)

Other comprehensive income (loss)

 

 

2.4

 

 

15.5

 

 

(10.7)

 

 

44.3

Comprehensive income

 

$

33.9

 

$

42.0

 

$

85.0

 

$

119.7

 

See accompanying notes to consolidated financial statements.

5


 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

October 1,

 

    

2018

    

2017

OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

95.7

 

$

75.4

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation

 

 

21.5

 

 

21.9

Amortization of intangibles

 

 

15.2

 

 

16.8

(Gain) loss on disposal and impairment of intangibles, property, plant and equipment and other

 

 

(0.1)

 

 

1.0

Stock-based compensation

 

 

10.0

 

 

10.2

Deferred income tax

 

 

(4.0)

 

 

1.8

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

 

 

 

 

 

 

Accounts receivable

 

 

(17.4)

 

 

(21.9)

Inventories

 

 

(35.4)

 

 

(10.1)

Prepaid expenses and other assets

 

 

(4.9)

 

 

11.1

Accounts payable, accrued expenses and other liabilities

 

 

(14.0)

 

 

(32.8)

Net cash provided by operating activities

 

 

66.6

 

 

73.4

INVESTING ACTIVITIES

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(24.1)

 

 

(17.1)

Proceeds from the sale of property, plant and equipment

 

 

0.1

 

 

0.4

Net proceeds from the sale of assets, and other

 

 

0.2

 

 

3.1

Business acquisitions, net of cash acquired and other

 

 

(2.2)

 

 

0.1

Net cash used in investing activities

 

 

(26.0)

 

 

(13.5)

FINANCING ACTIVITIES

 

 

 

 

 

 

Proceeds from long-term borrowings

 

 

50.0

 

 

20.0

Payments of long-term debt

 

 

(168.9)

 

 

(151.8)

Payment of capital leases and other

 

 

(6.4)

 

 

(4.6)

Proceeds from share transactions under employee stock plans

 

 

2.1

 

 

1.0

Payments to repurchase common stock

 

 

(15.5)

 

 

(13.6)

Dividends

 

 

(21.1)

 

 

(19.4)

Net cash used in financing activities

 

 

(159.8)

 

 

(168.4)

Effect of exchange rate changes on cash and cash equivalents

 

 

(4.2)

 

 

16.7

DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(123.4)

 

 

(91.8)

Cash and cash equivalents at beginning of year

 

 

280.2

 

 

338.4

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

156.8

 

$

246.6

NON CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

Acquisition of businesses:

 

 

 

 

 

 

Fair value of assets acquired

 

$

4.1

 

$

 —

Cash paid, net of cash acquired

 

 

1.7

 

 

 —

Liabilities assumed

 

$

2.4

 

$

 —

Issuance of stock under management stock purchase plan

 

$

1.5

 

$

1.0

CASH PAID FOR:

 

 

 

 

 

 

Interest

 

$

13.6

 

$

12.8

Income taxes

 

$

49.5

 

$

29.5

 

See accompanying notes to consolidated financial statements.

 

 

6


 

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1. Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the Watts Water Technologies, Inc. (the Company) Consolidated Balance Sheet as of September 30, 2018, the Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and October 1, 2017, the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and October 1, 2017, and the Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and October 1, 2017.

 

The consolidated balance sheet at December 31, 2017 has been derived from the audited consolidated financial statements at that date. The accounting policies followed by the Company are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  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, 2017. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2018. 

 

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

 

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.

 

2. Accounting Policies

 

The significant accounting policies used in preparation of these consolidated financial statements for the three and nine months ended September 30, 2018 are consistent with those discussed in Note 2 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, with the exception of the Company’s change in its Revenue Recognition accounting policy resulting from the adoption of ASC 606 described herein.

 

Revenue Recognition

 

On January 1, 2018, the Company adopted the accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard” or “ASU 2014-09”) to all contracts using the modified retrospective method. The adoption of ASU 2014-09 was not material to the Company and as such, there was no cumulative effect upon the January 1, 2018 adoption date. As the impact of the new revenue standard is not material to the Company, there is no pro-forma disclosure presented for the three and nine months ended September 30, 2018.   The Company expects the impact of the adoption of the new standard to be immaterial to the Company’s financial statements on an ongoing basis.

 

The Company recognizes revenue under the core principle to depict the transfer of control to the Company’s customers in an amount reflecting the consideration the Company expects to be entitled. In order to achieve that core principle, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.

 

7


 

The Company’s revenue for product sales is recognized on a point in time model, at the point control transfers to the customer, which is generally when products are shipped from the Company’s manufacturing or distribution facilities or when delivered to the customer’s named location. Sales tax, value-added tax, or other taxes collected concurrent with revenue producing activities are excluded from revenue. Freight costs billed to customers for shipping and handling activities are included in revenue with the related cost included in selling, general and administrative expenses. See Note 3 for further disclosures and detail regarding revenue recognition.

 

Other Recently Adopted Accounting Standards

 

In February 2018, the FASB issued ASU 2018-02 “Income Statement-Reporting Comprehensive Income.” ASU 2018-02 provides guidance on the reclassification of certain tax effects from the 2017 Tax Cuts and Jobs Act (“2017 Tax Act”) from accumulated other comprehensive income. Current generally accepted accounting principles requires deferred tax liabilities and deferred tax assets to be adjusted for the effect of a change in tax laws or tax rates, with that effect included in income from operations in the period of enactment. This included the income tax effects of items in accumulated other comprehensive income. This guidance allows a reclassification from accumulated other comprehensive income to retained earnings for the tax effects on items in accumulated other comprehensive income related to the change in tax rates from the 2017 Tax Act. This standard is effective for all entities for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. Early adoption of this standard is permitted. The Company adopted this standard in the first quarter of 2018, and it did not have a material impact on the Company’s financial statements.

 

In October 2016, the FASB issued ASU 2016-16 “Intra-Entity Transfers of Assets Other than Inventory.” ASU 2016-16 provides guidance on the timing of recognition of tax consequences of an intra-entity transfer of an asset other than inventory. The Company adopted the provision of this ASU during the first quarter of 2018, using the modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the quarter.

The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

Accounting Standards Updates

 

In August 2018, the FASB issued ASU 2018-15 “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40)-Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance requires an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently evaluating the impact of this guidance on the Company’s financial statements, and does not expect the adoption of this guidance to have a material impact on the Company’s financial statements.

 

In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820)-Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements under Topic 820. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently evaluating the impact of this guidance on the Company’s disclosures; however this guidance does not impact the Company’s financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016‑02 requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term for both finance and operating leases with a term longer than twelve months. Topic 842 was subsequently amended by ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842,” ASU 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU 2018-11 “Targeted Improvements.” ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018 and all interim periods thereafter. Early adoption is permitted for all entities. The Company plans to adopt this standard effective January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. The Company may choose to use either 1) the effective date of the standard or 2) the beginning of the earliest comparable period presented in the financial statements as the date of initial application. The Company expects to adopt the new standard on January 1, 2019 and use the effective date of the standard as the date

8


 

of the Company’s initial application. By electing this approach, the financial information and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

 

The new standard provides a number of optional practical expedients throughout the transition. The Company expects to elect the “package of practical expedients,” which permits the Company to not reassess under the new standard the Company’s prior conclusions about lease identification, lease classification, and initial direct costs. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements, the latter not being applicable to the Company.

 

The new standard also provides practical expedients for an entity’s ongoing accounting. The Company expects to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize right-of-use assets or lease liabilities, and this includes not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. The Company also expects to elect the practical expedient not to separate lease and non-lease components for all of the Company’s leases.

 

The Company is continuing to evaluate the new lease standard, and is in the process of designing the necessary changes to its existing processes and configuring system requirements that will be required to implement this new standard. The Company has a variety of categories of lease arrangements, including real estate, automobiles, manufacturing equipment, facility equipment, office equipment and certain service arrangements. The Company is currently reviewing its leasing arrangements in order to evaluate the impact of this standard on the Company’s financial statements. The Company does not expect a significant change in its leasing activity between now and adoption. The Company is unable to quantify the impact of adoption at this time. However, the Company expects the primary impact to its consolidated financial position upon adoption will be the recognition, on a discounted basis, of its minimum commitments under non-cancelable operating leases on its consolidated balance sheets resulting in the recording of right-of-use assets and lease obligations. The Company currently does not expect ASC 842 to have a material effect on either its consolidated statement of operations or consolidated statement of cash flow. 

 

Shipping and Handling

 

Shipping and handling costs included in selling, general and administrative expenses amounted to $14.2 million and $12.8 million for the third quarters of 2018 and 2017, respectively, and were $42.1 million and $37.8 million for the first nine months of 2018 and 2017, respectively.

 

Research and Development

 

Research and development costs included in selling, general and administrative expenses amounted to $8.7 million and $7.3 million for the third quarters of 2018 and 2017, respectively, and were $25.5 million and $21.6 million for the first nine months of 2018 and 2017, respectively.

 

3. Revenue Recognition

 

The Company is a leading supplier of products that manage and conserve the flow of fluids and energy into, through and out of buildings in the residential and commercial markets of the Americas, Europe, and AsiaPacific, Middle East, and Africa (“APMEA”). For over 140 years, the Company has designed and produced valve systems that safeguard and regulate water systems, energy efficient heating and hydronic systems, drainage systems and water filtration technology that helps purify and conserve water.

 

The Company distributes products through four primary distribution channels: wholesale, original equipment manufacturers (OEMs), specialty, and do-it-yourself (DIY). The Company operates in three geographic segments: Americas, Europe, and APMEA. Each of these segments sells similar products, which are comprised of the following principal product lines:

 

·

Residential & commercial flow control products—includes products typically sold into plumbing and hot water applications such as backflow preventers, water pressure regulators, temperature and pressure relief valves, and thermostatic mixing valves.

·

HVAC & gas products—includes commercial highefficiency boilers, water heaters and heating solutions, hydronic and electric heating systems for underfloor radiant applications, custom heat and hot water solutions,

9


 

hydronic pump groups for boiler manufacturers and alternative energy control packages, and flexible stainless steel connectors for natural and liquid propane gas in commercial food service and residential applications. HVAC is an acronym for heating, ventilation and air conditioning.

·

Drainage & water reuse products—includes drainage products and engineered rain water harvesting solutions for commercial, industrial, marine and residential applications.

·

Water quality products—includes pointofuse and pointofentry water filtration, conditioning and scale prevention systems for both commercial and residential applications.

 

The following table disaggregates revenue, which is presented as net sales in the financial statements, for each reportable segment, by distribution channel and principal product line:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2018

 

For the nine months ended September 30, 2018

 

 

 

 

(in millions)

 

 

 

 

 

(in millions)

 

 

 

 

Americas

 

Europe

 

APMEA

 

Consolidated

 

Americas

 

Europe

 

APMEA

 

Consolidated

Distribution Channel

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

$

146.7

 

$

73.5

 

$

14.8

 

$

235.0

 

$

433.9

 

$

234.7

 

$

44.4

 

$

713.0

OEM

 

 

19.4

 

 

37.5

 

 

0.3

 

 

57.2

 

 

58.6

 

 

114.9

 

 

1.1

 

 

174.6

Specialty

 

 

82.7

 

 

 —

 

 

1.5

 

 

84.2

 

 

236.4

 

 

 —

 

 

4.3

 

 

240.7

DIY

 

 

13.9

 

 

0.6

 

 

 —

 

 

14.5

 

 

46.9

 

 

2.1

 

 

 —

 

 

49.0

Total

 

$

262.7

 

$

111.6

 

$

16.6

 

$

390.9

 

$

775.8

 

$

351.7

 

$

49.8

 

$

1,177.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2018

 

For the nine months ended September 30, 2018

 

 

 

 

 

(in millions)

 

 

 

 

 

 

(in millions)

 

 

Principal Product Line

 

Americas

 

Europe

 

APMEA

 

Consolidated

 

Americas

 

Europe

 

APMEA

 

Consolidated

Residential & Commercial Flow Control

 

$

144.4

 

$

40.2

 

$

11.2

 

$

195.8

 

$

435.3

 

$

132.2

 

$

33.8

 

$

601.3

HVAC and Gas Products

 

 

77.1

 

 

49.4

 

 

4.3

 

 

130.8

 

 

220.2

 

 

152.7

 

 

13.6

 

 

386.5

Drainage and Water Re-use Products

 

 

19.8

 

 

21.7

 

 

0.7

 

 

42.2

 

 

55.2

 

 

65.9

 

 

1.4

 

 

122.5

Water Quality Products

 

 

21.4

 

 

0.3

 

 

0.4

 

 

22.1

 

 

65.1

 

 

0.9

 

 

1.0

 

 

67.0

Total

 

$

262.7

 

$

111.6

 

$

16.6

 

$

390.9

 

$

775.8

 

$

351.7

 

$

49.8

 

$

1,177.3

 

The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to represent the contract with a customer. The Company’s contracts with customers are generally for products only and typically do not include other performance obligations such as professional services, extended warranties, or other material rights. In situations where sales are to a distributor, the Company has concluded that its contracts are with the distributor as the Company holds a contract bearing enforceable rights and obligations only with the distributor. As part of its consideration of the contract, the Company evaluates certain factors including the customer’s ability to pay (or credit risk). For each contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified performance obligations. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. As the Company’s standard payment terms are less than one year, the Company has elected the practical expedient under ASC 606-10-32-18 not to assess whether a contract has a significant financing component. The Company allocates the transaction price to each distinct product based on its relative standalone selling price. The product price as specified on the purchase order is considered the standalone selling price as it is an observable input which depicts the price as if sold to a similar customer in similar circumstances. Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment from the Company’s manufacturing site or distribution center, or delivery to the customer’s named location. In certain circumstances, revenue from shipments to retail customers is recognized only when the product is consumed by the customer, as based on the terms of the arrangement, transfer of control is not satisfied until that point in time. In determining whether control has transferred, the Company considers if there is a present right to payment, physical possession and legal title, along with risks and rewards of ownership having transferred to the customer. In certain circumstances, the Company manufactures customized product without alternative use for its customers. However, as these arrangements do not entitle the Company a right to payment of cost plus a profit for work completed, the Company has concluded that revenue recognition at the point in time control transfers is appropriate and not over time recognition.

 

10


 

At times, the Company receives orders for products to be delivered over multiple dates that may extend across reporting periods. The Company invoices for each delivery upon shipment and recognizes revenues for each distinct product delivered, assuming transfer of control has occurred. As scheduled delivery dates are within one year, under the optional exemption provided by ASC 606-10-50-14, revenues allocated to future shipments of partially completed contracts are not disclosed.

 

The Company generally provides an assurance warranty that its products will substantially conform to the published specification. The Company’s liability is limited to either a credit equal to the purchase price or replacement of the defective part. Returns under warranty have historically been immaterial. The Company does not consider activities related to such warranty, if any, to be a separate performance obligation. For certain of its products, the Company will separately sell extended warranty and service policies to its customers. The Company considers the sale of the extended warranty a separate performance obligation. These policies typically are for periods ranging from one to three years. Payments received are deferred and recognized over the policy period. For all periods presented, the revenue recognized and the revenue deferred under these policies is not material to the consolidated financial statements.

 

The timing of revenue recognition, billings and cash collections from the Company’s contracts with customers can vary based on the payment terms and conditions in the customer contracts. In some cases, customers will partially prepay for their goods; in other cases, after appropriate credit evaluations, payment is due in arrears. In addition, there are constraints which cause variability in the ultimate consideration to be recognized. These constraints typically include early payment discounts, volume rebates, rights of return, cooperative advertising, and market development funds.  The Company includes these constraints in the estimated transaction price when there is a basis to reasonably estimate the amount of variable consideration.  These estimates are based on historical experience, anticipated future performance and the Company’s best judgment at the time. When the timing of the Company’s recognition of revenue is different from the timing of payments made by the customer, the Company recognizes either a contract asset (performance precedes contractual due date) or a contract liability (customer payment precedes performance). Contracts with payment in arrears are recognized as receivables. The opening and closing balances of the Company’s contract assets and contract liabilities are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract

 

Contract

 

Contract

 

 

 

Assets

 

Liabilities - Current

 

Liabilities - Noncurrent

 

 

 

 

 

 

(in millions)

 

 

 

 

Balance - January 1, 2018

 

$

0.6

 

$

11.3

 

$

2.1

 

Change in period

 

 

1.1

 

 

0.2

 

 

0.3

 

Balance - April 1, 2018

 

$

1.7

 

$

11.5

 

$

2.4

 

Change in period

 

 

(0.3)

 

 

0.1

 

 

0.3

 

Balance - July 1, 2018

 

$

1.4

 

$

11.6

 

$

2.7

 

Change in period

 

 

0.4

 

 

(0.4)

 

 

 —

 

Balance - September 30, 2018

 

$

1.8

 

$

11.2

 

$

2.7

 

 

 

 

 

 

 

 

 

 

 

 

 

The amount of revenue recognized during the three and nine months ended September 30, 2018 that was included in the opening contract liability balance was $5.4 million and $11.5 million, respectively. This revenue consists primarily of revenue recognized for shipments of product which had been prepaid as well as the amortization of extended warranty and service policy revenue. The Company did not recognize any material revenue from obligations satisfied in prior periods. The change in Contract Liabilities is not material for the three and nine months ended September 30, 2018. There were no impairment losses related to Contract Assets for the nine months ended September 30, 2018.

 

The Company incurs costs to obtain and fulfill a contract; however, the Company has elected the practical expedient under ASC 340-40-24-4 to recognize all incremental costs to obtain a contract as an expense when incurred if the amortization period is one year or less. The Company has elected to treat shipping and handling activities performed after the customer has obtained control of the related goods as a fulfillment cost and the related cost is accrued for in conjunction with the recording of revenue for the goods.

 

4. Income Taxes 

 

The 2017 Tax Act was enacted on December 22, 2017 and has resulted in significant changes to the U.S. corporate income tax system. These changes include (1) lowering the U.S. corporate income tax rate from 35% to 21%, (2) implementing a base erosion and anti-abuse tax, (3) generally eliminating U.S. federal income taxes on dividends from

11


 

foreign subsidiaries, (4) a new provision designed to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries, which allows for the possibility of utilizing foreign tax credits to offset the tax liability (subject to limitations), (5) a lower effective U.S. tax rate on certain revenues from sources outside the U.S., and (6) a one-time mandatory deemed repatriation tax (“Toll Tax”) on foreign subsidiaries’ previously untaxed accumulated foreign earnings.

 

In the period ended December 31, 2017, the Company recorded a provisional tax expense of $25.1 million related to the 2017 Tax Act, which included a $23.3 million charge for the Toll Tax. For the nine months ended September 30, 2018, the Company has not recorded any additional provisional expense or benefit related to the 2017 Tax Act.

 

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. These provisional amounts may be impacted by further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations, foreign tax credit computations, and state tax conformity to federal tax changes. When the Company refines these provisional amounts, any adjustments will be recorded in the period completed. The final analysis may be different from the Company’s current provisional amounts, which could materially affect the Company’s tax obligations and effective tax rate in the period or periods in which the adjustments are made.

 

As of September 30, 2018, the amounts recorded for the 2017 Tax Act remain provisional for the Toll Tax, the remeasurement of deferred taxes, and gross foreign tax credit carryforwards and related valuation allowances to offset foreign tax credit carryforwards. Given the complexity of the 2017 Tax Act, the Company continues to gather additional information required to complete the accounting and evaluate the tax impact. The Company will continue its analysis and documentation through the measurement period taking into consideration any further guidance provided. The Company has not yet determined its policy election with respect to whether to record deferred taxes for basis differences expected to reverse as a result of the GILTI provisions in future periods or use the period cost method.

 

Due to the complexity of the new GILTI tax rules, the Company has included an estimate of the current GILTI impact in the Company’s tax provision for 2018. The Company’s GILTI estimate may be revised in future periods as the Company obtains additional data, and as the IRS issues new guidance on implementing the 2017 Tax Act.

 

5. Goodwill & Intangibles

 

The Company operates in three geographic segments: Americas, Europe, and APMEA. The changes in the carrying amount of goodwill by geographic segment are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

Gross Balance

 

Accumulated Impairment Losses

 

Net Goodwill

 

 

 

 

 

Acquired

 

Foreign

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

During

 

Currency

 

Balance

 

Balance

 

Impairment

 

Balance

 

 

 

 

 

January 1,

 

the

 

Translation

 

September 30,

 

January 1,

 

Loss During

 

September 30,

 

September 30,

 

 

    

2018

    

Period (1)

    

and Other

    

2018

    

2018

    

the Period

    

2018

    

2018

 

 

 

(in millions)

 

Americas

 

$

437.4

 

 

1.5

 

 

(0.4)

 

 

438.5

 

$

(24.5)

 

 

 

 

(24.5)

 

 

414.0

 

Europe

 

 

249.3

 

 

 

 

(3.0)

 

 

246.3

 

 

(129.7)

 

 

 —

 

 

(129.7)

 

 

116.6

 

APMEA

 

 

30.9

 

 

 —

 

 

(1.0)

 

 

29.9

 

 

(12.9)

 

 

 

 

(12.9)

 

 

17.0

 

Total

 

$

717.6

 

 

1.5

 

 

(4.4)

 

 

714.7

 

$

(167.1)

 

 

 —

 

 

(167.1)

 

 

547.6

 

 

12


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

Gross Balance

 

Accumulated Impairment Losses

 

Net Goodwill

 

 

 

 

 

Acquired

 

Foreign

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

During

 

Currency

 

Balance

 

Balance

 

Impairment

 

Balance

 

 

 

 

 

January 1,

 

the

 

Translation

 

December 31,

 

January 1,

 

Loss During

 

December 31,

 

December 31,

 

 

    

2017

    

Period

    

and Other

    

2017

    

2017

    

the Period

    

2017

    

2017

 

 

 

(in millions)

 

Americas

 

$

434.7

 

 

2.0

 

 

0.7

 

 

437.4

 

$

(24.5)

 

 

 

 

(24.5)

 

 

412.9

 

Europe

 

 

234.9

 

 

 

 

14.4

 

 

249.3

 

 

(129.7)

 

 

 —

 

 

(129.7)

 

 

119.6

 

APMEA

 

 

30.2

 

 

 —

 

 

0.7

 

 

30.9

 

 

(12.9)

 

 

 

 

(12.9)

 

 

18.0

 

Total

 

$

699.8

 

 

2.0

 

 

15.8

 

 

717.6

 

$

(167.1)

 

 

 —

 

 

(167.1)

 

 

550.5

 


(1)Americas goodwill additions during the first nine months of 2018 relate to immaterial acquisitions.

 

Intangible assets include the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Gross

 

 

 

 

Net

 

Gross

 

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

    

Amount

    

Amortization

    

Amount

    

Amount

    

Amortization

    

Amount

 

 

 

(in millions)

 

Patents

 

$

16.1

 

$

(15.7)

 

$

0.4

 

$

16.1

 

$

(15.4)

 

$

0.7

 

Customer relationships

 

 

232.9

 

 

(144.0)

 

 

88.9

 

 

233.2

 

 

(133.5)

 

 

99.7

 

Technology

 

 

54.6

 

 

(26.2)

 

 

28.4

 

 

53.9

 

 

(23.1)

 

 

30.8

 

Trade names

 

 

26.1

 

 

(11.1)

 

 

15.0

 

 

25.5

 

 

(9.7)

 

 

15.8

 

Other

 

 

4.3

 

 

(3.5)

 

 

0.8

 

 

6.9

 

 

(6.0)

 

 

0.9

 

Total amortizable intangibles

 

 

334.0

 

 

(200.5)

 

 

133.5

 

 

335.6

 

 

(187.7)

 

 

147.9

 

Indefinite-lived intangible assets

 

 

36.5

 

 

 —

 

 

36.5

 

 

37.3

 

 

 —

 

 

37.3

 

 

 

$

370.5

 

$

(200.5)

 

$

170.0

 

$

372.9

 

$

(187.7)

 

$

185.2

 

 

Aggregate amortization expense for amortized intangible assets for the third quarters of 2018 and 2017 was $4.5 million and $5.7 million, respectively, and for the first nine months of 2018 and 2017, was $15.2 million and $16.8 million, respectively.

 

6. Restructuring

 

The Company’s 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 liability is incurred. These costs are included in restructuring charges in the Company’s consolidated statements of operations.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

October 1,

 

September 30,

 

October 1,

 

 

2018

 

2017

 

2018

 

2017

 

 

(in millions)

Restructuring costs:

 

 

 

 

 

 

 

 

 

 

 

 

2015 Actions

 

$

 —

 

$

0.5

 

$

 —

 

$

2.1

Other Actions

 

 

3.4

 

 

0.9

 

 

3.4

 

 

1.5

Total restructuring charges

 

$

3.4

 

$

1.4

 

$

3.4

 

$

3.6

 

13


 

The Company recorded pre-tax restructuring costs in its business segments as follows: