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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 8/04/22 Watts Water Technologies Inc. 10-Q 6/26/22 64:10M Toppan Merrill Bridge/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 3.01M
2: EX-10.2 Material Contract HTML 37K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 23K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 23K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 20K
6: EX-32.2 Certification -- §906 - SOA'02 HTML 20K
12: R1 Document and Entity Information HTML 72K
13: R2 Consolidated Balance Sheets HTML 128K
14: R3 Consolidated Balance Sheets (Parenthetical) HTML 43K
15: R4 Consolidated Statements of Operations HTML 91K
16: R5 Consolidated Statements of Comprehensive Income HTML 38K
17: R6 Consolidated Statements of Stockholders Equity HTML 94K
18: R7 Consolidated Statements of Cash Flows HTML 104K
19: R8 Basis of Presentation HTML 24K
20: R9 Accounting Policies HTML 22K
21: R10 Revenue Recognition HTML 218K
22: R11 Goodwill & Intangibles HTML 126K
23: R12 Financial Instruments and Derivative Instruments HTML 119K
24: R13 Restructuring and Other Charges, Net HTML 148K
25: R14 Earnings per Share and Stock Repurchase Program HTML 107K
26: R15 Stock-Based Compensation HTML 34K
27: R16 Segment Information HTML 199K
28: R17 Accumulated Other Comprehensive Loss HTML 62K
29: R18 Debt HTML 28K
30: R19 Contingencies and Environmental Remediation HTML 26K
31: R20 Subsequent Events HTML 24K
32: R21 Accounting Policies (Policies) HTML 32K
33: R22 Revenue Recognition (Tables) HTML 203K
34: R23 Goodwill & Intangibles (Tables) HTML 126K
35: R24 Financial Instruments and Derivative Instruments HTML 109K
(Tables)
36: R25 Restructuring and Other Charges, Net (Tables) HTML 149K
37: R26 Earnings per Share and Stock Repurchase Program HTML 104K
(Tables)
38: R27 Stock-Based Compensation (Tables) HTML 29K
39: R28 Segment Information (Tables) HTML 198K
40: R29 Accumulated Other Comprehensive Loss (Tables) HTML 61K
41: R30 Basis of Presentation (Details) HTML 21K
42: R31 Accounting Policies - Shipping and Handling, and HTML 25K
Research and Development (Details)
43: R32 Revenue Recognition (Details) HTML 95K
44: R33 Revenue Recognition - Performance obligation HTML 25K
(Details)
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46: R35 Goodwill and Intangibles - Intangibles (Details) HTML 55K
47: R36 Financial Instruments and Derivative Instruments - HTML 77K
Fair Value on a Recurring Basis (Details)
48: R37 Financial Instruments and Derivative Instruments - HTML 42K
Fair Value Measured on Recurring Basis Using
Significant Unobservable Inputs (Level 3)
(Details)
49: R38 Financial Instruments and Derivative Instruments - HTML 66K
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50: R39 Restructuring and Other Charges, Net (Details) HTML 80K
51: R40 Restructuring and Other Charges, Net - Pre-tax HTML 53K
Restructuring (Details)
52: R41 Restructuring and Other Charges, Net (Details) HTML 70K
53: R42 Earnings per Share and Stock Repurchase Program HTML 80K
(Details)
54: R43 Stock-Based Compensation (Details) HTML 65K
55: R44 Segment Information (Details) HTML 125K
56: R45 Accumulated Other Comprehensive Loss (Details) HTML 38K
57: R46 Debt (Details) HTML 62K
58: R47 Contingencies and Environmental Remediation HTML 20K
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59: R48 Subsequent Events (Details) HTML 24K
62: XML IDEA XML File -- Filing Summary XML 110K
60: XML XBRL Instance -- wts-20220626x10q_htm XML 3.30M
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i 10-Q
i ☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended i June 26, 2022
or
i ☐ | 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 i 001-11499
WATTS WATER TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
| | |
i Delaware | | i 04-2916536 |
(State
or Other Jurisdiction of Incorporation or | | (I.R.S. Employer Identification No.) |
| | |
i 815 Chestnut Street, i North Andover, i MA | | i 01845 |
(Address of Principal Executive Offices) | | (Zip Code) |
( i 978) i 688-1811
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.)
Securities registered pursuant to Section 12(b) of the Act:
| ||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
i Class A common stock, par value $0.10 per share | i WTS | i New York Stock Exchange |
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. i 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). i 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.
| | |
i Large accelerated filer ☒ | | Accelerated filer ☐ |
| | |
Non-accelerated filer ☐ | | Smaller reporting company i ☐ Emerging growth company i ☐ |
| |
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 i ☐ 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 July 24, 2022 |
Class A Common Stock, $0.10 par value | | i 27,304,015 |
| | |
Class B Common Stock, $0.10 par value | | i 6,008,290 |
1
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
| | | |
| 3 | ||
| | | |
| 3 | ||
| | | |
| Consolidated Balance Sheets at June 26, 2022 and December 31, 2021 (unaudited) | | 3 |
| | | |
| | 4 | |
| | | |
| | 5 | |
| | | |
| | 6 | |
| | | |
| | 8 | |
| | | |
| | 9 | |
| | | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 23 | |
| | | |
| 33 | ||
| | | |
| 33 | ||
| | | |
| 34 | ||
| | | |
| 34 | ||
| | | |
| 34 | ||
| | | |
| 35 | ||
| | | |
| 36 | ||
| | | |
| 37 | ||
| | | |
| | | |
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)
| | | | | | |
| | June 26, | | |||
|
| 2022 |
| 2021 | ||
ASSETS | | |
| | | |
CURRENT ASSETS: | | | | | | |
Cash and cash equivalents | | $ | i 230.0 | | $ | i 242.0 |
Trade accounts receivable, less reserve allowances of $ i 11.2 million at June 26, 2022 and $ i 10.3 million at December 31, 2021 | |
| i 267.1 | |
| i 220.9 |
Raw materials | | | i 150.3 | | | i 119.4 |
Work in process | | | i 27.0 | | | i 20.4 |
Finished goods | | | i 254.4 | | | i 230.9 |
Total Inventories | | | i 431.7 | | | i 370.7 |
Prepaid expenses and other current assets | |
| i 38.9 | |
| i 27.9 |
Total Current Assets | |
| i 967.7 | |
| i 861.5 |
PROPERTY, PLANT AND EQUIPMENT | |
| | |
| |
Property, plant and equipment, at cost | | | i 594.8 | | | i 608.8 |
Accumulated depreciation | | | ( i 400.8) | | | ( i 408.1) |
Property, plant and equipment, net | | | i 194.0 | | | i 200.7 |
OTHER ASSETS: | | | | | | |
Goodwill | |
| i 590.9 | |
| i 600.7 |
Intangible assets, net | |
| i 119.4 | |
| i 128.6 |
Deferred income taxes | |
| i 3.3 | |
| i 3.5 |
Other, net | |
| i 59.0 | |
| i 60.6 |
TOTAL ASSETS | | $ | i 1,934.3 | | $ | i 1,855.6 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
CURRENT LIABILITIES: | | | | | | |
Accounts payable | | $ | i 166.3 | | $ | i 143.4 |
Accrued expenses and other liabilities | |
| i 189.3 | |
| i 186.9 |
Accrued compensation and benefits | |
| i 65.5 | |
| i 78.2 |
Total Current Liabilities | |
| i 421.1 | |
| i 408.5 |
LONG-TERM DEBT | |
| i 202.2 | |
| i 141.9 |
DEFERRED INCOME TAXES | |
| i 39.2 | |
| i 40.5 |
OTHER NONCURRENT LIABILITIES | |
| i 85.3 | |
| i 91.5 |
STOCKHOLDERS’ EQUITY: | | | | | | |
Preferred Stock, $ i i 0.10 / par value; i i 5,000,000 / shares authorized; i i no / shares issued or outstanding | |
| — | |
| — |
Class A common stock, $ i i 0.10 / par value; i i 120,000,000 / shares authorized; i i 1 / vote per share; issued and outstanding, i 27,297,954 shares at June 26, 2022 and i 27,584,525 shares at December 31, 2021 | |
| i 2.7 | |
| i 2.8 |
Class B common stock, $ i i 0.10 / par value; i i 25,000,000 / shares authorized; i i 10 / votes per share; issued and outstanding, i i 6,024,290 / shares at June 26, 2022 and at December 31, 2021 | |
| i 0.6 | |
| i 0.6 |
Additional paid-in capital | |
| i 641.6 | |
| i 631.2 |
Retained earnings | |
| i 696.8 | |
| i 665.9 |
Accumulated other comprehensive loss | |
| ( i 155.2) | |
| ( i 127.3) |
Total Stockholders’ Equity | |
| i 1,186.5 | |
| i 1,173.2 |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | i 1,934.3 | | $ | i 1,855.6 |
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)
| | | | | | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended | | ||||||||
| | June 26, | | June 27, | | June 26, | | | |||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Net sales | | $ | i 526.6 | | $ | i 467.0 | | $ | i 989.8 | | $ | i 880.3 | |
Cost of goods sold | |
| i 287.4 | |
| i 266.9 | |
| i 552.0 | |
| i 506.5 | |
GROSS PROFIT | |
| i 239.2 | |
| i 200.1 | |
| i 437.8 | |
| i 373.8 | |
Selling, general and administrative expenses | |
| i 141.6 | |
| i 130.4 | |
| i 267.7 | |
| i 244.2 | |
Restructuring | |
| i 1.7 | |
| i 17.0 | |
| i 2.7 | |
| i 17.3 | |
OPERATING INCOME | |
| i 95.9 | |
| i 52.7 | |
| i 167.4 | |
| i 112.3 | |
Other (income) expense: | | | | | | | | | | | | | |
Interest income | |
| — | |
| — | |
| ( i 0.1) | |
| — | |
Interest expense | |
| i 1.7 | |
| i 1.5 | |
| i 3.1 | |
| i 3.5 | |
Other (income) expense, net | |
| — | |
| ( i 0.5) | |
| i 0.3 | |
| ( i 0.8) | |
Total other expense | |
| i 1.7 | |
| i 1.0 | |
| i 3.3 | |
| i 2.7 | |
INCOME BEFORE INCOME TAXES | |
| i 94.2 | |
| i 51.7 | |
| i 164.1 | |
| i 109.6 | |
Provision for income taxes | |
| i 24.5 | |
| i 14.2 | |
| i 39.9 | |
| i 30.4 | |
NET INCOME | | $ | i 69.7 | | $ | i 37.5 | | $ | i 124.2 | | $ | i 79.2 | |
Basic EPS | | | | | | | | | | | | | |
NET INCOME PER SHARE | | $ | i 2.08 | | $ | i 1.11 | | $ | i 3.70 | | $ | i 2.34 | |
Weighted average number of shares | |
| i 33.5 | |
| i 33.8 | |
| i 33.6 | |
| i 33.8 | |
Diluted EPS | | | | | | | | | | | | | |
NET INCOME PER SHARE | | $ | i 2.07 | | $ | i 1.11 | | $ | i 3.68 | | $ | i 2.34 | |
Weighted average number of shares | |
| i 33.6 | |
| i 33.9 | |
| i 33.7 | |
| i 33.9 | |
Dividends declared per share | | $ | i 0.30 | | $ | i 0.26 | | $ | i 0.56 | | $ | i 0.49 | |
See accompanying notes to consolidated financial statements.
4
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in millions)
(Unaudited)
| | | | | | | | | | | | | |
|
| Second Quarter Ended |
| Six Months Ended |
| ||||||||
| | June 26, | | June 27, | | June 26, | | | |||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Net income | | $ | i 69.7 | | $ | i 37.5 | | $ | i 124.2 | | $ | i 79.2 | |
Other comprehensive (loss) gain net of tax: | | | | | | | | | | | | | |
Foreign currency translation adjustments | |
| ( i 23.6) | |
| i 5.8 | |
| ( i 33.0) | |
| ( i 8.3) | |
Cash flow hedges | | | i 1.6 | | | ( i 0.8) | | | i 5.1 | | | ( i 0.9) | |
Other comprehensive (loss) gain | |
| ( i 22.0) | |
| i 5.0 | |
| ( i 27.9) | |
| ( i 9.2) | |
Comprehensive income | | $ | i 47.7 | | $ | i 42.5 | | $ | i 96.3 | | $ | i 70.0 | |
See accompanying notes to consolidated financial statements.
5
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | Class A | | Class B | | Additional | | | | | Other | | Total | |||||||||
(For the six months ended | | Common Stock | | Common Stock | | Paid-In | | Retained | | Comprehensive | | Stockholders’ | ||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Loss |
| Equity | |||||||
Balance at December 31, 2021 |
| i 27,584,525 | | $ | i 2.8 |
| i 6,024,290 | | $ | i 0.6 | | $ | i 631.2 | | $ | i 665.9 | | $ | ( i 127.3) | | $ | i 1,173.2 |
Net income | | — | | | — | | — | | | — | | | — | | | i 124.2 | | | — | | | i 124.2 |
Other comprehensive loss | | — | | | — | | — | | | — | | | — | | | — | | | ( i 27.9) | | | ( i 27.9) |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | i 96.3 |
Shares of Class A common stock issued upon the exercise of stock options |
| i 2,325 | | | — | | — | | | — | | | i 0.2 | | | — | | | — | | | i 0.2 |
Stock-based compensation |
| — | | | — | | — | | | — | | | i 8.2 | | | — | | | — | | | i 8.2 |
Stock repurchase |
| ( i 433,623) | | | ( i 0.1) | | — | | | — | | | — | | | ( i 61.1) | | | — | | | ( i 61.2) |
Net change in restricted and performance stock units | | i 144,727 | | | — | | — | | | — | | | i 2.0 | | | ( i 12.9) | | | — | | | ( i 10.9) |
Common stock dividends | | — | | | — | | — | | | — | | | — | | | ( i 19.3) | | | — | | | ( i 19.3) |
Balance at June 26, 2022 |
| i 27,297,954 | | $ | i 2.7 |
| i 6,024,290 | | $ | i 0.6 | | $ | i 641.6 | | $ | i 696.8 | | $ | ( i 155.2) | | $ | i 1,186.5 |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | Class A | | Class B | | Additional | | | | | Other | | Total | |||||||||
(For the second quarter ended | | Common Stock | | Common Stock | | Paid-In | | Retained | | Comprehensive | | Stockholders’ | ||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Loss |
| Equity | |||||||
Balance at March 27, 2022 |
| i 27,437,126 | | $ | i 2.7 |
| i 6,024,290 | | $ | i 0.6 | | $ | i 636.5 | | $ | i 655.9 | | $ | ( i 133.2) | | $ | i 1,162.5 |
Net income | | — | | | — | | — | | | — | | | — | | | i 69.7 | | | — | | | i 69.7 |
Other comprehensive loss | | — | | | — | | — | | | — | | | — | | | — | | | ( i 22.0) | | | ( i 22.0) |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | i 47.7 |
Shares of Class A common stock issued upon the exercise of stock options | | — | | | — | | — | | | — | | | i 0.2 | | | — | | | — | | | i 0.2 |
Stock-based compensation |
| — | | | — | | — | | | — | | | i 4.9 | | | — | | | — | | | i 4.9 |
Stock repurchase |
| ( i 140,233) | | | — | | — | | | — | | | — | | | ( i 18.2) | | | — | | | ( i 18.2) |
Net change in restricted and performance stock units | | i 1,061 | | | — | | — | | | — | | | — | | | ( i 0.3) | | | — | | | ( i 0.3) |
Common stock dividends | | — | | | — | | — | | | — | | | — | | | ( i 10.3) | | | — | | | ( i 10.3) |
Balance at June 26, 2022 |
| i 27,297,954 | | $ | i 2.7 |
| i 6,024,290 | | $ | i 0.6 | | $ | i 641.6 | | $ | i 696.8 | | $ | ( i 155.2) | | $ | i 1,186.5 |
6
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | Class A | | Class B | | Additional | | | | | Other | | Total | |||||||||
(For the six months ended | | Common Stock | | Common Stock | | Paid-In | | Retained | | Comprehensive | | Stockholders’ | ||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Loss |
| Equity | |||||||
Balance at December 31, 2020 |
| i 27,478,512 | | $ | i 2.8 |
| i 6,144,290 | | $ | i 0.6 | | $ | i 606.3 | | $ | i 560.1 | | $ | ( i 100.0) | | $ | i 1,069.8 |
Net income | | — | | | — | | — | | | — | | | — | | | i 79.2 | | | — | | | i 79.2 |
Other comprehensive loss | | — | | | — | | — | | | — | | | — | | | — | | | ( i 9.2) | | | ( i 9.2) |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | i 70.0 |
Shares of Class B common stock converted to Class A common stock | | i 70,000 | | | — | | ( i 70,000) | | | — | | | — | | | — | | | — | | | — |
Shares of Class A common stock issued upon the exercise of stock options | | i 112 | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Stock-based compensation | | — | | | — | | — | | | — | | | i 9.9 | | | — | | | — | | | i 9.9 |
Stock repurchase | | ( i 62,070) | | | — | | — | | | — | | | — | | | ( i 7.8) | | | — | | | ( i 7.8) |
Net change in restricted and performance stock units | | i 90,556 | | | — | | — | | | — | | | i 1.9 | | | ( i 9.2) | | | — | | | ( i 7.3) |
Common stock dividends | | — | | | — | | — | | | — | | | — | | | ( i 16.7) | | | — | | | ( i 16.7) |
Balance at June 27, 2021 | | i 27,577,110 | | $ | i 2.8 | | i 6,074,290 | | $ | i 0.6 | | $ | i 618.1 | | $ | i 605.6 | | $ | ( i 109.2) | | $ | i 1,117.9 |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | Class A | | Class B | | Additional | | | | | Other | | Total | |||||||||
(For the second quarter ended | | Common Stock | | Common Stock | | Paid-In | | Retained | | Comprehensive | | Stockholders’ | ||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Loss |
| Equity | |||||||
Balance at March 28, 2021 |
| i 27,585,082 | | $ | i 2.8 |
| i 6,124,290 | | $ | i 0.6 | | $ | i 611.0 | | $ | i 581.0 | | $ | ( i 114.2) | | $ | i 1,081.2 |
Net income | | — | | | — | | — | | | — | | | — | | | i 37.5 | | | — | | | i 37.5 |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | i 5.0 | | | i 5.0 |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | i 42.5 |
Shares of Class B common stock converted to Class A common stock | | i 50,000 | | | — | | ( i 50,000) | | | — | | | — | | | — | | | — | | | — |
Shares of Class A common stock issued upon the exercise of stock options | | i 112 | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Stock-based compensation | | — | | | — | | — | | | — | | | i 7.1 | | | — | | | — | | | i 7.1 |
Stock repurchase | | ( i 30,917) | | | — | | — | | | — | | | — | | | ( i 4.0) | | | — | | | ( i 4.0) |
Net change in restricted and performance stock units | | ( i 27,167) | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Common stock dividends | | — | | | — | | — | | | — | | | — | | | ( i 8.9) | | | — | | | ( i 8.9) |
Balance at June 27, 2021 | | i 27,577,110 | | $ | i 2.8 | | i 6,074,290 | | $ | i 0.6 | | $ | i 618.1 | | $ | i 605.6 | | $ | ( i 109.2) | | $ | i 1,117.9 |
See accompanying notes to consolidated financial statements.
7
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
| | | | | | |
| | Six Months Ended | ||||
| | June 26, | | |||
|
| 2022 |
| 2021 | ||
OPERATING ACTIVITIES | | | | | | |
Net income | | $ | i 124.2 | | $ | i 79.2 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation | |
| i 14.2 | |
| i 16.0 |
Amortization of intangibles | |
| i 6.1 | |
| i 7.3 |
Loss on disposal and impairment of property, plant and equipment and other | |
| i 1.5 | |
| i 0.7 |
Stock-based compensation | |
| i 8.2 | |
| i 9.9 |
Deferred income tax | |
| ( i 1.1) | |
| ( i 4.8) |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | |
| ( i 54.1) | |
| ( i 60.8) |
Inventories | |
| ( i 72.5) | |
| ( i 52.1) |
Prepaid expenses and other assets | |
| ( i 6.0) | |
| ( i 7.5) |
Accounts payable, accrued expenses and other liabilities | |
| i 24.4 | |
| i 85.3 |
Net cash provided by operating activities | |
| i 44.9 | |
| i 73.2 |
INVESTING ACTIVITIES | | | | | | |
Additions to property, plant and equipment | |
| ( i 13.1) | |
| ( i 13.0) |
Proceeds from the sale of property, plant and equipment | |
| i 0.8 | |
| i 4.9 |
Net cash used in investing activities | |
| ( i 12.3) | |
| ( i 8.1) |
FINANCING ACTIVITIES | | | | | | |
Proceeds from long-term borrowings | | | i 75.0 | | | i 35.0 |
Payments of long-term debt | |
| ( i 15.0) | |
| ( i 40.0) |
Payments for withholding taxes on vested awards | |
| ( i 12.9) | |
| ( i 9.2) |
Payments for finance leases and other | | | ( i 0.6) | | | ( i 0.6) |
Proceeds from share transactions under employee stock plans | |
| i 0.2 | |
| — |
Debt issuance costs | | | — | | | ( i 2.4) |
Payments to repurchase common stock | |
| ( i 61.1) | |
| ( i 7.8) |
Dividends | |
| ( i 19.3) | |
| ( i 16.7) |
Net cash used in financing activities | |
| ( i 33.7) | |
| ( i 41.7) |
Effect of exchange rate changes on cash and cash equivalents | |
| ( i 10.9) | |
| ( i 2.2) |
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | |
| ( i 12.0) | |
| i 21.2 |
Cash and cash equivalents at beginning of year | |
| i 242.0 | |
| i 218.9 |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | i 230.0 | | $ | i 240.1 |
| | | | | | |
SUPPLEMENTAL CASH FLOW DISCLOSURE: | | | | | | |
Issuance of stock under management stock purchase plan | | $ | i 0.3 | | $ | i 0.5 |
CASH PAID FOR: | | | | | | |
Interest | | $ | i 2.3 | | $ | i 3.9 |
Income taxes | | $ | i 42.3 | | $ | i 31.1 |
See accompanying notes to consolidated financial statements.
8
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
i1. Basis of Presentation
iThe accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the Watts Water Technologies, Inc. (the “Company”) Consolidated Balance Sheet as of June 26, 2022, the Consolidated Statements of Operations for the second quarters and six months ended June 26, 2022 and June 27, 2021, the Consolidated Statements of Comprehensive Income for the second quarters and six months ended June 26, 2022 and June 27, 2021, the Consolidated Statements of Stockholders’ Equity for the second quarters and six months ended June 26, 2022 and June 27, 2021, and the Consolidated Statements of Cash Flows for the six months ended June 26, 2022 and June 27, 2021.
The consolidated balance sheet at December 31, 2021 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, 2021. 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, 2021. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2022.
The Company operates on a 52-week fiscal year ending on December 31, with each quarter, except the fourth quarter, ending on a Sunday. Any quarterly data contained in this Quarterly Report on Form 10-Q generally reflect the results of operations for a 13-week period.
iEstimates
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. We are not aware of any specific event or circumstance that would require updates to the Company’s estimates or judgments or require the Company to revise the carrying value of the Company’s assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ from those estimates.
/
i2. Accounting Policies
The significant accounting policies used in preparation of these consolidated financial statements for the second quarter ended June 26, 2022, 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, 2021.
iShipping and Handling
Shipping and handling costs included in selling, general and administrative expenses amounted to $ i 18.4 million and $ i 17.5 million for the second quarters of 2022 and 2021, respectively, and were $ i 36.1 million and $ i 32.9 million for the first six months of 2022 and 2021, respectively.
/
iResearch and Development
Research and development costs included in selling, general and administrative expenses amounted to $ i 12.3 million and $ i 11.0 million for the second quarters of 2022 and 2021, respectively, and were $ i 24.2 million and $ i 21.8 million for the first six months of 2022 and 2021, respectively.
/ /
9
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 commercial and residential markets of the Americas, Europe, and Asia-Pacific, Middle East, and Africa (“APMEA”). For over i 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 i four primary distribution channels: wholesale, original equipment manufacturers (OEMs), specialty, and do-it-yourself (DIY). The Company operates in i 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, thermostatic mixing valves and leak detection products. |
| ● | HVAC & gas products—includes commercial high-efficiency boilers, water heaters and heating solutions, hydronic and electric heating systems for under-floor radiant applications, custom heat and hot water solutions, 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 re-use products—includes drainage products and engineered rain water harvesting solutions for commercial, industrial, marine and residential applications. |
| ● | Water quality products—includes point-of-use and point-of-entry water filtration, conditioning and scale prevention systems for commercial, marine 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:
i
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the second quarter ended June 26, 2022 | | For the six months ended June 26, 2022 | ||||||||||||||||||||
| | | | (in millions) | | | | | | (in millions) | | | ||||||||||||
Distribution Channel | | Americas | | Europe | | APMEA | | Consolidated | | Americas | | Europe | | APMEA | | Consolidated | ||||||||
Wholesale | | $ | i 214.3 | | $ | i 81.0 | | $ | i 20.8 | | $ | i 316.1 | | $ | i 389.1 | | $ | i 165.0 | | $ | i 38.8 | | $ | i 592.9 |
OEM | | | i 27.1 | |
| i 46.3 | |
| i 2.0 | |
| i 75.4 | | | i 52.7 | |
| i 91.7 | |
| i 3.4 | |
| i 147.8 |
Specialty | | | i 112.4 | |
| — | |
| — | |
| i 112.4 | | | i 206.2 | |
| — | |
| — | |
| i 206.2 |
DIY | |
| i 22.1 | |
| i 0.6 | |
| — | |
| i 22.7 | |
| i 41.8 | |
| i 1.1 | |
| — | |
| i 42.9 |
Total | | $ | i 375.9 | | $ | i 127.9 | | $ | i 22.8 | | $ | i 526.6 | | $ | i 689.8 | | $ | i 257.8 | | $ | i 42.2 | | $ | i 989.8 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the second quarter ended June 26, 2022 | | For the six months ended June 26, 2022 | ||||||||||||||||||||
| | | | (in millions) | | | | | | (in millions) | | | ||||||||||||
Principal Product Line | | Americas | | Europe | | APMEA | | Consolidated | | Americas | | Europe | | APMEA | | Consolidated | ||||||||
Residential & Commercial Flow Control | | $ | i 211.9 | | $ | i 46.2 | | $ | i 18.6 | | $ | i 276.7 | | $ | i 389.9 | | $ | i 92.3 | | $ | i 34.5 | | $ | i 516.7 |
HVAC and Gas Products | | | i 100.7 | |
| i 57.9 | |
| i 3.6 | |
| i 162.2 | | | i 185.0 | |
| i 117.9 | |
| i 6.0 | |
| i 308.9 |
Drainage and Water Re-use Products | | | i 29.8 | |
| i 22.7 | |
| i 0.3 | |
| i 52.8 | | | i 52.6 | |
| i 45.5 | |
| i 1.1 | |
| i 99.2 |
Water Quality Products | |
| i 33.5 | |
| i 1.1 | |
| i 0.3 | |
| i 34.9 | |
| i 62.3 | |
| i 2.1 | |
| i 0.6 | |
| i 65.0 |
Total | | $ | i 375.9 | | $ | i 127.9 | | $ | i 22.8 | | $ | i 526.6 | | $ | i 689.8 | | $ | i 257.8 | | $ | i 42.2 | | $ | i 989.8 |
/ /10
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the second quarter ended June 27, 2021 | | For the six months ended June 27, 2021 | ||||||||||||||||||||
| | | | (in millions) | | | | | | (in millions) | | | ||||||||||||
Distribution Channel | | Americas | | Europe | | APMEA | | Consolidated | | Americas | | Europe | | APMEA | | Consolidated | ||||||||
Wholesale | | $ | i 177.3 | | $ | i 88.5 | | $ | i 21.4 | | $ | i 287.2 | | $ | i 334.7 | | $ | i 169.5 | | $ | i 38.0 | | $ | i 542.2 |
OEM | | | i 24.1 | |
| i 47.4 | |
| i 1.6 | |
| i 73.1 | | | i 44.6 | |
| i 88.4 | |
| i 2.6 | |
| i 135.6 |
Specialty | | | i 86.1 | |
| — | |
| i 0.1 | |
| i 86.2 | | | i 160.2 | |
| — | |
| i 0.1 | |
| i 160.3 |
DIY | |
| i 19.6 | |
| i 0.9 | |
| — | |
| i 20.5 | |
| i 40.4 | |
| i 1.8 | |
| — | |
| i 42.2 |
Total | | $ | i 307.1 | | $ | i 136.8 | | $ | i 23.1 | | $ | i 467.0 | | $ | i 579.9 | | $ | i 259.7 | | $ | i 40.7 | | $ | i 880.3 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the second quarter ended June 27, 2021 | | For the six months ended June 27, 2021 | ||||||||||||||||||||
| | | | (in millions) | | | | | | (in millions) | | | ||||||||||||
Principal Product Line | | Americas | | Europe | | APMEA | | Consolidated | | Americas | | Europe | | APMEA | | Consolidated | ||||||||
Residential & Commercial Flow Control | | $ | i 177.2 | | $ | i 51.8 | | $ | i 18.6 | | $ | i 247.6 | | $ | i 339.5 | | $ | i 99.1 | | $ | i 33.3 | | $ | i 471.9 |
HVAC and Gas Products | | | i 77.6 | |
| i 60.9 | |
| i 3.6 | |
| i 142.1 | | | i 143.5 | |
| i 115.1 | |
| i 5.9 | |
| i 264.5 |
Drainage and Water Re-use Products | | | i 25.2 | |
| i 22.5 | |
| i 0.5 | |
| i 48.2 | | | i 43.8 | |
| i 42.7 | |
| i 0.9 | |
| i 87.4 |
Water Quality Products | |
| i 27.1 | |
| i 1.6 | |
| i 0.4 | |
| i 29.1 | |
| i 53.1 | |
| i 2.8 | |
| i 0.6 | |
| i 56.5 |
Total | | $ | i 307.1 | | $ | i 136.8 | | $ | i 23.1 | | $ | i 467.0 | | $ | i 579.9 | | $ | i 259.7 | | $ | i 40.7 | | $ | i 880.3 |
The Company generally 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 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 to 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.
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 the guidance, 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 these as separate performance obligations. These policies typically are for periods ranging from one to i three years. Payments
11
received are deferred and recognized over the policy period. For all periods presented, the revenue recognized and the revenue deferred under these policies are 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 limited cases, customers will partially prepay for their goods. 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. The Company did not recognize any material revenue from obligations satisfied in prior periods. When the timing of the Company’s recognition of revenue is different from the timing of payments made by the customer, the Company recognizes a contract liability (customer payment precedes performance). For all periods presented, the recognized contract liabilities and the associated revenue deferred are not material to the consolidated financial statements.
The Company incurs costs to obtain and fulfill a contract; however, the Company has elected 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.
i4. Goodwill & Intangibles
The Company operates in i three geographic segments: Americas, Europe, and APMEA. The changes in the carrying amount of goodwill by geographic segment are as follows:
i
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Balance | | Accumulated Impairment Losses | | Foreign Currency Translation | | Net Goodwill | ||||||||||||||||
| | | | Acquired | | | | | | | | | | | January 1, | | | |||||||
| | Balance | | During | | Balance | | Balance | | Impairment | | Balance | | 2022 - | | | ||||||||
| | January 1, | | the | | June 26, | | January 1, | | Loss During | | June 26, | | June 26, | | |||||||||
|
| 2022 |
| Period |
| 2022 |
| 2022 |
| the Period |
| 2022 |
| 2022 |
| 2022 | ||||||||
| | (in millions) | ||||||||||||||||||||||
Americas | | $ | i 490.9 | | $ | — | | $ | i 490.9 | | $ | ( i 24.5) | | $ | — | | $ | ( i 24.5) | | $ | ( i 0.2) | | $ | i 466.2 |
Europe | |
| i 242.9 | |
| — | |
| i 242.9 | |
| ( i 129.7) | |
| — | |
| ( i 129.7) | |
| ( i 8.1) | |
| i 105.1 |
APMEA | |
| i 34.0 | |
| — | |
| i 34.0 | |
| ( i 12.9) | |
| — | |
| ( i 12.9) | |
| ( i 1.5) | |
| i 19.6 |
Total | | $ | i 767.8 | | $ | — | | $ | i 767.8 | | $ | ( i 167.1) | | $ | — | | $ | ( i 167.1) | | $ | ( i 9.8) | | $ | i 590.9 |
Goodwill and indefinite-lived intangible assets are tested for impairment at least annually or more frequently if events or circumstances indicate that it is “more likely than not” that they might be impaired, such as from a change in business conditions. The Company performs its annual goodwill and indefinite-lived intangible assets impairment assessment in the fourth quarter of each year. At the most recent annual impairment test which occurred in the fourth quarter of 2021, the Company performed qualitative fair value assessments, including an evaluation of certain key assumptions for all i seven of its reporting units. The Company concluded that the fair value of all i i seven / reporting units exceeded their carrying values at that time.
/12
Intangible assets include the following:
i
| | | | | | | | | | | | | | | | | | |
| | | ||||||||||||||||
| | Gross | | | | | Net | | Gross | | | | | Net | ||||
| | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying | ||||||
|
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount | ||||||
| | (in millions) | ||||||||||||||||
Patents | | $ | i 16.1 | | $ | ( i 16.1) | | $ | — | | $ | i 16.1 | | $ | ( i 16.1) | | $ | — |
Customer relationships | |
| i 237.0 | |
| ( i 176.8) | |
| i 60.2 | |
| i 237.5 | |
| ( i 173.1) | |
| i 64.4 |
Technology | |
| i 57.4 | |
| ( i 42.7) | |
| i 14.7 | |
| i 58.6 | |
| ( i 40.7) | |
| i 17.9 |
Trade names | |
| i 26.6 | |
| ( i 17.4) | |
| i 9.2 | |
| i 26.8 | |
| ( i 16.9) | |
| i 9.9 |
Other | |
| i 4.3 | |
| ( i 3.8) | |
| i 0.5 | |
| i 4.3 | |
| ( i 3.8) | |
| i 0.5 |
Total amortizable intangibles | |
| i 341.4 | |
| ( i 256.8) | |
| i 84.6 | |
| i 343.3 | |
| ( i 250.6) | |
| i 92.7 |
Indefinite-lived intangible assets | |
| i 34.8 | |
| — | |
| i 34.8 | |
| i 35.9 | |
| — | |
| i 35.9 |
| | $ | i 376.2 | | $ | ( i 256.8) | | $ | i 119.4 | | $ | i 379.2 | | $ | ( i 250.6) | | $ | i 128.6 |
Aggregate amortization expense for amortized intangible assets for the second quarters ended June 26, 2022 and June 27, 2021 was $ i 3.0 million and $ i 3.4 million, respectively, and for the first six months of 2022 and 2021 was $ i 6.1 million and $ i 7.3 million, respectively.
i5. Financial Instruments and Derivative Instruments
Fair Value
The carrying amounts of cash and cash equivalents, trade receivables and trade payables approximate fair value because of the short maturity of these financial instruments. The fair value of the Company’s borrowings under the Amended and Restated Credit Agreement entered into on March 30, 2021 (the “Amended Credit Agreement”) approximates its carrying value.
Financial Instruments
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including deferred compensation plan assets and related liabilities, contingent consideration, and derivatives. The fair values of these financial assets and liabilities were determined using the following inputs at June 26, 2022 and December 31, 2021:
i
| | | | | | | | | | | | |
| | Fair Value Measurement at June 26, 2022 Using: | ||||||||||
| | | | | Quoted Prices in Active | | Significant Other | | Significant | |||
| | | | | Markets for Identical | | Observable | | Unobservable | |||
| | | | | Assets | | Inputs | | Inputs | |||
|
| Total |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
| | (in millions) | ||||||||||
Assets | | | | | | | | | | | | |
Plan asset for deferred compensation(1) | | $ | i 2.0 | | $ | i 2.0 | | $ | — | | $ | — |
Interest rate swap(2) | | $ | i 7.5 | | $ | — | | $ | i 7.5 | | $ | — |
Designated foreign currency hedges(4) | | $ | i 0.1 | | $ | — | | $ | i 0.1 | | $ | — |
Total assets | | $ | i 9.6 | | $ | i 2.0 | | $ | i 7.6 | | $ | — |
Liabilities | | | | | | | | | | | | |
Plan liability for deferred compensation(3) | | $ | i 2.0 | | $ | i 2.0 | | $ | — | | $ | — |
Contingent consideration(6) | | $ | i 6.1 | | $ | — | | $ | — | | $ | i 6.1 |
Total liabilities | | $ | i 8.1 | | $ | i 2.0 | | $ | — | | $ | i 6.1 |
/ /13
| | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2021 Using: | ||||||||||
| | | | | Quoted Prices in Active | | Significant Other | | Significant | |||
| | | | | Markets for Identical | | Observable | | Unobservable | |||
|
| | | | Assets | | Inputs | | Inputs | |||
| | Total |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
| | (in millions) | ||||||||||
Assets | | | | | | | | | | | | |
Plan asset for deferred compensation(1) | | $ | i 2.6 | | $ | i 2.6 | | $ | — | | $ | — |
Interest rate swap(1) | | $ | i 1.4 | | $ | — | | $ | i 1.4 | | $ | — |
Total assets | | $ | i 4.0 | | $ | i 2.6 | | $ | i 1.4 | | $ | — |
Liabilities | | | | | | | | | | | | |
Interest rate swap(5) | | $ | i 0.6 | | $ | — | | $ | i 0.6 | | $ | — |
Plan liability for deferred compensation(3) | | $ | i 2.6 | | $ | i 2.6 | | $ | — | | $ | — |
Contingent consideration(6) | | $ | i 6.3 | | $ | — | | $ | — | | $ | i 6.3 |
Total liabilities | | $ | i 9.5 | | $ | i 2.6 | | $ | i 0.6 | | $ | i 6.3 |
(1) | Included on the Company’s consolidated balance sheet in other assets (other, net). |
(2) | As of June 26, 2022, $ i 1.9 million classified in prepaid expenses and other current assets on the Company’s consolidated balance sheet and $ i 5.6 million classified in other assets (other, net). |
(3) | Included on the Company’s consolidated balance sheet in accrued compensation and benefits. |
(4)Included on the Company’s consolidated balance sheet in prepaid expenses and other current assets.
(5)Included on the Company’s consolidated balance sheet in accrued expenses and other liabilities.
(6)As of June 26, 2022, contingent consideration of $ i 6.1 million related to i two immaterial acquisitions, of which $ i 3.6 million was classified in accrued expenses and other liabilities and $ i 2.5 million was classified in other noncurrent liabilities on the Company’s consolidated balance sheet. As of December 31, 2021, contingent consideration of $ i 6.3 million related to i two immaterial acquisitions, of which $ i 3.8 million was classified in accrued expenses and other liabilities and $ i 2.5 million was classified in other noncurrent liabilities on the Company’s consolidated balance sheet.
There were no changes in fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) in the second quarter of 2022.
In connection with the immaterial acquisition of Australian Valve Group Pty Ltd (“AVG”) completed during the third quarter of 2020 and Sentinel Hydrosolutions, LLC (“Sentinel”) completed during the fourth quarter of 2021, contingent liabilities of $ i 2.8 million and $ i 2.5 million, respectively, were recognized as the estimate of the acquisition date fair value of the contingent consideration. The AVG contingent liability as of June 26, 2022 was $ i 3.6 million after increasing the liability by $ i 0.8 million during the second quarter of 2021, due to increased probability of achieving higher performance metrics, and foreign exchange translations. These liabilities were classified as Level 3 under the fair value hierarchy as they were based on the probability of achievement of future performance metrics as of the respective dates of acquisition, which were not observable in the market. Failure to meet the performance metrics would reduce this liability to i zero, while complete achievement would increase the liability to a maximum contingent consideration of approximately $ i 4.1 million for AVG and $ i 4.5 million for Sentinel.
Cash equivalents consist of instruments with original 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 uses financial instruments from time to time to enhance its ability to manage risk, including foreign currency and commodity pricing exposures, which exist as part of its ongoing business operations. The use of derivatives exposes the Company to counterparty credit risk for nonperformance and to market risk related to changes in currency exchange rates and commodity prices. The Company manages its exposure to counterparty credit risk through diversification of counterparties. The Company’s counterparties in derivative transactions are substantial commercial banks with significant experience using such derivative instruments. The impact of market risk on the fair value and cash flows of the Company’s derivative instruments is monitored and the Company restricts the use of derivative financial instruments to hedging activities. The Company does not enter into contracts for trading purposes nor does the Company
14
enter into any contracts for speculative purposes. The use of derivative instruments is approved by senior management under written guidelines.
Interest Rate Swaps
On March 30, 2021, the Company entered into the Amended Credit Agreement. The Amended Credit Agreement extended the maturity date of the $ i 800 million senior unsecured revolving credit facility from February 12, 2022 to March 30, 2026 (the "Revolving Credit Facility"). Borrowings outstanding under the Revolving Credit Facility bear interest at a fluctuating rate per annum as further detailed in Note 11.
In order to manage the Company’s exposure to changes in cash flows attributable to fluctuations in LIBOR-indexed interest payments related to the Company’s floating rate debt, the Company entered into an interest rate swap on March 30, 2021. Under the interest rate swap agreement, the Company receives the one-month USD-LIBOR subject to a i 0.00% floor and pays a fixed rate of i 1.02975% on a notional amount of $ i 100.0 million. The swap matures on March 30, 2026. The Company formally documents the hedge relationships at hedge inception to ensure that its interest rate swaps qualify for hedge accounting. On a quarterly basis, the Company assesses whether the interest rate swap is highly effective in offsetting changes in the cash flow of the hedged item. The Company does not hold or issue interest rate swaps for trading purposes. The swaps are designated as cash flow hedges. For the second quarter and six months ended June 26, 2022, a net gain of $ i 1.3 million and $ i 4.9 million, respectively, was recorded in Accumulated Other Comprehensive Loss to recognize the effective portion of the fair value of the interest rate swap that qualifies as a cash flow hedge.
Designated Foreign Currency Hedges
The Company’s foreign subsidiaries transact most business, including certain intercompany transactions, in foreign currencies. Such transactions are principally purchases or sales of materials. The Company has exposure to a number of foreign currencies, including the Canadian dollar, the euro, and the Chinese yuan. The Company uses a layering methodology, whereby at the end of each quarter, the Company enters into forward exchange contracts hedging Canadian dollar to U.S. dollar, which hedge up to i 85% of the forecasted intercompany purchase transactions between one of the Company’s Canadian subsidiaries and the Company’s U.S. operating subsidiaries for the next i twelve months. The Company uses a similar layering methodology when entering into forward exchange contracts hedging U.S. dollar to the Chinese yuan, which hedge up to i 60% of the forecasted intercompany sales transactions between one of the Company’s Chinese subsidiaries and one of the Company’s U.S. operating subsidiaries for the next i twelve months. As of June 26, 2022, all designated foreign exchange hedge contracts were cash flow hedges under ASC 815, Derivatives and Hedging. The Company records the effective portion of the designated foreign currency hedge contracts in other comprehensive income until inventory turns and is sold to a third-party. Once the third-party transaction associated with the hedged forecasted transaction occurs, the effective portion of any related gain or loss on the designated foreign currency hedge is reclassified into earnings within cost of goods sold. In the event the notional amount of the derivatives exceeds the forecasted intercompany purchases for a given month, the excess hedge position will be attributed to the following month’s forecasted purchases. However, if the following month’s forecasted purchases cannot absorb the excess hedge position from the current month, the effective portion of the hedge recorded in other comprehensive income will be reclassified to earnings.
The notional amounts outstanding as of June 26, 2022 for the Canadian dollar to U.S. dollar contracts and the U.S. dollar to the Chinese yuan were $ i 15.9 million and $ i 5.4 million, respectively. The fair value of the Company’s designated foreign hedge contracts outstanding as of June 26, 2022 was an asset of $ i 0.1 million. As of June 26, 2022, the amount expected to be reclassified into cost of goods sold from other comprehensive income in the next i twelve months is immaterial.
i6. Restructuring and Other Charges, Net
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 in which the liability is incurred. These costs are included in restructuring charges in the Company’s consolidated statements of operations.
15
A summary of the pre-tax cost by restructuring program is as follows:
i
| | | | | | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended | | ||||||||
|
| June 26, |
| June 27, |
| June 26, |
| | |||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
| | (in millions) | | ||||||||||
Restructuring costs: | | | | | | | | | | | | | |
2021 France Actions | | $ | i 1.3 | | $ | i 18.0 | | $ | i 2.3 | | $ | i 18.0 | |
Other Actions | |
| i 0.4 | |
| ( i 1.0) | |
| i 0.4 | |
| ( i 0.7) | |
Total restructuring charges | | $ | i 1.7 | | $ | i 17.0 | | $ | i 2.7 | | $ | i 17.3 | |
The Company recorded pre-tax restructuring costs in its business segments as follows:
i
| | | | | | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended | | ||||||||
| | June 26, | | June 27, | | June 26, | | | |||||
|
| 2022 | | 2021 | | 2022 | | 2021 |
| ||||
| | (in millions) | | ||||||||||
Americas | | $ | i 0.4 | | $ | ( i 0.7) | | $ | i 0.5 | | $ | ( i 0.7) | |
Europe | |
| i 1.3 | |
| i 17.9 | |
| i 2.3 | |
| i 17.9 | |
APMEA | |
| — | |
| ( i 0.2) | |
| ( i 0.1) | |
| i 0.1 | |
Total | | $ | i 1.7 | | $ | i 17.0 | | $ | i 2.7 | | $ | i 17.3 | |
2021 France Actions
On June 25, 2021, the Board of Directors approved a restructuring program with respect to the Company’s operating facilities in France, within its Europe operating segment. The restructuring program includes the shutdown of the Company’s manufacturing facility in Méry, France and the consolidation of that facility’s operations primarily into the Company’s facilities in Virey-le-Grand and Hautvillers, France. The total pre-tax restructuring charges associated with the program were initially estimated to be approximately $ i 26.3 million. As of June 26, 2022, the Company reduced its total expected pre-tax charges for the program to approximately $ i 22.9 million, of which $ i 22.0 million was incurred program-to-date. The reduction in total expected charges primarily related to lower severance and outplacement costs than initially estimated. The total expected charges include costs for employee severance, relocation of equipment, clean-up of the facility and certain asset write-downs, and resulted in the elimination of approximately i 80 positions at the Méry, France facility. As a result of the facility consolidations, the net headcount reduction in France was approximately i 40 positions. Total net after-tax charges for this restructuring program are expected to be approximately $ i 17.0 million (including approximately $ i 1.5 million in non-cash charges), with costs being incurred through the second half of 2022, at which time the restructuring program is expected to be completed. The Company spent approximately $ i 0.6 million in capital expenditures to consolidate operations. Annual cash savings, net of tax, are estimated to be approximately $ i 3.0 million, which the Company expects to fully realize by 2023.
The following table summarizes by type, the total expected, incurred and remaining pre-tax restructuring costs for the Company’s restructuring program related to the 2021 France Actions:
i
| | | | | | | | | | | | | | | |
| | | | | | | | | | | Facility | | | | |
| | | | | Legal and | | Asset | | exit | | | | |||
|
| Severance |
| consultancy |
| write-downs |
| and other |
| Total | |||||
| | (in millions) | |||||||||||||
Costs incurred — 2021 |
| $ | i 16.9 |
| $ | i 0.9 |
| $ | i 0.9 |
| $ | i 1.0 |
| $ | i 19.7 |
Costs incurred—first quarter 2022 | | | i 0.2 | | | i 0.1 | | | i 0.4 | | | i 0.3 | | | i 1.0 |
Costs incurred—second quarter 2022 | | | i 0.6 | | | i 0.1 | | | i 0.4 | | | i 0.2 | | | i 1.3 |
Remaining costs to be incurred | | | i 0.9 | | | — | | | — | | | — | | | i 0.9 |
Total expected restructuring costs |
| $ | i 18.6 | | $ | i 1.1 | | $ | i 1.7 | | $ | i 1.5 |
| $ | i 22.9 |
16
Details of the restructuring reserve activity for the Company’s 2021 France Actions for the period ended June 26, 2022 are as follows:
i
| | | | | | | | | | | | | | | |
| | | | | | | | | | Facility | | | |||
| | | | | Legal and | | Asset | | exit | | | | |||
|
| Severance |
| consultancy |
| write-downs |
| and other |
| Total | |||||
| | (in millions) | |||||||||||||
Balance at December 31, 2021 | | $ | i 9.9 | | $ | i 0.2 | | $ | — | | $ | i 0.5 | | $ | i 10.6 |
Net pre-tax restructuring charges | | | i 0.2 | | | i 0.1 | | | i 0.4 | | | i 0.3 | | | i 1.0 |
Utilization and foreign currency impact | | | ( i 4.7) | | | ( i 0.1) | | | ( i 0.4) | | | ( i 0.3) | | | ( i 5.5) |
Balance at March 27, 2022 | | $ | i 5.4 | | $ | i 0.2 | | $ | — | | $ | i 0.5 | | $ | i 6.1 |
Net pre-tax restructuring charges | | | i 0.6 | | | i 0.1 | | | i 0.4 | | | i 0.2 | | | i 1.3 |
Utilization and foreign currency impact | | | ( i 2.0) | | | ( i 0.2) | | | ( i 0.4) | | | ( i 0.5) | | | ( i 3.1) |
Balance at June 26, 2022 | | $ | i 4.0 | | $ | i 0.1 | | $ | — | | $ | i 0.2 | | $ | i 4.3 |
Other Actions
The Company periodically initiates other actions which are not part of a major program. Included in “Other Actions” for the second quarter and six months ended June 26, 2022 were immaterial actions primarily taken in the Americas segment. An additional $ i 1.1 million of facility exit charges related to the decommissioning of machinery at one of the Company’s facilities in the Americas is expected to be incurred in the third and fourth quarters of 2022.
i7. Earnings per Share and Stock Repurchase Program
The following table sets forth the reconciliation of the calculation of earnings per share:
i
| | | | | | | | | | | | | | | | | |
| | For the Second Quarter Ended June 26, 2022 | | For the Second Quarter Ended June 27, 2021 |
| ||||||||||||
| | Income | | Shares | | Per Share | | Income | | Shares | | Per Share | | ||||
|
| (Numerator) |
| (Denominator) |
| Amount |
| (Numerator) |
| (Denominator) |
| Amount |
| ||||
| | (Amounts in millions, except per share information) |
| ||||||||||||||
Basic EPS: | | | | | | | | | | | | | | | | | |
Net income | | $ | i 69.7 | | i 33.5 | | $ | i 2.08 | | $ | i 37.5 | | i 33.8 | | $ | i 1.11 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | | |
Common stock equivalents | | | | | i 0.1 | | | ( i 0.01) | | | |
| i 0.1 | | | — | |
Diluted EPS: | | | | | | | | | | | | | | | | | |
Net income | | $ | i 69.7 | | i 33.6 | | $ | i 2.07 | | $ | i 37.5 |
| i 33.9 | | $ | i 1.11 | |
| | | | | | | | | | | | | | | | | |
| | For the Six Months Ended June 26, 2022 | | For the Six Months Ended June 27, 2021 | | ||||||||||||
| | Income | | Shares | | Per Share | | Income | | Shares | | Per Share | | ||||
|
| (Numerator) |
| (Denominator) |
| Amount |
| (Numerator) |
| (Denominator) |
| Amount | | ||||
| | (Amounts in millions, except per share information) | | ||||||||||||||
Basic EPS: | | | | | | | | | | | | | | | | | |
Net income | | $ | i 124.2 | | i 33.6 | | $ | i 3.70 | | $ | i 79.2 | | i 33.8 | | $ | i 2.34 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | | |
Common stock equivalents | | | | | i 0.1 | | | ( i 0.02) | | | |
| i 0.1 | | | — | |
Diluted EPS: | | | | | | | | | | | | | | | | | |
Net income | | $ | i 124.2 | | i 33.7 | | $ | i 3.68 | | $ | i 79.2 |
| i 33.9 | | $ | i 2.34 | |
/There were i i no / options to purchase Class A common stock outstanding during the second quarters and six months ended June 26, 2022 or June 27, 2021 that would have been anti-dilutive.
On February 6, 2019, the Company’s Board of Directors authorized the repurchase of up to $ i 150 million of the Company’s Class A common stock, to be purchased from time to time on the open market or in privately negotiated transactions. For the stock repurchase program, the Company entered into Rule 10b5-1 plans, which permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The repurchase program may be suspended or discontinued at any time, subject to the terms of the Rule 10b5-1 plans the Company entered into with respect to the repurchase program. As of June 26, 2022, there was $ i 36.3 million remaining authorized for share repurchases under the $ i 150 million program.
/17
For the second quarters ended June 26, 2022 and June 27, 2021, the Company repurchased i 140,233 shares for $ i 18.2 million and i 30,917 shares for $ i 4.0 million, respectively. For the six months ended June 26, 2022 and June 27, 2021, the Company repurchased i 433,623 shares for $ i 61.1 million and i 62,070 shares for $ i 7.8 million, respectively.
i8. Stock-Based Compensation
The Company granted i 48,285 and i 52,230 units of deferred stock awards during the first six months of 2022 and 2021, respectively. The Company grants shares of deferred stock awards to key employees and stock awards to non-employee members of the Company’s Board of Directors under the Second Amended and Restated 2004 Stock Incentive Plan (“2004 Stock Incentive Plan”). Deferred stock awards to employees typically vest over a i three-year period and stock awards to non-employee members of the Company’s Board of Directors vest immediately.
The Company also grants performance stock units to key employees under the 2004 Stock Incentive Plan. Performance stock units cliff vest at the end of a performance period set by the Compensation Committee of the Board of Directors at the time of grant, which is currently i three years. Upon vesting, the number of shares of the Company’s Class A common stock awarded to each performance stock unit recipient will be determined based on the Company’s performance relative to certain performance goals set at the time the performance stock units were granted. The recipient of a performance stock unit award may earn from i zero shares to twice the number of target shares awarded to such recipient. The performance stock units are amortized to expense over the vesting period and based on the Company’s performance relative to the performance goals, may be adjusted. Changes to the estimated shares expected to vest will result in adjustments to the related share-based compensation expense that will be recorded in the period of change. If the performance goals are not met, no awards are earned and previously recognized compensation expense is reversed. The Company granted i 40,014 and i 46,774 performance stock units during the first six months of 2022 and 2021, respectively. The performance goals for the performance stock units are based on the compound annual growth rate of the Company’s revenue over the i three-year performance period and the Company’s return on invested capital (“ROIC”) for the third year of the performance period.
Under the Management Stock Purchase Plan (“MSPP”), the Company granted i 28,711 and i 24,690 restricted stock units (“RSUs”) during the first six months of 2022 and 2021, respectively. The MSPP allows for the granting of 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. Participating employees may use up to i 50% of their annual incentive bonus to purchase RSUs for a purchase price equal to i 80% of the fair market value of the Company’s Class A common stock as of the date of grant. RSUs vest either annually over a i three-year period from the grant date or upon the third anniversary of the grant date. Receipt of the shares underlying RSUs is deferred for a minimum of i three years, or such greater number of years as is chosen by the employee, from the date of grant.
The fair value of each share issued under the MSPP is estimated on the date of grant, using the Black-Scholes-Merton Model, based on the following weighted average assumptions:
i
| | | | | |
|
| 2022 |
| 2021 |
|
Expected life (years) | | i 3.0 | | i 3.0 | |
Expected stock price volatility |
| i 33.7 | % | i 32.7 | % |
Expected dividend yield |
| i 0.80 | % | i 0.75 | % |
Risk-free interest rate |
| i 2.0 | % | i 0.3 | % |
The risk-free interest rate is based upon the U.S. Treasury yield curve at the time of grant for the respective expected life of the RSUs. The expected life (estimated period of time outstanding) of RSUs and volatility were calculated using historical data. The expected dividend yield of stock is the Company’s best estimate of the expected future dividend yield.
The above assumptions were used to determine the weighted average grant-date fair value of the discount on RSUs granted in 2022 and 2021 of $ i 47.26 and $ i 37.12, respectively.
A more detailed description of each of these plans can be found in Note 13 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
/
18
9. Segment Information
The Company operates in i three geographic segments: Americas, Europe, and APMEA. Each of these segments sells similar products and has separate financial results that are reviewed by the Company’s chief operating decision-maker. Each segment earns revenue and income almost exclusively from the sale of the Company’s products. The Company sells its products into various end markets around the world, with sales by region based upon location of the entity recording the sale. See Note 3 for further detail on the product lines sold into by region. All intercompany sales transactions have been eliminated. The accounting policies for each segment are the same as those described in Note 2 above and 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, 2021.
The following is a summary of the Company’s significant accounts and balances by segment, reconciled to its consolidated totals:
i
| | | | | | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended | | ||||||||
| | June 26, | | June 27, | | June 26, | | | |||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
| | (in millions) | | ||||||||||
Net sales | | |
| | |
| | |
| | |
| |
Americas | | $ | i 375.9 | | $ | i 307.1 | | $ | i 689.8 | | $ | i 579.9 | |
Europe | |
| i 127.9 | |
| i 136.8 | |
| i 257.8 | |
| i 259.7 | |
APMEA | |
| i 22.8 | |
| i 23.1 | |
| i 42.2 | |
| i 40.7 | |
Consolidated net sales | | $ | i 526.6 | | $ | i 467.0 | | $ | i 989.8 | | $ | i 880.3 | |
Operating income (loss) | | | | | | | | | | | | | |
Americas | | $ | i 85.5 | | $ | i 55.2 | | $ | i 143.4 | | $ | i 103.7 | |
Europe | |
| i 19.6 | |
| i 5.4 | |
| i 40.7 | |
| i 24.9 | |
APMEA | |
| i 3.6 | |
| i 4.3 | |
| i 6.6 | |
| i 6.6 | |
Subtotal reportable segments | |
| i 108.7 | |
| i 64.9 | |
| i 190.7 | |
| i 135.2 | |
Corporate(*) | |
| ( i 12.8) | |
| ( i 12.2) | |
| ( i 23.3) | |
| ( i 22.9) | |
Consolidated operating income | |
| i 95.9 | |
| i 52.7 | |
| i 167.4 | |
| i 112.3 | |
Interest income | |
| — | |
| — | |
| ( i 0.1) | |
| — | |
Interest expense | |
| i 1.7 | |
| i 1.5 | |
| i 3.1 | |
| i 3.5 | |
Other expense (income), net | |
| — | |
| ( i 0.5) | |
| i 0.3 | |
| ( i 0.8) | |
Income before income taxes | | $ | i 94.2 | | $ | i 51.7 | | $ | i 164.1 | | $ | i 109.6 | |
Capital expenditures | | | | | | | | | | | | | |
Americas | | $ | i 4.3 | | $ | i 4.8 | | $ | i 7.8 | | $ | i 7.2 | |
Europe | |
| i 2.8 | |
| i 2.9 | |
| i 4.9 | |
| i 5.2 | |
APMEA | |
| i 0.4 | |
| i 0.6 | |
| i 0.4 | |
| i 0.6 | |
Consolidated capital expenditures | | $ | i 7.5 | | $ | i 8.3 | | $ | i 13.1 | | $ | i 13.0 | |
Depreciation and amortization | | | | | | | | | | | | | |
Americas | | $ | i 6.7 | | $ | i 7.4 | | $ | i 13.7 | | $ | i 15.1 | |
Europe | |
| i 2.8 | |
| i 3.0 | |
| i 5.5 | |
| i 6.3 | |
APMEA | |
| i 0.5 | |
| i 1.1 | |
| i 1.1 | |
| i 1.9 | |
Consolidated depreciation and amortization | | $ | i 10.0 | | $ | i 11.5 | | $ | i 20.3 | | $ | i 23.3 | |
Identifiable assets (at end of period) | | | | | | | | | | | | | |
Americas | | | | | | | | $ | i 1,223.6 | | $ | i 1,127.2 | |
Europe | | | | | | | |
| i 569.1 | |
| i 586.7 | |
APMEA | | | | | | | |
| i 141.6 | |
| i 141.4 | |
Consolidated identifiable assets | | | | | | | | $ | i 1,934.3 | | $ | i 1,855.3 | |
Property, plant and equipment, net (at end of period) | | | | | | | | | | | | | |
Americas | | | | | | | | $ | i 123.6 | | $ | i 120.6 | |
Europe | | | | | | | |
| i 65.8 | |
| i 81.5 | |
APMEA | | | | | | | |
| i 4.6 | |
| i 4.9 | |
Consolidated property, plant and equipment, net | | | | | | | | $ | i 194.0 | | $ | i 207.0 | |
* Corporate expenses are primarily for administrative compensation expense, compliance costs, professional fees, including corporate-related legal and audit expenses, shareholder services and benefit administration costs.
/ /19
The above operating segments are presented on a basis consistent with the presentation included in the Company’s December 31, 2021 consolidated financial statements included in its Annual Report on Form 10-K.
The property, plant and equipment in the U.S. of the Company’s Americas segment was $ i 118.7 million and $ i 116.0 million at June 26, 2022 and June 27, 2021, respectively.
The following includes U.S. net sales of the Company’s Americas segment:
i
| | | | | | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended | | ||||||||
| | June 26, | | June 27, | | June 26, | | | |||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
| | (in millions) | | ||||||||||
U.S. net sales | | $ | i 352.1 | | $ | i 285.0 | | $ | i 646.3 | | $ | i 539.4 | |
The following includes intersegment sales for Americas, Europe and APMEA:
i
| | | | | | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended | | ||||||||
| | June 26, | | June 27, | | June 26, | | | |||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
| | (in millions) | | ||||||||||
Intersegment Sales | | |
| | |
| | |
| | |
| |
Americas | | $ | i 2.4 | | $ | i 2.5 | | $ | i 5.4 | | $ | i 4.9 | |
Europe | |
| i 6.9 | |
| i 8.5 | |
| i 14.0 | |
| i 16.2 | |
APMEA | |
| i 29.0 | |
| i 37.1 | |
| i 52.5 | |
| i 63.4 | |
Intersegment sales | | $ | i 38.3 | | $ | i 48.1 | | $ | i 71.9 | | $ | i 84.5 | |
i10. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of the following:
i
| | | | | | | | | |
|
| | |
| | |
| Accumulated | |
| | Foreign | | | | | Other | ||
| | Currency | | | Cash Flow | | Comprehensive | ||
|
| Translation |
| | Hedges (1) |
| Loss | ||
| | (in millions) | |||||||
| | | | | | | | | |
Balance December 31, 2021 | | $ | ( i 127.9) | | $ | i 0.6 | | $ | ( i 127.3) |
Change in period | |
| ( i 9.4) | |
| i 3.5 | |
| ( i 5.9) |
Balance March 27, 2022 | | $ | ( i 137.3) | | $ | i 4.1 | | $ | ( i 133.2) |
Change in period | |
| ( i 23.6) | |
| i 1.6 | |
| ( i 22.0) |
Balance June 26, 2022 | | $ | ( i 160.9) | | $ | i 5.7 | | $ | ( i 155.2) |
| | | | | | | | | |
Balance December 31, 2020 | | $ | ( i 99.9) | | $ | ( i 0.1) | | $ | ( i 100.0) |
Change in period | |
| ( i 14.1) | |
| ( i 0.1) | |
| ( i 14.2) |
Balance March 28, 2021 | | $ | ( i 114.0) | | $ | ( i 0.2) | | $ | ( i 114.2) |
Change in period | |
| i 5.8 | |
| ( i 0.8) | |
| i 5.0 |
Balance June 27, 2021 | | $ | ( i 108.2) | | $ | ( i 1.0) | | $ | ( i 109.2) |
| (1) | Cash flow hedges include interest rate swaps and designated foreign currency hedges. See Note 5 for further details. |
i11. Debt
On March 30, 2021, the Company entered into the Amended Credit Agreement. The Amended Credit Agreement amended the Company’s borrowings under the Amended and Restated Credit Agreement entered into on April 24, 2020 (the “Prior Amended Credit Agreement”), to extend the maturity date of the $ i 800 million senior unsecured revolving credit facility from February 12, 2022 to March 30, 2026. Among other changes from the Prior Amended Credit Agreement, the Amended Credit Agreement increased the Company’s maximum consolidated leverage ratio (including both the base ratio and the ratio permitted during temporary step-ups following certain acquisitions), adjusted certain fees to reflect market conditions and reduced the i 1.00% floor on the adjusted LIBOR rate to i 0.00%.
/20
The Revolving Credit Facility also includes sub-limits of $ i 100 million for letters of credit and $ i 15 million for swing line loans. As of June 26, 2022, the Company had drawn down $ i 205.0 million on this line of credit and had $ i 12.1 million in letters of credit outstanding, which resulted in $ i 582.9 million of unused and available credit under the Revolving Credit Facility. Borrowings outstanding bear interest at a fluctuating rate per annum equal to an applicable percentage defined as (i) in the case of Eurocurrency rate loans, the adjusted British Bankers Association LIBOR rate plus an applicable percentage, ranging from i 1.075% to i 1.325%, determined by reference to the Company's consolidated leverage ratio, or (ii) in the case of alternate base rate loans and swing line loans, interest (which at all times will not be less than i 1.00%) at the greatest of (a) the Prime Rate in effect on such day, (b) the FRBNY Rate in effect on such day plus i 0.50% and (c) the adjusted LIBOR rate plus i 1.00% for a one-month interest period in dollars. The weighted average interest rate on debt outstanding under the Revolving Credit Facility as of June 26, 2022 was i 2.31%. The weighted average interest rate on debt outstanding inclusive of the interest rate swap discussed in Note 5 of the Notes to Consolidated Financial Statements and interest rates under the Revolving Credit Facility as of June 26, 2022 was i 2.29%. As of June 26, 2022, the Company was in compliance with all covenants related to the Amended Credit Agreement.
In addition to paying interest under the Amended Credit Agreement, the Company is also required to pay certain fees in connection with the Revolving Credit Facility, including, but not limited to, an unused facility fee and letter of credit fees.
The Amended Credit Agreement matures on March 30, 2026, subject to extension under certain circumstances and subject to the terms of the Amended Credit Agreement. The Company may repay loans outstanding under the Amended Credit Agreement from time to time without premium or penalty, other than customary breakage costs, if any, and subject to the terms of the Amended Credit Agreement.
The Amended Credit Agreement imposes various restrictions on the Company and its subsidiaries, including restrictions pertaining to: (i) the incurrence of additional indebtedness, (ii) limitations on liens, (iii) making distributions, dividends and other payments, (iv) mergers, consolidations and acquisitions, (v) dispositions of assets, (vi) certain consolidated leverage ratios and consolidated interest coverage ratios, (vii) transactions with affiliates, (viii) changes to governing documents, and (ix) changes in control.
The Company maintains letters of credit that guarantee its performance or payment to third parties in accordance with specified terms and conditions. Amounts outstanding were $ i 12.1 million as of June 26, 2022. The Company’s letters of credit are primarily associated with insurance coverage. The Company’s letters of credit generally expire within i one year of issuance. These instruments may exist or expire without being drawn down. Therefore, they do not necessarily represent future cash flow obligations.
i12. Contingencies and Environmental Remediation
In the ordinary course of business, the Company is involved in disputes, litigation, and governmental or regulatory inquiries and investigations, both pending and threatened, including those involving product liability, environmental matters, and commercial disputes.
Other than the items described below, significant commitments and contingencies at June 26, 2022 are consistent with those discussed in Note 15 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
As of June 26, 2022, the Company estimates that the aggregate amount of reasonably possible loss in excess of the amount accrued for its contingencies is approximately $ i 4.5 million pre-tax. With respect to the estimate of reasonably possible loss, management has estimated the upper end of the range of reasonably possible loss based on (i) the amount of money damages claimed, where applicable, (ii) the allegations and factual development to date, (iii) available defenses based on the allegations, and/or (iv) other potentially liable parties. This estimate is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimate will change from time to time, and actual results may vary significantly from the current estimate. In the event of an unfavorable outcome in one or more of the matters, the ultimate liability may be in excess of amounts currently accrued, if any, and may be material to the Company’s operating results or cash flows for a particular quarterly or annual period. However, based on information currently known to it, management believes that the ultimate outcome of all matters, as they are resolved over time, is not likely to have a material adverse effect on the financial condition of the Company, though the outcome could be material to the Company’s operating results for any particular period depending, in part, upon the operating results for such period.
/21
Chemetco, Inc. Superfund Site, Hartford, Illinois
In August 2017, Watts Regulator Co. (a wholly-owned subsidiary of the Company) received a “Notice of Environmental Liability” from the Chemetco Site Group (“Group”) alleging that it is a potentially responsible party for the Chemetco, Inc. Superfund Site in Hartford, Illinois (the “Site”) because it arranged for the disposal or treatment of hazardous substances that were contained in materials sent to the Site and that resulted in the release or threat of release of hazardous substances at the Site. The letter offered Watts Regulator Co. the opportunity to join the Group and participate in the Remedial Investigation and Feasibility Study (“RI/FS”) for a portion of the Site. Watts Regulator Co. joined the Group in September 2017 and was added in March 2018 as a signatory to the Administrative Settlement Agreement and Order on Consent with the United States Environmental Protection Agency (“USEPA”) governing completion of the RI/FS. The Remedial Investigation (“RI”) report has been completed for the first portion of the site. For that same portion of the site, the draft Feasibility Study (“FS”) report was submitted to U.S. Environmental Protection Agency (USEPA) for review and comment in September 2021. Comments and final approval from the EPA are required to complete the FS process; comments from the EPA are pending. Based on information currently known to it, management believes that Watts Regulator Co.’s share of the costs of the RI/FS is not likely to have a material adverse effect on the financial condition of the Company, or have a material adverse effect on the Company’s operating results for any particular period. The Company is unable to estimate a range of reasonably possible loss for the above matter in which damages have not been specified because: (i) the FS process for the first portion of the Site has not been completed, and the RI/FS process for the remainder of the Site has not yet been initiated, to determine what remediation plans will be implemented and the costs of such plans; (ii) the total amount of material sent to the Site, and the total number of potentially responsible parties who may or may not agree to fund or perform any remediation, have not been determined; (iii) the share contribution for potentially responsible parties to any remediation has not been determined; and (iv) the number of years required to implement a remediation plan acceptable to USEPA is uncertain.
i13. Subsequent Events
On August 1, 2022, the Company declared a quarterly dividend of i thirty cents ($ i 0.30) per share on each outstanding share of Class A common stock and Class B common stock payable on September 15, 2022 to stockholders of record on September 1, 2022.
/22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The following discussion and analysis are provided to increase the understanding of, and should be read in conjunction with, the accompanying unaudited consolidated financial statements and related notes. In this quarterly report on Form 10-Q, references to “the Company,” “Watts,” “we,” “us” or “our” refer to Watts Water Technologies, Inc. and its consolidated subsidiaries.
We are a leading supplier of products, solutions and systems that manage and conserve the flow of fluids and energy into, through and out of buildings in the commercial and residential markets in the Americas, Europe and Asia-Pacific, Middle East and Africa (“APMEA”). For over 140 years, we have 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. We earn revenue and income almost exclusively from the sale of our products. Our principal product lines include:
● 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, thermostatic mixing valves and leak detection products.
● HVAC & gas products—includes commercial high-efficiency boilers, water heaters and heating solutions, hydronic and electric heating systems for under-floor radiant applications, custom heat and hot water solutions, 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 re-use products—includes drainage products and engineered rain water harvesting solutions for commercial, industrial, marine and residential applications.
● Water quality products—includes point-of-use and point-of-entry water filtration, conditioning and scale prevention systems for commercial, marine and residential applications.
We believe that the factors relating to our future growth include continued product innovation that meets the needs of our customers and our end markets; our ability to continue to make selective acquisitions, both in our core markets as well as in complementary markets; regulatory requirements relating to the quality and conservation of water and the safe use of water; increased demand for clean water; and continued enforcement of plumbing and building codes. We have completed 12 acquisitions since 2012. Our acquisition strategy focuses on businesses that promote our key macro themes around safety and regulation, energy efficiency and water conservation. We target businesses that will provide us with one or more of the following: an entry into new markets and/or new geographies, improved channel access, unique and/or proprietary technologies, advanced production capabilities or complementary solution offerings.
Our innovation strategy is focused on differentiated products and solutions that will provide greater opportunity to distinguish ourselves in the marketplace. Conversely, we continue to migrate away from commoditized products where we cannot add value. Our goal is to be a solutions provider, not merely a components supplier. We continually look for strategic opportunities to invest in new products and markets or divest existing product lines where necessary in order to meet those objectives.
Over the past several years we have been building our smart and connected foundation by expanding our internal capabilities and making strategic acquisitions. Our strategy is to deliver superior customer value through smart and connected products and solutions. This strategy focuses on three dimensions: Connect, Control and Conserve. We are focused on introducing products that connect our customers with smart systems, control systems for optimal performance, and conserve critical resources by increasing operability, efficiency and safety.
Products representing a majority of our sales are subject to regulatory standards and code enforcement, which typically require that these products meet stringent performance criteria. We have consistently advocated for the development and enforcement of such plumbing codes. We are focused on maintaining stringent quality control and testing procedures at each of our manufacturing facilities in order to manufacture products in compliance with code requirements and take
23
advantage of the resulting demand for compliant products. We believe that product development, product testing capability and investment in plant and equipment needed to manufacture products in compliance with code requirements, represent a competitive advantage for us.
Market activity levels have generally recovered from the COVID-19 pandemic, however there are still end markets we serve that may take time to recover, and potential regional COVID-19 outbreaks and associated restrictions may occur. Extended lockdowns, the impact of other actions and restrictions due to COVID-19 on a regional and global level could further impact our operating results.
We remain diligent as a company to mitigate potential future outbreaks in our facilities by taking precautions to reduce the spread of COVID-19 while maintaining our production capabilities. We continue to focus on the health and safety of our employees by maintaining health authority and government recommended safety protocols, enabling remote work and hybrid work schedules where feasible, providing personal protective equipment and providing COVID-19 information, which includes the latest CDC and other government protocols and our pandemic plan.
The global supply chain disruptions have shown some signs of easing, however market demand remains a challenge that is impacting inventory positions and order fulfillment lead times. We continue to experience rising prices across some key commodities and other raw materials, energy inflation and higher transportation costs. Labor shortages and workforce disruptions have affected our manufacturing and distribution processes, as well as those of our suppliers. The ongoing war in Ukraine has added strain to the European markets and the global economy, as well as exacerbated inflation, particularly energy inflation. Logistical issues remain around container capacity, port congestion and in-road trucking. COVID-19 shutdowns continue to disrupt global ports, though delays have improved since 2021. The global shortage of electronic components such as semiconductors and other raw materials continues to challenge our supply chain. While we believe we were able to effectively manage these disruptions during the second quarter of 2022 by various measures, including raising prices to address cost inflation, we cannot predict how ongoing inflation, the war in Ukraine, COVID-19 restrictions, supply chain disruptions and related costs may impact our ability to service our customers or the potential impact on our profit margins going forward.
Due to the above circumstances and as described generally in this Form 10-Q, the Company’s results of operations for the second quarter ended June 26, 2022 are not necessarily indicative of the results to be expected for the full fiscal year. Management cannot predict the full impact of the uncertainties discussed above. For further information regarding the impact of supply chain and logistics disruption risks to the Company and information regarding the impact of COVID-19 on the Company, see Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Financial Overview
Second quarter 2022 sales increased 12.8%, or $59.6 million, on a reported basis and 16.2%, or $75.8 million, on an organic basis, compared to the second quarter of 2021, primarily driven by incremental price as well as the global economic recovery across all of our operating segments, partially muted by the estimated 2.6% of incremental sales in the second quarter of 2021 attributable to the severe freezing weather in the South-Central United States. The impact from the war in Ukraine on the second quarter of 2022 was not significant. The reported sales increase included the unfavorable impact of foreign exchange of 3.9%, or $18.2 million, primarily driven by the appreciation of the U.S. dollar against the euro, and an increase in acquired sales of $2.0 million. Organic sales is a non-GAAP financial measure that excludes the impacts of acquisitions, divestitures and foreign exchange from year-over-year comparisons. Management believes reporting organic sales growth provides useful information to investors, potential investors and others, because it allows for additional insight into underlying sales trends by providing sales growth on a consistent basis. We reconcile the change in organic sales to our reported sales for each region within our results below. Operating income of $95.9 million increased by $43.2 million, or 82.0%, in the second quarter of 2022 as compared to the second quarter of 2021. This increase was primarily driven by incremental price, higher sales volume, productivity, cost savings from prior restructuring actions and lower restructuring charges, partially offset by inflation, investments, and the return of expenses related to business normalization. The lower restructuring charges were due to a $18 million pre-tax restructuring charge recorded in the second quarter of 2021 related to the approved French restructuring program.
24
Recent Developments
On July 19, 2022, we announced the appointment of Andre Dhawan as our Chief Operating Officer effective upon the commencement of his employment with us on August 15, 2022. In connection with Mr. Dhawan joining the Company, Munish Nanda will step down as President of the Americas & Europe effective as of August 15, 2022, and thereafter will assist with the transition and provide advisory services until his planned retirement in May 2023.
On August 1, 2022, we declared a quarterly dividend of thirty cents ($0.30) per share on each outstanding share of Class A common stock and Class B common stock payable on September 15, 2022 to stockholders of record on September 1, 2022.
Results of Operations
Second Quarter Ended June 26, 2022 Compared to Second Quarter Ended June 27, 2021
Net Sales. Our business is reported in three geographic segments: Americas, Europe and APMEA. Our net sales in each of these segments for each of the second quarters of 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | |
| | Second Quarter Ended | | Second Quarter Ended | | | | | % Change to |
| ||||||
| | | | | | | Consolidated |
| ||||||||
|
| Net Sales |
| % Sales |
| Net Sales |
| % Sales |
| Change |
| Net Sales |
| |||
| | (dollars in millions) |
| |||||||||||||
Americas | | $ | 375.9 | | 71.4 | % | $ | 307.1 | | 65.8 | % | $ | 68.8 | | 14.8 | % |
Europe | |
| 127.9 |
| 24.3 | |
| 136.8 |
| 29.3 | |
| (8.9) |
| (1.9) | |
APMEA | |
| 22.8 |
| 4.3 | |
| 23.1 |
| 4.9 | |
| (0.3) |
| (0.1) | |
Total | | $ | 526.6 |
| 100.0 | % | $ | 467.0 |
| 100.0 | % | $ | 59.6 |
| 12.8 | % |
The change in net sales was attributable to the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Change As a % | | Change As a % |
| ||||||||||
| | | | | | | | | | | | | | of Consolidated Net Sales | | of Segment Net Sales |
| ||||||||||
|
| | |
| | |
| | | | |
| | | | | | | | | | | | | |
| |
| | Americas | | Europe | | APMEA | | Total | | Americas | | Europe | | APMEA | | Total | | Americas | | Europe | | APMEA |
| ||||
| | (dollars in millions) |
| ||||||||||||||||||||||||
Organic | | $ | 67.7 | | $ | 7.4 | | $ | 0.7 |
| $ | 75.8 |
| 14.5 | % | 1.6 | % | 0.1 | % | 16.2 | % | 22.0 | % | 5.4 | % | 3.0 | % |
Foreign exchange | |
| (0.9) | |
| (16.3) | |
| (1.0) | |
| (18.2) |
| (0.2) |
| (3.5) |
| (0.2) |
| (3.9) |
| (0.3) |
| (11.9) |
| (4.3) | |
Acquired | |
| 2.0 | |
| — | |
| — | |
| 2.0 |
| 0.5 |
| — |
| — |
| 0.5 |
| 0.7 |
| — |
| — | |
Total | | $ | 68.8 | | $ | (8.9) | | $ | (0.3) | | $ | 59.6 |
| 14.8 | % | (1.9) | % | (0.1) | % | 12.8 | % | 22.4 | % | (6.5) | % | (1.3) | % |
Our products are sold to wholesalers, OEMs, DIY chains, and through various specialty channels. The change in organic net sales by channel was attributable to the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Change As a % |
| ||||||
| | | | | | | | | | | | | | | | | of Prior Year Sales |
| ||||||
|
| Wholesale |
| OEMs |
| DIY |
| Specialty |
| Total |
| Wholesale |
| OEMs |
| DIY | | Specialty |
| |||||
|
| (dollars in millions) | | |||||||||||||||||||||
Americas | | $ | 37.8 | | $ | 3.0 | | $ | 2.5 | | $ | 24.4 | | $ | 67.7 |
| 21.3 | % | 12.4 | % | 12.8 | % | 28.3 | % |
Europe | |
| 2.8 | |
| 4.8 | |
| (0.2) | | | — | |
| 7.4 |
| 3.2 |
| 10.1 | | (22.2) | | — | |
APMEA | |
| 0.3 | |
| 0.5 | |
| — | | | (0.1) | |
| 0.7 |
| 1.4 |
| 31.3 |
| — | | (100.0) | |
Total | | $ | 40.9 | | $ | 8.3 | | $ | 2.3 | | $ | 24.3 | | $ | 75.8 | | | | | | | | | |
Organic net sales in the Americas increased primarily due to incremental price across all of our channels and higher volume. The volume increase was partially muted due to the second quarter of 2021 being positively impacted from the severe weather freeze in the South-Central United States, which drove an estimated 4% of incremental sales in our wholesale and DIY channels.
Organic net sales in Europe increased primarily due to higher price, with growth in both Fluid Solutions and Drains platforms as well as all major regions. Net sales also increased in our HVAC products within the Italy and Germany OEM markets driven by government energy incentives. Sales growth in the quarter was negatively impacted by approximately $3 million due to our decision to exit all direct sales into Russia as a result of the war in Ukraine effective April 1, 2022.
25
Organic net sales in APMEA increased primarily due to higher price, with sales growth in China and Australia. China’s sales growth was primarily driven by higher demand for commercial valves within data centers, partially offset by a decline in under floor heating sales caused by COVID-19 lockdowns in China.
The net decrease in sales due to foreign exchange was mostly due to the appreciation of the U.S. dollar against the euro in the second quarter of 2022. We cannot predict whether foreign currencies will appreciate or depreciate against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our net sales.
The change in net sales due to acquisitions relates to an immaterial acquisition in the Americas segment in the fourth quarter of 2021.
Gross Profit. Gross profit and gross profit as a percent of net sales (gross margin) for the second quarters of 2022 and 2021 were as follows:
| | | | | | | |
| | Second Quarter Ended |
| ||||
| | | | ||||
| | (dollars in millions) |
| ||||
Gross profit | | $ | 239.2 | | $ | 200.1 | |
Gross margin | |
| 45.4 | % |
| 42.8 | % |
Gross profit and gross margin increased primarily from higher price, volume and productivity savings, partially offset by inflation related to material and labor costs, higher logistic and freight costs and the return of expenses related to business normalization.
Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses increased $11.2 million, or 8.6%, in the second quarter of 2022 compared to the second quarter of 2021. The increase in SG&A expenses was attributable to the following:
| | | | | | |
|
| (in millions) |
| % Change |
| |
Organic | | $ | 13.8 |
| 10.6 | % |
Foreign exchange | |
| (3.8) |
| (2.9) | |
Acquired | | | 1.2 | | 0.9 | |
Total | | $ | 11.2 |
| 8.6 | % |
The organic increase was primarily due to an increase in investments of $5.4 million, including our smart and connected initiatives and commercial excellence, increased variable costs due to the higher sales volume of $5.0 million, general inflation of $3.4 million, as well as the return of expenses related to business normalization of $4.0 million compared to the second quarter of 2021. These increases were partially offset by $3.8 million due to productivity initiatives and a net decrease in short-term and long-term compensation accruals of $1.0 million. The decrease in foreign exchange was mainly due to the appreciation of the U.S. dollar against the euro. The acquired SG&A costs related to an immaterial acquisition in the Americas segment in the fourth quarter of 2021. Total SG&A expenses, as a percentage of sales, were 26.9% in the second quarter of 2022 compared to 27.9% in the second quarter of 2021.
Restructuring. In the second quarter of 2022, we recorded a net restructuring charge of $1.7 million which related to a 2021 French restructuring program that was approved in the second quarter of 2021 as well as other actions related to the decommissioning of machinery at one of our facilities in the Americas. In the second quarter of 2021, we recorded a net restructuring charge of $17.0 million, which included an $18.0 million charge related to a 2021 French restructuring program. For a more detailed description of our current restructuring plans, see Note 6 of the Notes to Consolidated Financial Statements.
26
Operating Income. Operating income (loss) by segment for the second quarters of 2022 and 2021 was as follows:
| | | | | | | | | | | | |
| | | | | | | | | | | |
|
|
| |
| | |
| % Change to |
| ||||
| | Second Quarter Ended | | | | | Consolidated |
| ||||
|
| June 26, | | June 27, |
| | |
| Operating | | ||
| | 2022 |
| 2021 |
| Change |
| Income | | |||
|
| (dollars in millions) | | | | |||||||
Americas | | $ | 85.5 |
| $ | 55.2 |
| $ | 30.3 |
| 57.5 | % |
Europe | |
| 19.6 | |
| 5.4 | |
| 14.2 |
| 26.9 | |
APMEA | |
| 3.6 | |
| 4.3 | |
| (0.7) |
| (1.3) | |
Corporate | |
| (12.8) | |
| (12.2) | |
| (0.6) |
| (1.1) | |
Total | | $ | 95.9 | | $ | 52.7 | | $ | 43.2 |
| 82.0 | % |
The increase (decrease) in operating income (loss) was attributable to the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Change As a % of | | Change As a % of |
| ||||||||||||||
| | | | | | | | | | | | | | | | | Consolidated Operating Income | | Segment Operating Income |
| ||||||||||||||
|
| | |
| | |
| |
| | |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | Americas | | Europe | | APMEA | | Corporate | | Total | | Americas | | Europe | | APMEA | | Corporate | | Total | | Americas | | Europe | | APMEA | | Corporate |
| |||||
| | (dollars in millions) |
| |||||||||||||||||||||||||||||||
Organic | | $ | 31.3 | | $ | 0.2 | | $ | (0.3) | | $ | (0.6) | | $ | 30.6 | | 59.4 | % | 0.4 | % | (0.5) | % | (1.1) | % | 58.2 | % | 56.7 | % | 3.7 | % | (7.0) | % | 4.9 | % |
Foreign exchange | | | (0.2) | | | (2.6) | | | (0.2) | | | — | | | (3.0) | | (0.4) | | (5.0) | | (0.4) | | — | | (5.8) | | (0.4) | | (48.1) | | (4.7) | | — |
|
Acquired | | | 0.3 | | | — | | | — | | | — | | | 0.3 | | 0.6 | | — | | — | | — | | 0.6 | | 0.5 | | — | | — | | — |
|
Restructuring, impairment charges |
| | (1.1) |
| | 16.6 |
| | (0.2) |
| | — |
| | 15.3 |
| (2.1) |
| 31.5 |
| (0.4) |
| — |
| 29.0 |
| (2.0) |
| 307.4 |
| (4.7) |
| — | |
Total | | $ | 30.3 | | $ | 14.2 | | $ | (0.7) | | $ | (0.6) | | $ | 43.2 |
| 57.5 | % | 26.9 | % | (1.3) | % | (1.1) | % | 82.0 | % | 54.8 | % | 263.0 | % | (16.4) | % | 4.9 | % |
The increase in organic operating income was due to higher price, volume, benefits from productivity initiatives, and savings from prior restructuring actions. These increases were partially offset by inflation related to material and labor costs, higher logistic and freight costs, investment and the return of expenses related to business normalization.
Interest Expense. Interest expense in the second quarter of 2022 increased $0.2 million, or 13.3%, compared to the second quarter of 2021, primarily due to an increase in interest rates during the second quarter of 2022. Refer to Note 11 of the Notes to Consolidated Financial Statements for further details.
Income Taxes. Our effective income tax rate decreased to 26.0% in the second quarter of 2022, from 27.5% in the second quarter of 2021. The decrease is primarily due to the restructuring of our Mexican supply chain operations.
Net Income. Net income was $69.7 million, or $2.07 per common share on a diluted basis, for the second quarter of 2022, compared to $37.5 million, or $1.11 per common share on a diluted basis, for the second quarter of 2021. Results for the second quarter of 2022 include an after-tax charge of $1.3 million, or $0.04 per common share, for restructuring. Results for the second quarter of 2021 include an after-tax charge of $12.6 million, or $0.37 per common share, for restructuring.
Six Months Ended June 26, 2022 Compared to Six Months Ended June 27, 2021
Net Sales. Our business is reported in three geographic segments: Americas, Europe and APMEA. Our net sales in each of these segments for each of the six months of 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | |
| | Six Months Ended | | Six Months Ended | | | | | % Change to |
| ||||||
| | | | | | | Consolidated |
| ||||||||
|
| Net Sales |
| % Sales |
| Net Sales |
| % Sales |
| Change |
| Net Sales |
| |||
|
| (dollars in millions) | | |||||||||||||
Americas | | $ | 689.8 |
| 69.7 | % | $ | 579.9 |
| 65.9 | % | $ | 109.9 |
| 12.5 | % |
Europe | |
| 257.8 |
| 26.0 | |
| 259.7 |
| 29.5 | |
| (1.9) |
| (0.3) | |
APMEA | |
| 42.2 |
| 4.3 | |
| 40.7 |
| 4.6 | |
| 1.5 |
| 0.2 | |
Total | | $ | 989.8 |
| 100.0 | % | $ | 880.3 |
| 100.0 | % | $ | 109.5 |
| 12.4 | % |
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The change in net sales was attributable to the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Change as a % | | Change as a % | |||||||||||
| | | | | | | | | | | | | | of Consolidated Net Sales | | of Segment Net Sales | |||||||||||
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| | |
| | |
| |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| | Americas | | Europe | | APMEA | | Total | | Americas | | Europe | | APMEA | | Total | | Americas | | Europe | | APMEA | | ||||
| | (dollars in millions) | |||||||||||||||||||||||||
Organic | | $ | 106.7 | | $ | 24.0 | | $ | 2.9 | | $ | 133.6 |
| 12.1 | % | 2.7 | % | 0.4 | % | 15.2 | % | 18.4 | % | 9.3 | % | 7.1 | % |
Foreign exchange | |
| (0.9) | |
| (25.9) | |
| (1.4) | |
| (28.2) |
| (0.1) |
| (3.0) |
| (0.2) |
| (3.3) |
| (0.1) |
| (10.0) |
| (3.4) |
|
Acquired | | | 4.1 | | | — | | | — | | | 4.1 | | 0.5 | | — | | — | | 0.5 | | 0.7 | | — | | — | |
Total | | $ | 109.9 | | $ | (1.9) | | $ | 1.5 | | $ | 109.5 |
| 12.5 | % | (0.3) | % | 0.2 | % | 12.4 | % | 19.0 | % | (0.7) | % | 3.7 | % |
Our products are sold to wholesalers, OEMs, DIY chains, and through various specialty channels. The change in organic net sales by channel was attributable to the following:
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||
| | | | | | | | | | | | | | | | | Change As a % | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | of Prior Year Sales | |||||||||||||||||||||||
|
| Wholesale |
| OEMs |
| DIY |
| Specialty |
| Total |
| Wholesale |
| OEMs |
| DIY | | Specialty |
| |||||||||||||||||||||
| | (dollars in millions) |
| |||||||||||||||||||||||||||||||||||||
Americas | | $ | 55.2 | | $ | 8.1 | | $ | 1.5 | | $ | 41.9 | | $ | 106.7 |
| 16.5 | % | 18.2 | % | 3.7 | % | 26.2 | % | ||||||||||||||||
Europe | |
| 12.0 | |
| 12.6 | |
| (0.6) | |
| — | |
| 24.0 |
| 7.1 |
| 14.3 | | (33.3) | | — | | ||||||||||||||||
APMEA | |
| 2.1 | |
| 0.9 | |
| — | |
| (0.1) | |
| 2.9 |
| 5.5 |
| 34.6 |
| — | | (100.0) | | ||||||||||||||||
Total | | $ | 69.3 | | $ | 21.6 | | $ | 0.9 | | $ | 41.8 | | $ | 133.6 | | | | | | | | | | ||||||||||||||||
Organic net sales in the Americas increased primarily due to incremental price across all of our channels and higher volume. The volume increase was partially muted due to the first six months of 2021 being positively impacted from the severe weather freeze in the South-Central United States, which drove an estimated 4% of incremental sales in our wholesale and DIY channels.
Organic net sales in Europe increased due to higher price, with growth in both Fluid Solutions and Drains platforms as well as all major regions. Net sales also increased in our HVAC products within the Italy and Germany OEM markets driven by government energy incentives. Sales growth was negatively impacted by approximately $3 million due to our decision to exit all direct sales into Russia as a result of the war in Ukraine effective April 1, 2022.
Organic net sales in APMEA increased primarily due to higher price and volumes, with sales growth in China, Australia, New Zealand and the Middle East. China’s sales growth was primarily driven by higher demand for commercial valves within data centers.
The net decrease in sales due to foreign exchange was mostly due to the appreciation of the U.S. dollar against the euro in the first six months of 2022. We cannot predict whether foreign currencies will appreciate or depreciate against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our net sales.
The change in net sales due to acquisitions relates to an immaterial acquisition in the Americas segment in the fourth quarter of 2021.
Gross Profit. Gross profit and gross profit as a percent of net sales (gross margin) for the first six months of 2022 and 2021 were as follows:
| | | | | | | |
| | Six Months Ended |
| ||||
| | | | ||||
| | (dollars in millions) |
| ||||
Gross profit | | $ | 437.8 | | $ | 373.8 | |
Gross margin | |
| 44.2 | % |
| 42.5 | % |
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Gross profit and gross margin increased primarily from higher price, volume and productivity savings, partially offset by inflation related to material and labor costs, higher logistic and freight costs and the return of expenses related to business normalization.
Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses increased $23.5 million, or 9.6%, in the first six months of 2022 compared to the first six months of 2021. The increase in SG&A expenses was attributable to the following:
| | | | | | |
|
| (in millions) |
| % Change |
| |
Organic | | $ | 27.4 |
| 11.2 | % |
Foreign exchange | |
| (6.3) |
| (2.6) | |
Acquired | | | 2.4 | | 1.0 | |
Total | | $ | 23.5 |
| 9.6 | % |
The organic increase was primarily due to increase in investments of $9.5 million, including our smart and connected initiatives and commercial excellence, increased variable costs due to the higher sales volume of $8.6 million, general inflation of $7.6 million, as well as the return of expenses related to business normalization of $7.8 million compared to the first six months of 2021. These increases were partially offset by $5.8 million due to productivity initiatives and a decrease in short-term and long-term compensation accruals of $2.6 million. The decrease in foreign exchange was mainly due to the appreciation of the U.S. dollar against the euro. The acquired SG&A costs related to an immaterial acquisition in the Americas segment in the fourth quarter of 2021. Total SG&A expenses, as a percentage of sales, were 27.0% in the first six months of 2022 compared to 27.7% in the first six months of 2021.
Restructuring. In the first six months of 2022, we recorded a net restructuring charge of $2.7 million which related to a 2021 French restructuring program that was approved in the second quarter of 2021 as well as other actions related to the decommissioning of machinery at one of our facilities in the Americas. In the first six months of 2021, we recorded a net restructuring charge of $17.3 million, which included an $18.0 million charge related to a 2021 French restructuring program. For a more detailed description of our current restructuring plans, see Note 6 of the Notes to Consolidated Financial Statements.
Operating Income. Operating income (loss) by segment for the first six months of 2022 and 2021 was as follows:
| | | | | | | | | | | | |
| | | | | | | | | | | % Change to |
|
| | Six Months Ended | | | | | Consolidated |
| ||||
|
| June 26, |
| June 27, |
| | |
| Operating |
| ||
|
| 2022 |
| 2021 | | Change | | Income | | |||
|
| (Dollars in millions) | | |||||||||
Americas | | $ | 143.4 | | $ | 103.7 | | $ | 39.7 |
| 35.4 | % |
Europe | |
| 40.7 | |
| 24.9 | |
| 15.8 |
| 14.1 | |
APMEA | |
| 6.6 | |
| 6.6 | |
| — |
| — | |
Corporate | |
| (23.3) | |
| (22.9) | |
| (0.4) |
| (0.4) | |
Total | | $ | 167.4 | | $ | 112.3 | | $ | 55.1 |
| 49.1 | % |
The increase (decrease) in operating income (loss) was attributable to the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Change as a % of | | Change as a % of |
| ||||||||||||||
| | | | | | | | | | | | | | | | | Consolidated Operating Income | | Segment Operating Income |
| ||||||||||||||
|
| | |
| | |
| |
| | |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | Americas | | Europe | | APMEA | | Corporate | | Total | | Americas | | Europe | | APMEA | | Corporate | | Total | | Americas | | Europe | | APMEA | | Corporate |
| |||||
| | (Dollars in millions) |
| |||||||||||||||||||||||||||||||
Organic | | $ | 40.5 | | $ | 4.5 | | $ | 0.6 | | $ | (0.4) | | $ | 45.2 |
| 36.1 | % | 4.0 | % | 0.5 | % | (0.4) | % | 40.2 | % | 39.1 | % | 18.1 | % | 9.1 | % | 1.7 | % |
Foreign exchange | |
| (0.1) | |
| (4.3) | |
| (0.8) | |
| — | |
| (5.2) |
| (0.1) |
| (3.8) |
| (0.7) |
| — |
| (4.6) |
| (0.1) |
| (17.3) |
| (12.1) |
| — | |
Acquired | | | 0.5 | | | — | | | — | | | — | | | 0.5 | | 0.5 | | — | | — | | — | | 0.5 | | 0.5 | | — | | — | | — | |
Restructuring, impairment charges | |
| (1.2) | |
| 15.6 | |
| 0.2 | |
| — | |
| 14.6 |
| (1.1) |
| 13.9 |
| 0.2 |
| — |
| 13.0 |
| (1.2) |
| 62.7 |
| 3.0 |
| — | |
Total | | $ | 39.7 | | $ | 15.8 | | $ | — | | $ | (0.4) | | $ | 55.1 |
| 35.4 | % | 14.1 | % | — | % | (0.4) | % | 49.1 | % | 38.3 | % | 63.5 | % | — | % | 1.7 | % |
The increase in organic operating income was primarily due to higher price, volume, benefits from productivity initiatives, and savings from prior restructuring actions. These increases were partially offset by inflation related to
29
material and labor costs, higher logistic and freight costs, investment and the return of expenses related to business normalization.
Interest Expense. Interest expense in the first six months of 2022 decreased $0.4 million, or 11.4%, compared to the first six months of 2021, primarily due to a lower principal balance of debt outstanding during the first six months of 2022, partially offset by an increase in interest rates. Refer to Note 11 of the Notes to Consolidated Financial Statements for further details.
Income Taxes. Our effective income tax rate decreased to 24.3% in the first six months of 2022, from 27.7% in the first six months of 2021. The decrease is primarily due to the restructuring of our Mexican supply chain operations, a higher tax benefit resulting from the vesting of stock compensation awards in the first six months of 2022 and the favorable impact of changes in tax contingencies.
Net Income. Net income was $124.2 million, or $3.68 per common share on a diluted basis, for the first six months of 2022, compared to $79.2 million, or $2.34 per common share on a diluted basis, for the first six months of 2021. Results for the first six months of 2022 include an after-tax charge of $2.0 million, or $0.06 per common share, for restructuring. Results for the first six months of 2021 include an after-tax charge of $12.8 million, or $0.37 per common share, for restructuring.
Liquidity and Capital Resources
We generated $44.9 million of net cash provided by operating activities in the first six months of 2022 compared to $73.2 million of net cash provided by operating activities in the first six months of 2021. The decrease in net cash provided by operating activities was primarily related to our proactive decision to increase inventories in response to strong market demand and continued supply chain disruptions, in addition to increased payments related to restructuring and employee and customer incentives. These decreases were partially offset by higher net income. For the remainder of 2022, we expect to spend approximately $5 million related to the French restructuring program that was approved in 2021.
We used $12.3 million of net cash for investing activities in the first six months of 2022 compared to $8.1 million used in the first six months of 2021. We used $0.1 million more cash for capital expenditures and received $4.1 million less in cash proceeds from asset sales in the first six months of 2022 compared to the first six months of 2021. For the remainder of 2022, we expect to invest approximately $22 million to $27 million in capital equipment as part of our ongoing commitment to improve our operating capabilities.
We used $33.7 million of net cash for financing activities during the first six months of 2022 primarily due to payments of $61.1 million to repurchase approximately 434,000 shares of Class A common stock, dividend payments of $19.3 million and tax withholding payments on vested stock awards of $12.9 million; offset by proceeds from drawdowns on our line of credit totaling $75.0 million (offset by long-term debt repayments of $15.0 million). In the first six months of 2021, we used $41.7 million of net cash for financing activities primarily due to dividend payments of $16.7 million, tax withholding payments on vested stock awards of $9.2 million, and payments of $7.8 million to repurchase approximately 62,000 shares of Class A common stock.
On March 30, 2021, we and certain of our subsidiaries entered into the Amended Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent. The Amended Credit Agreement amended and restated the Prior Amended Credit Agreement to extend the maturity date of the $800 million senior unsecured revolving credit facility from February 12, 2022 to March 30, 2026. Among other changes, the Amended Credit Agreement increased our maximum consolidated leverage ratio (including both the base ratio and the ratio permitted during temporary step-ups following certain acquisitions), adjusted certain fees to reflect market conditions and reduced the 1.00% floor on the adjusted LIBOR rate to 0.00%. The Revolving Credit Facility under the Amended Credit Agreement also includes sublimits of $100 million for letters of credit and $15 million for swing line loans. As of June 26, 2022, we had drawn down $205.0 million on this line of credit and had $12.1 million in letters of credit outstanding, which resulted in $582.9 million of unused and available credit under the Revolving Credit Facility. Borrowings outstanding under the Revolving Credit Facility bear interest at a fluctuating rate per annum equal to an applicable percentage defined as (i) in the case of Eurocurrency rate loans, the adjusted British Bankers Association LIBOR rate plus an applicable percentage, ranging from 1.075% to 1.325%, determined by reference to our consolidated leverage ratio, or (ii) in the case of alternate base rate loans and swing line loans, interest (which at all times will not be less than 1.00%) at the greatest of (a) the Prime
30
Rate in effect on such day, (b) the FRBNY Rate in effect on such day plus 0.50% and (c) the adjusted LIBOR rate plus 1.00% for a one month interest period in dollars. The weighted average interest rate on debt outstanding under the Revolving Credit Facility as of June 26, 2022 was 2.31%. The weighted average interest rate on debt outstanding inclusive of the interest rate swap discussed in Note 5 of the Notes to Consolidated Financial Statements and interest rates under the Revolving Credit Facility as of June 26, 2022 was 2.29%. In addition to paying interest under the Amended Credit Agreement, we are also required to pay certain fees in connection with the Revolving Credit Facility, including, but not limited to, an unused facility fee and letter of credit fees. The Amended Credit Agreement matures on March 30, 2026, subject to extension under certain circumstances and subject to the terms of the Amended Credit Agreement. We may repay loans outstanding under the Amended Credit Agreement from time to time without premium or penalty, other than customary breakage costs, if any, and subject to the terms of the Amended Credit Agreement. As of June 26, 2022, we were in compliance with all covenants related to the Amended Credit Agreement.
As of June 26, 2022, we held $230.0 million in cash and cash equivalents. Of this amount, $166.8 million of cash and cash equivalents were held by foreign subsidiaries. Our U.S. operations typically generate sufficient cash flows to meet our domestic obligations. However, if we did have to borrow to fund some or all of our expected cash outlays, we can do so at reasonable interest rates by utilizing the undrawn borrowings under our Revolving Credit Facility. We believe that our financial resources will allow us to manage the impacts of the COVID-19 pandemic, the war in Ukraine, inflation and supply chain disruption on our business operations for the foreseeable future. We anticipate the impacts related to these matters will continue to evolve, and, as a result we will continue to evaluate our financial position as additional information becomes available. Subsequent to recording the Toll Tax as part of the Tax Cuts and Jobs Act of 2017, our intent is to permanently reinvest undistributed earnings of foreign subsidiaries, and we do not have any current plans to repatriate post-Toll Tax foreign earnings to fund operations in the United States. However, if amounts held by foreign subsidiaries were needed to fund operations in the United States, we could be required to accrue and pay taxes to repatriate these funds. Such charges may include potential state income taxes and other tax charges.
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Non-GAAP Financial Measures
In accordance with the SEC's Regulation G and Item 10(e) of Regulation S-K, the following provides definitions of the non-GAAP financial measures used by management. We believe that these measures provide additional insight into underlying business results and trends. These non-GAAP financial measures are not intended to be considered by the user in place of the related GAAP financial measure, but rather as supplemental information to more fully understand our business results. These non-GAAP financial measures may not be the same as similar measures used by other companies due to possible differences in method and in the items or events being adjusted.
Organic sales growth is a non-GAAP financial measure of sales growth that excludes the impacts of acquisitions, divestitures and foreign exchange from period-over-period comparisons. A reconciliation to the most closely related U.S. GAAP financial measure, net sales, has been included in our discussion within “Results of Operations” above. Organic net sales should be considered in addition to, and not as a replacement for or as a superior measure to net sales. Management believes reporting organic sales growth provides useful information to investors, potential investors and others, by facilitating easier comparisons of our revenue performance with prior and future periods.
Free cash flow is a non-GAAP financial measure that does not represent cash provided by operating activities in accordance with U.S. GAAP. Therefore, it should not be considered an alternative to net cash provided by or used in operating activities as an indication of our performance. The cash conversion rate of free cash flow to net income is also a measure of our performance in cash flow generation. We believe free cash flow to be an appropriate supplemental measure of our operating performance because it provides investors with a measure of our ability to generate cash, repay debt, pay dividends, repurchase stock and fund acquisitions.
31
A reconciliation of net cash provided by operating activities to free cash flow is provided below:
| | | | | | | |
| | Six Months Ended | |||||
| | June 26, | | | |||
| | 2022 | | 2021 | | ||
| | (in millions) | |||||
Net cash provided by operating activities | | $ | 44.9 | | $ | 73.2 | |
Less: additions to property, plant, and equipment | |
| (13.1) | |
| (13.0) | |
Plus: proceeds from the sale of property, plant, and equipment | |
| 0.8 | |
| 4.9 | |
Free cash flow | | $ | 32.6 | | $ | 65.1 | |
Net income —as reported | | $ | 124.2 | | $ | 79.2 | |
Cash conversion rate of free cash flow to net income | |
| 26.2 | % |
| 82.2 | % |
Free cash flow declined in the first six months of 2022 when compared to the first six months of 2021 primarily driven by our proactive decision to increase inventories in response to strong market demand and continued supply chain disruptions, increased payments related to restructuring and employee and customer incentives, and higher net capital spend, partially offset by higher net income.
Our net debt to capitalization ratio, a non-GAAP financial measure used by management, at June 26, 2022 was (2.4%) compared to (9.3%) at December 31, 2021. The increase was driven by an increase in debt outstanding of $60.3 million and a decrease in net cash outstanding of $12.0 million at June 26, 2022 compared to December 31, 2021. Management believes the net debt to capitalization ratio is an appropriate supplemental measure because it helps investors understand our ability to meet our financing needs and serves as a basis to evaluate our financial structure. Our computation may not be comparable to other companies that may define their net debt to capitalization ratios differently.
A reconciliation of long-term debt (including current portion) to net debt and our net debt to capitalization ratio is provided below:
| | | | | | |
| | June 26, | | |||
| | 2022 | | 2021 | ||
| | (in millions) | ||||
Current portion of long‑term debt |
| $ | — | | $ | — |
Plus: long-term debt, net of current portion |
| | 202.2 | |
| 141.9 |
Less: cash and cash equivalents |
| | (230.0) | |
| (242.0) |
Net debt | | $ | (27.8) | | $ | (100.1) |
A reconciliation of capitalization is provided below:
| | | | | | | |
| | June 26, | | | |||
| | 2022 | | 2021 | | ||
| | (in millions) |
| ||||
Net debt | | $ | (27.8) | | $ | (100.1) | |
Total stockholders’ equity | |
| 1,186.5 | |
| 1,173.2 | |
Capitalization | | $ | 1,158.7 | | $ | 1,073.1 | |
Net debt to capitalization ratio | |
| (2.4) | % |
| (9.3) | % |
Application of Critical Accounting Policies and Key Estimates
We believe that our critical accounting policies are those related to revenue recognition, inventory valuation, goodwill and other intangibles, product liability costs, legal contingencies and income taxes. We believe these accounting policies are particularly important to an understanding of our financial position and results of operations and require application of significant judgment by our management. In applying these policies, management uses its judgment in making certain assumptions and estimates. Our accounting policies are more fully described under the heading “Accounting Policies” in Note 2 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K as filed with the SEC on February 22, 2022.
32
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We use derivative financial instruments primarily to reduce exposure to adverse fluctuations in foreign exchange rates, interest rates and costs of certain raw materials used in the manufacturing process. We do not enter into derivative financial instruments for trading purposes. As a matter of policy, all derivative positions are used to reduce risk by hedging underlying economic exposure. The derivatives we use are instruments with liquid markets. See Note 5 of Notes to the Consolidated Financial Statements for further details.
Our consolidated earnings, which are reported in United States dollars, are subject to translation risks due to changes in foreign currency exchange rates. This risk is concentrated in the exchange rate between the U.S. dollar and the euro; the U.S. dollar and the Canadian dollar; and the U.S. dollar and the Chinese yuan.
Our non-U.S. subsidiaries transact most business, including certain intercompany transactions, in foreign currencies. Such transactions are principally purchases or sales of materials and are denominated in European currencies, the Chinese yuan or the U.S. or Canadian dollar. We use foreign currency forward exchange contracts from time to time to manage the risk related to intercompany loans, intercompany purchases and intercompany sales that occur during the course of a year, and certain open foreign currency denominated commitments to sell products to third parties. We have entered into forward exchange contracts which hedge approximately 80% to 85% of the forecasted intercompany purchases between one of our Canadian subsidiaries and our U.S. operating subsidiaries for the next twelve months. We also entered into forward exchange contracts which hedge up to 60% of the forecasted intercompany sales transactions between one of our Chinese subsidiaries and one of our U.S. operating subsidiaries for the next twelve months. We record the effective portion of the designated foreign currency hedge contracts in other comprehensive income until inventory turns and is sold to a third-party. Once the third-party transaction associated with the hedged forecasted transaction occurs, the effective portion of any related gain or loss on the designated foreign currency hedge is reclassified into cost of goods sold within earnings. The fair value of the Company’s designated foreign hedge contracts outstanding as of June 26, 2022 was an asset of $0.1 million.
Under the Amended Credit Agreement, our earnings and cash flows are exposed to fluctuations in LIBOR-indexed interest payments related to our floating rate debt. In order to manage our exposure, we entered into an interest rate swap on March 30, 2021. Under the interest rate swap agreement, we receive the one-month USD-LIBOR subject to a 0.00% floor, and we pay a fixed rate of 1.02975% on a notional amount of $100.0 million. The swaps mature on March 30, 2026. Information about our long-term debt facility and related interest rates appears in Note 11 of the Consolidated Financial Statements.
We purchase significant amounts of bronze ingot, brass rod, cast iron, stainless steel and plastic, which are utilized in manufacturing our many product lines. Our operating results can be adversely affected by changes in commodity prices if we are unable to pass on related price increases to our customers. We manage this risk by monitoring related market prices, working with our suppliers to achieve the maximum level of stability in their costs and related pricing, seeking alternative supply sources when necessary and passing increases in commodity costs to our customers, to the maximum extent possible, when they occur.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, or Exchange Act, as of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily applies its judgment in evaluating and implementing possible controls and procedures. The effectiveness of our disclosure controls and procedures is also necessarily limited by the staff and other resources available to us and the geographic diversity of our operations. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s
33
rules and forms and are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There was no change in our internal control over financial reporting that occurred during the second quarter ended June 26, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We will continue to review and document our disclosure controls and procedures, including our internal control over financial reporting, and we may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
As disclosed in Part I, Item 1, “Product Liability, Environmental and Other Litigation Matters” and Item 3, “Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2021, we are party to certain litigation. There have been no material developments with respect to our contingencies and environmental remediation proceedings during the quarter ended June 26, 2022, other than as described in Note 12 of the Notes to Consolidated Financial Statements, which is incorporated herein by reference.
Item 1A. Risk Factors
There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2021, which risk factors are incorporated herein by reference.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We satisfy the minimum withholding tax obligation due upon the vesting of shares of restricted stock and the conversion of restricted stock units into shares of Class A common stock by automatically withholding from the shares being issued a number of shares with an aggregate fair market value on the date of such vesting or conversion that would satisfy the withholding amount due.
The following table includes information with respect to shares of our Class A common stock withheld to satisfy withholding tax obligations during the second quarter ended June 26, 2022.
| | | | | | | | | |
| | Issuer Purchases of Equity Securities | |||||||
|
| |
| | |
| |
| (d) Maximum Number (or |
| | (a) Total | | | | | (c) Total Number of | | Approximate Dollar |
| | Number of | | | | | Shares (or Units) | | Value) of Shares (or |
| | Shares (or | | (b) Average | | Purchased as Part of | | Units) that May Yet Be | |
| | Units) | | Price Paid per | | Publicly Announced | | Purchased Under the | |
Period | | Purchased | | Share (or Unit) | | Plans or Programs | | Plans or Programs | |
| — | | $ | — |
| — |
| — | |
| — | | $ | — |
| — |
| — | |
| 711 | | $ | 132.75 | | — | | — | |
Total |
| 711 | | $ | 132.75 |
| — |
| — |
The following table includes information with respect to repurchases of our Class A common stock during the second quarter ended June 26, 2022 under our stock repurchase program.
| | | | | | | | | | |
| | Issuer Purchases of Equity Securities (1) | ||||||||
|
| |
| | |
| |
| (d) Maximum Number (or | |
| | (a) Total | | | | | (c) Total Number of | | Approximate Dollar | |
| | Number of | | (b) Average | | Shares (or Units) | | Value) of Shares (or | ||
| | Shares (or | | Price Paid | | Purchased as Part of | | Units) that May Yet Be | ||
| | Units) | | per Share | | Publicly Announced | | Purchased Under the | ||
Period | | Purchased(1) | | (or Unit) | | Plans or Programs | | Plans or Programs | ||
| 9,152 | | $ | 137.76 |
| 9,152 | | $ | 53,239,708 | |
| 20,530 | | $ | 129.54 |
| 20,530 | | $ | 50,580,324 | |
| 110,551 | | $ | 129.54 | | 110,551 | | $ | 36,257,304 | |
Total |
| 140,233 | | $ | 130.07 |
| 140,233 | | | |
| (1) | On February 6, 2019, the Board of Directors authorized a stock repurchase program of up to $150 million of the Company’s Class A common stock to be purchased from time to time on the open market or in privately negotiated transactions. The timing and number of shares repurchased will be determined by the Company’s management based on its evaluation of market conditions and other factors. |
35
Item 6. Exhibits
Exhibit No. |
| Description |
|---|---|---|
3.1 | | |
3.2 | | |
10.1 | | |
10.2† | | |
10.3 | | |
31.1† | | |
31.2† | | |
32.1†† | | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 |
32.2†† | | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 |
101.INS* | | Inline XBRL Instance Document |
101.SCH* | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
†† Furnished herewith.
* Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets at June 26, 2022 and December 31, 2021, (ii) Consolidated Statements of Operations for the Second Quarters and Six Months ended June 26, 2022 and June 27, 2021, (iii) Consolidated Statements of Comprehensive Income for the Second Quarters and Six Months ended June 26, 2022 and June 27, 2021, (iv) Consolidated Statements of Stockholders’ Equity for the Second Quarters and Six Months ended June 26, 2022 and June 27, 2021, (v) Consolidated Statements of Cash Flows for the Six Months ended June 26, 2022 and June 27, 2021, and (vi) Notes to Consolidated Financial Statements.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | |
| WATTS WATER TECHNOLOGIES, INC. | |
| | |
Date: August 4, 2022 | By: | |
| | |
| | Chief Executive Officer (principal executive officer) |
| | |
Date: August 4, 2022 | By: | /s/ Shashank Patel |
| | Chief Financial Officer (principal financial officer) |
Date: August 4, 2022 | By: | |
| | Chief Accounting Officer (principal accounting officer) |
37
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 3/30/26 | ||||
| 12/31/22 | ||||
| 9/15/22 | ||||
| 9/1/22 | ||||
| 8/15/22 | ||||
| Filed on: | 8/4/22 | |||
| 8/1/22 | 4 | |||
| 7/24/22 | ||||
| 7/19/22 | 8-K | |||
| 6/27/22 | ||||
| For Period end: | 6/26/22 | |||
| 5/23/22 | ||||
| 5/22/22 | ||||
| 4/25/22 | ||||
| 4/24/22 | ||||
| 4/1/22 | ||||
| 3/28/22 | ||||
| 3/27/22 | 10-Q | |||
| 2/22/22 | 10-K, 4 | |||
| 2/12/22 | ||||
| 12/31/21 | 10-K, SD | |||
| 6/27/21 | 10-Q | |||
| 6/25/21 | 8-K | |||
| 3/30/21 | 8-K | |||
| 3/28/21 | 10-Q | |||
| 12/31/20 | 10-K, 5 | |||
| 4/24/20 | 8-K | |||
| 2/6/19 | 4, 8-K | |||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 2/21/24 Watts Water Technologies Inc. 10-K 12/31/23 121:18M Toppan Merrill Bridge/FA 2/21/23 Watts Water Technologies Inc. 10-K 12/31/22 105:17M Toppan Merrill Bridge/FA |
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 5/11/22 Watts Water Technologies Inc. 8-K:5,9 5/11/22 12:462K Toppan Merrill/FA 5/04/22 Watts Water Technologies Inc. 10-Q 3/27/22 65:8.7M Toppan Merrill Bridge/FA 2/22/22 Watts Water Technologies Inc. 10-K 12/31/21 104:16M Toppan Merrill Bridge/FA 11/02/21 Watts Water Technologies Inc. 8-K:5,9 11/01/21 11:299K Toppan Merrill Bridge/FA 8/01/19 Watts Water Technologies Inc. 10-Q 6/30/19 71:17M Toppan Merrill Bridge/FA |