UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑K10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31 2017, 2022
Or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001‑11499001-11499
WATTS WATER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware | 04‑291653604-2916536
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(State or Other Jurisdiction of | (I.R.S. Employer |
Incorporation or Organization) | Identification No.) |
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815 Chestnut Street, North Andover, MA | 01845 |
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code: (978) 688‑1811(978) 688-1811
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Classeach class | Trading Symbol(s) | Name of Each Exchangeeach exchange on Which Registeredwhich registered |
Class A common stock, par value $0.10 per share | WTS | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well‑knownwell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒⌧ No ☐◻
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ ◻No ☒⌧
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒⌧ No ☐◻
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑TS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒⌧ No ☐◻
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑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‑212b-2 of the Exchange Act.
Large accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ |
| | (Do not check if a
| Emerging growth company ☐ |
| | smaller reporting company)
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ⌧
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ◻
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑212b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2017,24, 2022, the aggregate market value of the registrant’s common stock held by non‑affiliatesnon-affiliates of the registrant was approximately $1,745,662,494$3,367,524,069 based on the closing sale price as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class |
| Outstanding at January 30, 201822, 2023 |
Class A common stock, $0.10 par value per share | | 27,690,78127,309,838 shares
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Class B common stock, $0.10 par value per share | | 6,379,2905,958,290 shares
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 16, 201817, 2023 are incorporated by reference into Part III of this Annual Report on Form 10‑K.10-K.
PART I
Item 1. BUSINESS.
This Annual Report on Form 10‑K10-K contains statements that are not historical facts and are considered forward‑lookingforward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward‑lookingforward-looking statements contain projections of our future results of operations or our financial position or state other forward‑lookingforward-looking information. In some cases, you can identify these forward‑lookingforward-looking statements by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” and “would” or similar words. You should not rely on forward‑lookingforward-looking statements because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to differ materially from the anticipated future results, performance or achievements expressed or implied by the forward‑lookingforward-looking statements. Some of the factors that might cause these differences are described under Item 1A—“Risk Factors.” You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward‑lookingforward-looking statements were based on information, plans and estimates at the date of this report, and, except as required by law, we undertake no obligation to update any forward‑lookingforward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.
In this Annual Report on Form 10‑K,10-K, references to “the Company,” “Watts Water,” “Watts,” “we,” “us” or “our” refer to Watts Water Technologies, Inc. and its consolidated subsidiaries.
Overview
Watts Regulator Co. was founded by Joseph E. Watts in 1874 in Lawrence, Massachusetts. Watts Regulator Co. started as a small machine shop supplying parts to the New England textile mills of the 19th century and grewcentury. Since then, Watts has grown into a global manufacturer and become one of products and systems focused on the control, conservation and qualityworld’s leading providers of water technologies and the comfortsolutions that are designed to promote safety, energy efficiency, and safety of the people using it.water conservation for commercial and residential buildings. Watts Water Technologies, Inc. was incorporated in Delaware in 1985 and becameis the parent company of Watts Regulator Co.
Our strategy is to be the preferred supplier of differentiated products, solutions and systems that manage and conserve the flow of fluids and energy into, through and out of buildings in the residentialcommercial and commercialresidential markets of the Americas, Europe, and Asia-Pacific, Middle East and Africa (“APMEA”)., our three geographic segments. Within this framework, we focus upon three themes: safety &and regulation, energy efficiency and water conservation. This strategy enablesprovides us to continuewith a platform to increase our earnings viathrough sales growth, both organic and inorganic, and the systematic reduction of manufacturing costs and operational expenses.
We intend to continueOur strategy is to expand organically by introducing new, complementary products and solutions in existing markets, by enhancing our preferred brands, by promoting plumbing code development to drive the need for safety and water quality products and by continually improving merchandising in our wholesale and retail distribution channels. We focus on selling solutions to our customers that integrate a variety of our product offerings. We target selected new productproducts and geographic markets based on growth potential, including our ability to leverage our existing distribution channels. Additionally, we leverage our distribution channels through the introduction of new products and solutions, as well as the integration of products of our acquired companies.
The Internet of Things (“IoT”) has allowed companies to transform components and products into smart and connected devices. We are committed to enhancing our smart and connected capabilities by expanding our internal competencies and making strategic acquisitions. We continue to invest in these capabilities by expanding our architecture development, enhancing digital tools used by our customers, including Watts’ website, and investing in new smart and connected product development projects. Our strategy focuses on three dimensions: Connect, Control and Conserve. We have introduced and plan to continue offering new products that will connect our customers with smart systems, control systems for optimal performance, and conserve critical resources by increasing operability, efficiency and safety. In 2018, we set a goal to derive 25% of our revenue from smart and connected enabled products by the end of 2023. As of December 31, 2022, 19% of our revenue was from smart and connected enabled products. We believe we are still tracking to achieve our goal of 25% by the end of 2023.
We continue to focus on sustainability by taking steps to reduce the negative impact our operations have on the environment while generating economic value by manufacturing and selling products, solutions and technologies that enable our customers to reduce the negative impact they have on the environment. As a leading global water technology company, we address some of the world's most important sustainability priorities – the conservation, control and safe use of water. Our smart and connected strategy is anchored by a commitment to connect our customers to smart systems, control those systems for optimal performance, and conserve critical water and other resources by increasing operability, efficiency, and safety. Internally, we have reduced our global water consumption and greenhouse gas emissions, improved our safety performance, made our work environment more diverse, equitable and inclusive, and maintained robust ethics and compliance programs to help ensure we do business with integrity and in accordance with high ethical standards.
We intend to continue to generate incremental growth by targeting selectedselect acquisitions both in our core markets as well asand in new complementary markets. We have completed 1012 acquisitions in the last decade.since 2012. Our acquisition strategy focuses on businesses that manufacture preferred brand name products that address our themes of safety &and regulation, energy efficiency and water conservation in our primary or related complementary markets.conservation. We target businesses that will provide us with one or more of the following: an entry into new markets, an increase in shelf space with existing customers, strong brand names, a new improved channel access, unique and/or improved technologyproprietary technologies, advanced production capabilities or an expansion of the breadth of our product andcomplementary solution offerings.
We are committed to reducing our manufacturing and operating costs using Lean methodologies to drive improvement across all key processes, and consolidating our diverse manufacturing operations and distribution centers.processes. We have a number of manufacturing facilities in lower‑costlower-cost regions. In recent years, we have announced global restructuring plans which reduced our manufacturing and distribution footprint in order to reduce our costs and to realize additionalincremental operating efficiencies.
Additionally, a majority of our manufacturing facilities are ISO 9000, 9001 or 9002 certified by the International Organization for Standardization.
MuchThe majority of our sales are for products that have been approved under regulatory standards incorporated into state and municipal plumbing, heating, building and fire protection codes in the Americas, Europe, and certain countries within APMEA. We have consistently advocated for the development and enforcement of plumbing codes and are committed to providing products to meet these standards.
Our business is reported in three geographic segments: Americas, Europe and APMEA. The contributions of each segment to net sales, operating income and the presentation of certain other financial information by segment are reported in Note 17 of the Notes to Consolidated Financial Statements and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.Products
Products
We have a broad range of products in terms of design distinction, size and configuration. We classify our many products into four global product lines.categories. These product linescategories are:
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● | | Residential & commercial flow control and protection products—includes products typically sold into plumbing and hot water applications such as backflow preventers, water pressure regulators, temperature and pressure relief valves, and thermostatic mixing valves.valves and leak detection and protection products. Many of our flow control and protection products are now smart and connected, warning of leaks and floods with alerts to Business Management Systems (BMS) and/or personal devices giving our customers greater insight into their water management and the ability to shut off the water supply to avoid waste and mitigate damages. Residential & commercial flow control and protection products accounted for approximately 52%, 56%,53% and 57%52% of our total net sales in 2017, 2016,2022, 2021 and 2015,2020, respectively. |
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● | | HVAC & gas products—includes commercial high‑efficiencyhigh-efficiency boilers, water heaters and heatingcustom heat and hot water solutions, hydronic and electric heating systems for under‑floorunder-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. Most of our HVAC products feature advanced controls enabling customers to easily connect to the Building Automation System for better monitoring, control and operation. HVAC & gas products accounted for approximately 32%31% of our total net sales in 2017,2022 and 29%2021, and 30% of our total net sales in 2016 and 2015.2020. HVAC is an acronym for heating, ventilation and air conditioning. |
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● | | Drainage & water re‑usere-use products—includes drainage products and engineered rain water harvesting solutions for commercial, industrial, marine and residential applications.applications, including connected roof drain systems. Drainage & water re‑usere-use products accounted for approximately 10% of our total net sales in 2017,2022 and 9%2021, and 11% of our total net sales in 2016 and 2015. 2020. |
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● | | Water quality products—includes point‑of‑usepoint-of-use and point‑of‑entrypoint-of-entry water filtration, monitoring, conditioning and scale prevention systems for both commercial, marine and residential applications. Water quality products accounted for approximately 7%, 6% and 7% of our total net sales in 2017and 2016,2022, 2021 and 5% of our total sales in 2015. 2020, respectively. |
Commercial and Operational Excellence
We strive to invest in product innovation that meets the wants and needs of our customers. Our focus is on differentiated products and solutions that will provide greater opportunity to distinguish and defend ourselves in the market place. Conversely, we wantmarketplace. We continue to migrate away from commoditized products where we cannotit is more difficult to add value. Our goal is to be a solutions provider, not merely a components supplier. We refer to this customer‑facingcustomer-facing mindset as commercial excellence, and we are continually looking for strategic opportunities to invest or divest, where necessary, in order to meet those objectives. In conjunction with this customer‑centriccustomer-centric focus, we continually review our operations to ensure we can efficiently and effectively produce and deliver products to customers. We are also striving to simplify our administrative operations to drive further efficiencies. We call this aspect of our business operational excellence.
In 2015, our Board of Directors approved a program relating to the transformation of our Americas and APMEA businesses, and in 2017 we successfully completed this program. The program involved the exit and discontinuation of low-margin, non-core product lines, enhancing our global sourcing capabilities and the reduction of the square footage of our Americas facilities. We eliminated approximately $165 million of our combined Americas and APMEA net sales of products that primarily sold through our do-it-yourself (DIY) distribution channel. We discontinued selling our remaining non-core product lines as of the end of the first quarter of 2016. As part of the exit of non-core product lines, we entered into an agreement to sell an operating subsidiary in China that was dedicated exclusively to the
manufacturing of products being discontinued. We completed that sale in the second quarter of 2016. The program also involved decreasing the square footage of our Americas facilities and reducing the Americas net operating footprint by approximately 30%. The footprint reduction was designed to improve the utilization of our remaining facilities, better leverage our cost structure, reduce working capital, and improve execution of customer delivery requirements. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.
Customers and Markets
We sell our products to plumbing, heating and mechanical wholesale distributors and dealers, original equipment manufacturers (OEMs), specialty product distributors, and major DIYdo-it-yourself (DIY) and retail chains. In September 2015, as part of the first phase
Wholesalers. Approximately 60%, 61% and 60% of our transformation of our Americas and APMEA business, we divested a substantial portion of our DIY business in the Americas, which reduced the significance of DIY as a distribution channel for our products in 2017 and 2016.
Wholesalers. Approximately 63%, 57%, and 52% of ournet sales in 2017, 2016,2022, 2021 and 2015,2020, respectively, were to wholesale distributors for commercial and residential applications.
OEMs. Approximately 16%, 21%, and 20%15% of our net sales in 2017, 2016,2022, 2021 and 2015, respectively,2020 were to OEMs. In the Americas, our typical OEM customers are water heater manufacturers and equipment and water systems manufacturers needing flow control devices and other products. Our sales to OEMs in Europe are primarily to boiler manufacturers and radiant system manufacturers. Our sales to OEMs in APMEA are primarily to boiler, water heater, air conditioning, and bath manufacturers, including manufacturers of faucet and shower products.appliance manufacturers.
Specialty. Approximately 17%21% of our net sales in 20172022, and 18%19% of our net sales in 20162021 and 20152020 were through our specialty channel. The specialty channel primarily includes sales related to high-efficiency boilers and water heaters, water filtration and conditioning products, specialty floor and tile products, and food service products and leak detection products.
DIY Chains. Approximately 4% of our net sales in 20172022, and 2016, and 10%5% of our net sales in 20152021 and 2020 were to DIY chains. The DIY channel primarily includes sales related to valves and a portion of our water quality products.
In 2017, 20162022, 2021 and 2015,2020, no customer accounted for more than 10% of our total net sales. Our top ten customers accounted for approximately $300.6$431.7 million, or 21%21.8%, of our total net sales in 2017; $275.22022; $371.5 million, or 20%20.5%, of our total net sales in 2016;2021; and $345.6$344.1 million, or 24%22.8%, of our total net sales in 2015.2020. Thousands of other customers constituted the balance of our net sales in each of those years.
Marketing and Sales
For product sales in the Americas, we rely primarily on commissioned manufacturers’ representatives to market our product lines, some of which maintain a consigned inventory of our products. These representatives sell primarily to plumbing and heating wholesalers and contractors or supply DIY stores. Our specialty channel products in the Americas are sold through independent representatives, dealers and distributors. We also sell products directly to wholesalers, OEMs and private label accounts primarily in Europe and APMEA, and, to a lesser extent, in the Americas.
We aim to inform and educate our channel partners, installers and end-use customers on how to maximize our product solutions. We do so through a variety of traditional and digital marketing avenues, including social media, trade shows, and advertising. We pride ourselves in providing industry leading product education through four distinct training vehicles: Online Courses, on-location Lunch and Learns, Live and Virtual Instructor Led Training, and Continuing Education Units (CEUs) for designers.
Manufacturing
We have integrated and automated manufacturing capabilities, including a statestate-of-the-art foundry dedicated exclusively to the production of products that qualify as “lead-free” under the art lead-free foundryU.S. Safe Drinking Water Act; and a traditional brass and bronze foundry, machining capabilities, plastic extrusion, and injection molding and assembly operations. Our foundry operations include metal pouring systems, automatic core making, and brass and bronze die‑castings.die-castings. Our machining operations feature computer‑controlledcomputer-controlled machine tools, high‑speedhigh-speed chucking machines with robotics, robotic assembly capability, laser-cutting technology, and automatic screw machines for machining bronze, brass and steel components. Our heating and hot water product manufacturing capabilities include all phases of light and heavy gauge metal fabrication, incorporating the latest technology for welding and brazing, as well as laser cutting; automated and robotic applications; and metal finishing, which includes chemical passivation of stainless steel. We have invested in recent years to expand our manufacturing capabilities and to adopt the most efficient and productive equipment. We are committed to maintaining our manufacturing equipment at a level consistent with current technology in order to maintain high levels of quality and manufacturing efficiencies. In 2017,2022, we continued to invest in our systems and in our manufacturing facilities and training facilities.our commercial and operational excellence initiatives.
Capital expenditures and depreciation for each of the last three years were as follows:
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| | | Years Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
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| | Years Ended December 31, | | |
| | 2017 | | 2016 | | 2015 | | |
| | (in millions) | | |
| | | (in millions) |
Capital expenditures | | $ | 29.4 | | $ | 36.0 | | $ | 27.7 | | | $ | 28.1 | | $ | 26.7 | | $ | 43.8 |
Depreciation | | $ | 29.7 | | $ | 30.4 | | $ | 31.6 | | | $ | 27.6 | | $ | 31.4 | | $ | 31.3 |
Purchased Raw Materials and Components
We require substantial amounts ofOur products are made using various purchased components and raw materials, to produce our products, including primarily bronze, brass, cast iron, stainless steel, steel, plastic, and other materials used in our products.plastic. Substantially all of the raw materials we require to manufacture our products are purchased from outside sources. The commodity markets have experienced tremendous volatility over the past several years, particularly with respect to copper and stainless steel. Bronze and brass are copper‑based alloys. The price of copper had steadily declined for a number of years until prices began to increase in the second half of 2016. Copper prices continued to increase in 2017,steel, and we expect elevated commodity pricing will be maintainedhave experienced high inflationary pressures in 2018, particularly with respect to copper.these markets. Tariffs impact the total cost of our products and the components and raw materials that go into manufacturing them. Increased tariff costs could adversely impact the gross margin we earn on our products. Because we internationally source a significant amount of raw materials and components, several months of raw materials and work in process are moving through our supply chain at any point in time. We are not able to predict whether component costs or commodity costs, including copper and stainless steel, will significantly increase or decrease in the future. If component costs or commodity costs increase in the future and we are not able to reduce or eliminate the effect of the cost increases by reducing production costs or implementing price increases, our profit margins could decrease. If component costs or commodity costs were to decline, we may experience pressurespressure from customers to reduce our selling prices. The timing of any price reductions and decreases in commodity costs may not align. As a result, our margins could be affected.
With limited exceptions, we have multiple suppliers for our commoditiescomponents and other raw materials. We believe our relationships with our key suppliers are good and that an interruption in supply from any one supplier would not materially affect our ability to meet our immediate demands while another supplier is qualified. We regularly review our suppliers to evaluate their strengths. If a supplier is unable to meet our demands, we believe that in most cases our inventory of components and raw materials will allow for sufficient time to identify and obtain the necessary commodities and other raw materials from an alternate source. We believe that the nature of the commoditiescomponents and other raw materials used in our business are such that multiple sources are generally available in the market. However, our current and alternative suppliers are largely concentrated in China. The occurrence of natural disasters, public health crises such as pandemics or epidemics, political crises such as war, terrorism or political instability, or other events that result in widespread business or supply chain disruptions in China could have a material adverse effect on our ability to obtain necessary components and raw materials, and our business and operating results could suffer.
The current global supply chain disruptions are impacting our supply of raw materials and purchased components. Refer to Item. 1A “Risk Factors” for risks related to the impact of supply chain and logistic disruptions and Item. 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional disclosure.
Code Compliance
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. StandardsCodes and standards in the Americas are established by such industry test and certificationgovernment organizations such as the American Society of Mechanical Engineers (ASME), the America Water Works Association (AWWA), the Canadian Standards Association (CSA), the American Society of Sanitary Engineering (ASSE), the American National Standards Institute—Leadership in Energy & Environmental Design (LEED), the University of Southern California Foundation for Cross‑Connection Control and Hydraulic Research (USC FCCC & HR), FM Global (FM), NSF International (NSF) and Underwriters Laboratories (UL), the National Board (NB), the Environmental Protection Agency (EPA), and the Californian Energy Commission (CEC). International standards are established by such organizations as, the International Code Council (ICC), and the International Association of Plumbing and Mechanical Officials (IAPMO). Many of thesethe codes and standards are incorporated into state and municipal plumbing and heating, building and fire protection codes.
National regulatory standards in Europe vary by country. The major standards and/or guidelines that our products must meet are AFNOR (France), DVGW (Germany), UNI/ICIM (Italy), KIWA (Netherlands), SVGW (Switzerland), SITAC (Sweden), WRAS (United Kingdom) and CEN (Denmark). Further, there are local regulatory standards requiring compliance as well.
Together with our commissioned manufacturers’ representatives, we haveWe consistently advocatedadvocate for the development and enforcement of plumbing codes. We maintain stringent quality controlcodes and testing procedures at each of our manufacturing facilities in order to manufacture products that comply with code requirements. We believe that product‑testing capability and investment in plant and equipment are needed to manufacture products that comply with code requirements.standards. Our product-testing capabilities and dedicated investments are areas of strength for the Company.us. Manufacturing operations consistently maintain stringent quality control and testing procedures, thus ensuring products remain in continuous compliance with all requirements. Investment in product-testing capability and in plant and equipment also ensures ongoing continuous product compliance. Additionally, a majority of our manufacturing facilities are ISO 9000, 9001 or 9002 certified by the International Organization for Standardization.
the U.S.-based voluntary industry association American Supply Association (ASA), which provides its members with industry information and coordinates resources for addressing regulatory issues and developing and maintaining codes and standards. Watts is also a member of the Canadian Institute of Plumbing and Heating (CIPH), which provides a similar function and benefit as ASA by monitoring and advocating on behalf of its members on various legislative and regulatory issues.
New Product Development and Engineering
We retain our own product development staff, design teams, and testing laboratories in the Americas, Europe and APMEA that work to enhance our existing products and develop new products.products and solutions with a focus on sustainable customer-centric technological innovation and smart and connected solutions. We maintain sophisticated product development and testing laboratories and are committedcontinue to investing moreinvest in this area. In 2015, we re-engineered our newsmart and connected product pipeline. We employ a global new-product development process that is used to prioritize, guide and rolled out a uniform global program. In 2016 and 2017,support new projects. Over the years, we have continued to drivebring innovation to our markets, includingwith smart and connected advancement in our backflow product line now providing sensors for flood detection, notification, and tampering security, providing potential to avoid tremendous water loss from undetected floods. Leak detection has also become an important product group helping avoid costly water-based damage and loss, providing the successful roll outability shut off water supply remotely at the first detection of IntelliStation™a leak with our Leak Defense system. We continue to invest in leak detection and have solutions that service both the residential market and commercial properties and multifamily units, together making water safer and cutting off water loss. We launched a new product, the Centurion, a 2000 MBH water heater that features state of the art combustion control technology, the first water heater to offer O2 Trim which allows the unit to self-adjust and maintain optimal air/fuel rations for peak efficiency, low emissions and maximum uptime reliability. We have made advancements in our Heat Interface Units, which act as a bridge between the central boiler and the AERCO Benchmark® Platinum boiler.heating /cooling domestic water systems to maximize their efficiency and provide optimal comfort and energy efficiency in the home. We continuedalsolaunched a smart and connected boiler control which allows for operation of any boiler and provides remote connectivity for troubleshooting and system diagnosis.
In 2022, we launched 20 new smart and connected product offerings, adding to our portfolio and expansion of our smart and connected strategy. We will continue to focus on and invest in our global new product development program to leverage new technologies, inhouse expertise and our electronics capabilities to driveexpand our “connected” productssmart and connected strategy. Research and development costs included in selling, general, and administrative expense amounted to $29.0 million, $26.5 million and $23.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Competition
The domestic and international markets for energy efficient products, water conservation devices, and products that address the safety &and regulation for the flow of fluids, are intensely competitive and require us to compete against some companies possessing greater financial, marketing and other resources than ours. Due to the breadth of our product offerings, the number and identities of our competitors vary by product line and market. We consider quality, brand preference, delivery times, engineering specifications, plumbing code requirements, price, technological expertise, breadth of product offerings, products that help customers’ sustainability efforts, and integratedsmart and connected products and solutions offerings to be the primary competitive factors. We believe that new product development and product engineering are also important to success in the water industry and that our position in the industry is attributable in part to our ability to develop new and innovative products quickly and to adapt and enhance existing products. We continue to develop new and innovative products to enhanceexpand our market position and are continuing to implementimplementing manufacturing and design programs to reduce costs. We cannot be certain that our efforts to develop new products will be successful or that our customers will accept our new products. Although we own certain patents and trademarks that we consider to be of importance, we do not believe that our business and competitiveness as a whole are dependent on any one of our patents or trademarks or on patent or trademark protection generally.
BacklogHuman Capital Management
Backlog was approximately $86.3 million at January 28, 2018 and approximately $83.2 million at January 29, 2017. We do not believe that our backlog at any point in time is indicative of future operating resultsemployees are our greatest asset, and we expectaim to provide a safe, inclusive and high-performance culture where our entire current backlog to be converted to sales in 2018.
Employees
people can thrive. As of December 31, 2017,2022, we employedhad approximately 4,800 people worldwide. With the exception of two subsidiaries, one in Canada and the other in New York, none of our4,600 employees globally, including 2,100 in the Americas, or APMEA2,200 in Europe and 300 in APMEA. At Watts, we strive to attract, develop, retain and engage high performing talent and we reward employee performance. By developing and promoting our talented people, we are covered by collective bargaining agreements. In some European countries,creating value for our customers and shareholders while advancing our Environmental, Social, and Corporate Governance (“ESG”) goals. As the economy and our business grow, so does the need for highly qualified talent; hence we are always competing for the best people in an environment of increasingly challenged supply. To that end, we have developed, and continue to enhance and refine, a robust and comprehensive talent management strategy that spans from talent attraction to performance management, career development and retention of our top talent and, ultimately, to succession planning across our organization. We continually strive to cultivate and support a highly engaged and productive workforce.
Talent Acquisition
| ● | Recruitment efforts follow a defined Talent Acquisition process to attract and hire top talent. |
| ● | We provide a robust college internship program to identify and cultivate an early-in-career pipeline of talent. |
| ● | We are actively engaging with a select group of historically Black colleges and universities, minority serving institutions, and professional organizations to help attract and recruit diverse professionals. |
| ● | We engage with external professional recruiting firms to supplement our internal recruiting efforts as needed. |
| ● | We have a rich global employee referral bonus program to attract qualified candidates and reward employees. |
| ● | We provide training to Human Resources Business Partners and hiring managers on the Watts Talent Acquisition Process. |
Professional Development
| ● | Leadership & Inclusivity. In 2022, we launched a global, multi-phased leadership training program for all employees that is designed to build leadership capability through a set of clear frameworks that are simple to use and easily recalled, thus enabling our employees to practice new habits and build inclusive behaviors. This training includes three modules focused on identifying bias to make better decisions, creating teams where all people feel valued and empowering people to use their voice and contribute ideas. |
| ● | Performance Management Training. We offer a targeted training series addressing the components of performance management to enable all employees in accomplishing their individual goals and strategic objectives of the organization. Specific modules have been developed for all employees on goal setting, performance conversations, assessing performance, and career development. |
| ● | One Watts Performance System (OWPS) Training Program.We want to make sure all employees are aligned with our operating philosophies and principles. Alignment helps us identify and eliminate waste and simplify and standardize our work. We have a global training program educating all employees on our philosophies and principles, empowering them to use OWPS tools in their daily work. |
| ● | LinkedIn Learning Curriculum. We provide a comprehensive suite of online LinkedIn Learning courses to supplement our management development training by providing employees with relevant training on specialized topics to fill in knowledge and experience gaps. |
| ● | Coaching. We provide global, broad-based coaching opportunities through several external partnerships that are targeted to the individual’s coaching and development needs. |
Engagement and Performance Management
| ● | Senior Leader Communication and Transparency.We actively seek opportunities for regular engagement and communication by our CEO and other senior executive leaders with our broader employee population. |
| ● | Employee Engagement Surveys.We annually conduct confidential company-wide employee engagement surveys. Feedback from these surveys provides our management team with valuable information about our workplace culture. Survey results are also reviewed with our Board of Directors, or Board, and used to develop and refine other aspects of our overall human capital management and other growth strategies. In 2022, 80% of our employee population participated in a pulse survey to gain feedback on a core set of engagement items and performance drivers aligned to our business priorities. |
| ● | Performance Management Framework.We maintain a robust annual performance management process across the organization. Together with their managers, employees start the process by setting goals; year-end activities begin with employee self-assessments and conclude with a conversation led by the manager on goal accomplishment and defined core competencies. |
| ● | Safety. Employee safety is one of our highest priorities and we strive for zero hazards and zero injuries by educating and training employees on safety best practices through awareness campaigns and related engagement initiatives. |
Diversity, Equity & Inclusion
An integral part of our mission to build a high performance, values-driven culture is creating an inclusive culture that welcomes and celebrates diversity. Our path to innovation starts and ends with our employees, who are subjectfundamental to traditional national collective bargaining agreements. the vibrancy and success of Watts. Everything we accomplish depends on creating an environment that is engaging and supportive and enables employees to perform to their potential. This is why we have initiated a comprehensive approach to diversity, equity and inclusion focusing on awareness and education programs for our leaders and employees; monitoring engagement through employee survey feedback; creating awareness with our employees about diversity, equity and inclusion topics through our company intranet, in employee meetings and on our public website; and improving our hiring and leadership development processes to increase diversity, equity and inclusion at all levels at Watts. We have also encouraged the visibility of diverse employees through the formation of employee resource groups, which are voluntary employee-led groups that provide a forum for employees to share common interests and experiences, gain professional development support, engage with our leadership teams, and drive initiatives to improve diversity, equity and inclusion at Watts.
Sustainability
Commitment to Sustainability
We have demonstrated our commitment to environmental sustainability by reducing our impact on the environment in multiple areas of our global business and by providing innovative products and solutions that enable our customers to reduce their impact on the environment. We are also focused on building a sustainable company by adhering to responsible business practices, prioritizing employee safety and providing our employees with opportunities for personal and professional growth, including through programs and initiatives to promote diversity, equity and inclusion. We also
strive to have a positive impact on the communities in which we live and work and other communities in need through community involvement, educational partnerships and charitable giving.
Sustainability Leadership
In May 2022, our Board amended the charter of our Nominating and Corporate Governance Committee to rename it as the Governance and Sustainability Committee and to assign it primary responsibility for the oversight of our ESG efforts and strategy. The Governance and Sustainability Committee reviews the Company’s ESG performance and strategic plans four times a year at its regularly scheduled quarterly meetings and receives additional updates from the Company’s Chief Sustainability Officer as needed. At the management level, our General Counsel and Chief Sustainability Officer, who reports directly to our Chief Executive Officer, has general oversight responsibility for all sustainability matters. Our General Counsel and Chief Sustainability Officer also chairs our global Sustainability Steering Committee, which is made up of senior company leaders and is responsible for formulating our sustainability strategy and overseeing the execution of our environmental, social and governance initiatives.
Sustainability Strategy
The materiality principle is one of the core principles of the Global Reporting Initiative (GRI). GRI is an independent global organization that provides one of the most widely used reporting standards framework for companies to communicate and demonstrate accountability for their impacts on the environment, economy and people. In order to address the principle of materiality, a company should undertake a process of identifying its key material topics that have the greatest financial, environmental and social impact on its business, as well as those topics regarded as highly important by its key internal and external stakeholder groups. We have conducted a sustainability materiality assessment with the assistance of an external consultant. The results of that assessment are being used by the Sustainability Steering Committee to identify our key focus areas and from there to build a strategy to address the material environmental, social and governance topics identified by the materiality assessment.
Climate Change Impact
The effects of climate change present several risks for our business. Recent municipal regulations prohibiting the installation of gas powered appliances have reduced the available market for our gas powered water heaters and boilers and our gas appliance connectors. Severe weather and climate events have also negatively impacted our operations. Recent hurricanes interrupted our operations in Fort Meyers, Florida; wildfires have threatened our facilities and operations in Woodland, California and Vernon, British Columbia, Canada; flooding and droughts have negatively impacted our operations in Italy and St. Pauls, North Carolina; and freezing temperatures have interrupted our operations in San Antonio, Texas. However, none of these events individually or collectively had a material adverse effect on our financial condition and results of operations.
Climate change and the increasing focus on sustainability have also created opportunities for our business. The growing interest in energy efficient products has increased demand for our high-efficiency boilers and water heaters, our Aegis heat pumps, under floor heating systems, smart thermostats, and our Microflex insulated pipes. Concern around water conservation has led to increased interest in products that are designed to reduce water consumption, such as our ACV Assure monitoring system, Intelliflow water shut off device, ZeroWaste reverse osmosis filters, OneFlow anti-scale system, Hygienic Pro drains and our Trident™ and Leak Defense leak detection and water shutoff systems. We have also seen increased interest in our products and services that are designed to protect our customers from contaminated water and safeguard biodiversity, such as backflow preventers, HF Scientific ballast water testing systems, Intellistation® digital water mixing systems, and Lync® brand solutions. Severe weather events that cause damage to, or destruction of, water systems and plumbing devices have also resulted in increased demand for replacement products and repair kits.
Environmental Stewardship
We have made substantial progress in minimizing the environmental impact of our operations. Recent initiatives have resulted in a reduction on our global water consumption and our greenhouse gas emissions, including through the implementation of smart monitoring systems in many of our high water use facilities to promote early leak and surge detection and investments in various energy reduction projects. With respect to our product handprint, we provide a portfolio of products, components and systems that conserve water, save energy, reduce waste and preserve water quality
and safety. In addition, our goal is to embed sustainability throughout the lifecycle of our products by creating safe, efficient, long-lasting products made with high-recycling-value materials wherever possible.
Social Responsibility
We are committed to creating both economic and social value and strive to have a positive impact on our global community. During 2022, we supported those in need through donations of money and products to several non-profit charitable organizations and through the volunteer efforts of our employees. One example was our ongoing partnership with the Planet Water Foundation. During 2022, we worked with Planet Water to fund the construction of six AquaTowers and AquaSan systems, which provide clean, safe drinking water for up to 10,800 people in Cambodia, India, Mexico, the Philippines and Indonesia.
Governance, Business Ethics, and Compliance
We believe that good corporate governance and an environment of high ethical standards are important for us to achieve business success and to create value for our employee relations are good.stockholders. Our Board is committed to high governance standards and continually works to improve them. We periodically review our corporate governance policies and practices and compare them to those suggested by various authorities on corporate governance and employed by other public companies and consider changes to our corporate governance policies and practices in light of such guidance and interpretations. We have adopted a Code of Business Conduct applicable to all officers, employees and Board members worldwide that serves as the foundation for our ethics and compliance program, and drives policy development, training initiatives, and reinforcement of our values throughout the global organization.
Recognition
In 2022, we were recognized for the fourth year in a row as one of Newsweek’s Most Responsible Companies. We were also promoted to the “low-risk” category by Sustainalytics in their annual ESG Risk Rating Report.
More information about our sustainability efforts is included in our latest Sustainability Report, available at https://investors.wattswater.com/sustainability. The material in our Sustainability Report is for informational purposes only and is not included as part of, or incorporated by reference into, this Annual Report on Form 10-K.
Product Liability, Environmental and Other Litigation Matters
We are subject to a variety of potential liabilities connected with our business operations, including potential liabilities and expenses associated with possible product defects or failures and compliance with environmental laws. We maintain product liability and other insurance coverage, which we believe to be generally in accordance with industry practices. Nonetheless, such insurance coverage may not be adequate to protect us fully against substantial damage claims.
Contingencies
Connector Class Actions
In November See “Item 1A. Risk Factors” and December 2014, Watts Water Technologies, Inc. and Watts Regulator Co. were named as defendants in three separate putative nationwide class action complaints (Meyers v. Watts Water Technologies, Inc., United States District Court for the Southern District of Ohio; Ponzo v. Watts Regulator Co., United States District Court for the District of Massachusetts; Sharp v. Watts Regulator Co., United States District Court for the District of Massachusetts) seeking to recover damages and other relief based on the alleged failure of water heater connectors. On June 26, 2015,
plaintiffs in the three actions filed a consolidated amended complaint, under the case captioned Ponzo v. Watts Regulator Co., in the United States District Court for the District of Massachusetts (hereinafter “Ponzo”). Watts Water Technologies was voluntarily dismissed from the Ponzo case. The complaint sought among other items, damages in an unspecified amount, replacement costs, injunctive relief, declaratory relief, and attorneys’ fees and costs. On August 7, 2015, the Company filed a motion to dismiss the complaint, which motion was mooted by the class settlements.
In February 2015, Watts Regulator Co. was named as a defendant in a putative nationwide class action complaint (Klug v. Watts Water Technologies, Inc., et al., United States District Court for the District of Nebraska) seeking to recover damages and other relief based on the alleged failureNote 15 of the Company’s Floodsafe connectors (hereinafter “Klug”). On June 26, 2015,Notes to the Company filed a partial motion to dismiss the complaint. In response, on July 17, 2015, plaintiff filed an amended complaint which added additional named plaintiffs and sought to correct deficiencies in the original complaint, Klug v. Watts Regulator Co., United States District Court for the District of Nebraska. The complaint seeks among other items, damages in an unspecified amount, injunctive relief, declaratory relief, and attorneys’ fees and costs. On July 31, 2015, the Company filed a partial motion to dismiss the complaint which was granted in part and denied in part on December 29, 2015. The Company answered the amended complaint on February 2, 2016. No formal discovery was conducted.
The Company participated in mediation sessions of the Ponzo and Klug cases in December 2015 and January 2016. On February 16, 2016, the Company reached an agreement in principle to settle all claims. The proposed total settlement amount is $14 million,Consolidated Financial Statements, both of which the Company is expected to pay approximately $4.1 million after insurance proceeds of up to $9.9 million. The parties executed final written settlement agreements in April 2016. Motions for preliminary approval of the settlements were submitted on May 4, 2016 before the District of Nebraska Federal Court. On December 7, 2016, the Court issued an order preliminarily approving the settlements. After a fairness hearing held on April 12, 2017, the Court entered Final Orders and Judgments approving the settlements on April 13, 2017. No appeals were filed and the settlements became final on May 15, 2017.are incorporated herein by reference.
Environmental Remediation
We have been named as a potentially responsible party with respect to a limited number of identified contaminated sites. The levels of contamination vary significantly from site to site as do the related levels of remediation efforts. Environmental liabilities are recorded based on the most probable cost, if known, or on the estimated minimum cost of remediation. Accruals are not discounted to their present value, unless the amount and timing of expenditures are fixed and reliably determinable. We accrue estimated environmental liabilities based on assumptions, which are subject to a number of factors and uncertainties. Circumstances that can affect the reliability and precision of these estimates include identification of additional sites, environmental regulations, level of clean‑upclean-up required, technologies available, number and financial condition of other contributors to remediation and the time period over which remediation may occur. We recognize changes in estimates as new remediation requirements are defined or as new information becomes available. See “Item 1A. Risk Factors” and Note 15 of the Notes to the Consolidated Financial Statements, both of which are incorporated herein by reference.
Asbestos Litigation
We are defending approximately 355550 lawsuits in different jurisdictions, alleging injury or death as a result of exposure to asbestos. The complaints in these cases typically name a large number of defendants and do not identify any of our particular products as a source of asbestos exposure. To date, discovery has failed to yield evidence of substantial exposure to any of our products and no judgments have been entered against us.
Other Litigation
Other lawsuits and proceedings or claims, arising from the ordinary course of operations, are also pending or threatened against us.
Available Information
We maintain a website with the address www.wattswater.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10‑K.10-K. Other than an investor’s own internet access charges, we make available free of charge through our website our Annual Report on Form 10‑K,10-K, quarterly reports on Form 10‑Q10-Q and current reports on Form 8‑K,8-K, and amendments to these reports, as soon as reasonably
practicable after we have electronically filed such material with, or furnished such material to, the Securities and Exchange Commission (SEC).
Information about Our Executive Officers and Directors
Set forth below are the names of our executive officers and directors, their respective ages and positions with our Company and a brief summary of their business experience for at least the past five years:
| | | | |
Executive Officers |
| Age |
| Position |
Robert J. Pagano, Jr. | | 5560
| | Chief Executive Officer, President, Chairperson of the Board and Director |
Todd A. TrappShashank Patel
| | 4762
| | Chief Financial Officer |
Jennifer L. CongdonMonica Barry
| | 4852
| | Chief Human Resources Officer |
Andre Dhawan | | 59 | | Chief Operating Officer |
Kenneth R. Lepage | | 4752
| | General Counsel, Executive Vice PresidentChief Sustainability Officer & Secretary |
Elie A. Melhem | | 5459
| | President, Asia‑Pacific,Asia-Pacific, the Middle East & Africa |
Munish NandaNon-Employee Directors
| | 53
| | President, Americas & Europe
|
Non‑Employee Directors
| | | | |
Robert L. Ayers(2)(3)
| | 72
| | Director
|
Christopher L. Conway(2)(3) | | 6267
| | Director |
Michael J. Dubose(2)(3) | | 67 | | Director |
David A. Dunbar(1)(3) | | 5661
| | Director |
Jes Munk Hansen(2)Louise K. Goeser(2)(3)
| | 5069
| | Director |
W. Craig Kissel(3)Kissel(2)(3) | | 6772
| | Chairman of the Board andLead Independent Director
|
Joseph T. Noonan | | 3641
| | Director |
Merilee Raines(1)(3) | | 6267
| | Director |
Joseph W. Reitmeier(1)(3) | | 5358
| | Director |
| (1) | (1)
| | Member of the Audit Committee |
| (2) | (2)
| | Member of the Compensation Committee |
| (3) | (3)
| | Member of the NominatingGovernance and Corporate GovernanceSustainability Committee |
Robert J. Pagano, Jr. has served as Chief Executive Officer, President and a director of ourthe Company since May 2014.2014 and as Chairperson of the Board of Directors since February 2022. He also served as interim Chief Financial Officer from October 2014 to April 2015.2015 and from April 2018 to July 2018. Mr. Pagano previously served as Senior Vice President of ITT Corporation and President, ITT Industrial Process from April 2009 to May 2014. Mr. Pagano originally joined ITT in 1997 and served in several additional management roles during his career at ITT, including as Vice
President Finance, Corporate Controller, and President of Industrial Products. ITT Corporation is a diversified manufacturer of highly engineered critical components and customized technology solutions for the energy, transportation and industrial markets. Prior to joining ITT, Mr. Pagano worked at KPMG LLP. Mr. Pagano is a Certified Public Accountant. Mr. Pagano has also served as a member of the Board of Directors of Applied Industrial Technologies, Inc. since August 2017. Applied Industrial Technologies is a distributor of bearings, power transmission products, fluid power components and other industrial supplies and provides engineering, design and systems integration for industrial and fluid power applications, as well as customized mechanical, fabricated rubber and fluid power shop services. Mr. Pagano has also served on the Board of Directors of The Water Council since October 2021. The Water Council is a non-profit organization focused on water research, education and economic development to solve critical water challenges by driving innovation in freshwater technology and advancing water stewardship.
Todd A. TrappShashank Patel has served as Chief Financial Officer of the Company since April 2015.July 2018. Mr. TrappPatel previously worked at Xylem Inc. from the time of its spin-off from ITT Corporation in 2011 until June 2018. While at Xylem, Mr. Patel served as Vice President, of Financial Planning & Analysis of Honeywell International Inc.Finance for Xylem Applied Water Systems, Dewatering and the America’s Commercial Team from July 2017 to June 2018, Integration Leader for the Sensus business from August 20132016 to June 2017, Vice President, Finance for Global Operations from April 2015. Mr. Trapp originally joined Honeywell in 2002 and served in several senior financial roles, including as2016 to July 2016, Interim Chief Financial Officer of the Airlines Business UnitXylem from November 2010July 2015 to August 2013,March 2016, and Vice President, of Business Analysis & Planning for Honeywell’s Aerospace Division from 2008 to November 2010, Director of Finance for the Transportation Systems Division from 2006 to 2008, Director of Business Analysis & Planning from 2005 to 2006, Investor Relations Manager from 2003 to 2005 and Senior Financial Analyst from 2002 to 2003. Honeywell is a Fortune 100 diversified technology and manufacturing leader, serving customers worldwide with aerospace products and services; control technologies for buildings, homes and industry; turbochargers; and performance materials. Prior to joining Honeywell, Mr. Trapp worked
as Assistant Treasurer at United Business Media Inc. and Manager of Treasury Services and Special Projects at Pearson Inc.
Jennifer L. Congdon has served as Chief Human Resources Officer since December 2016. Ms. Congdon previously served as Vice President, Human Resources, Applied Water Systems division from 2011 to July 2015. Mr. Patel also served in several leadership roles in finance, operations and Business Transformation and Continuous Improvement withengineering at ITT from 1996 until the spin-off of Xylem Inc. from August 2012 to December 2016.in 2011. Xylem is a global designer, manufacturer and equipment and service provider for water and wastewater applications. From 2010Mr. Patel has served as a member of the Board of Directors of Federal Signal Corporation since October 2021. Federal Signal Corporation designs, manufactures and supplies a suite of products and integrated solutions for municipal, governmental, industrial and commercial customers.
Monica Barry has served as Chief Human Resources Officer of the Company since October 2021. Ms. Barry previously served as Vice President, Talent Management, Organizational Development and Corporate Human Resources Business Partner with Colfax Corporation from February 2020 to August 2012,September 2021. Colfax is a global diversified technology company that provides specialty medical technologies and fabrication technology products and services. Ms. CongdonBarry served as Vice President, Global Talent, Learning & Development and Inclusion from July 2015 to January 2020 and as Vice President, Human Resources, Power TransmissionHealth Sector from August 2012 to October 2015 for Rexnord Corporation. Rexnord CorporationJohnson Matthey, PLC. Johnson Matthey is a multi-industry manufacturerprovider of catalyst systems for emission control within vehicles, products and marketerprocessing services for the efficient use and transformation of highly engineered mechanical power transmission componentsnatural resources, active pharmaceutical ingredients for a variety of treatments and water management products.drugs, and emerging opportunities in battery materials and fuel cells. From 20042010 to 2012, Ms. Barry served as Director Human Resources, North America Supply Chain & Labor Relations for The Campbell Soup Company. Prior to 2010, Ms. CongdonBarry held several human resources and operations management positions with FMC Corporation.
Andre Dhawan has served as Chief Operating Officer of increasing responsibility with Honeywell Internationalthe Company since August 2022. Mr. Dhawan previously worked at Gilbarco Veeder-Root, a subsidiary of Vontier Corporation and formerly a subsidiary of Danaher Corporation and Fortive Corporation. While at Gilbarco Veeder-Root, Mr. Dhawan served as President, Americas from July 2020 to July 2022 and President, EMEA & APAC from July 2015 to July 2020. Gilbarco Veeder-Root is a global manufacturer of fueling and convenience store equipment and technology. Mr. Dhawan also served as President, EMEA for Xylem Inc. Priorfrom 2013 to joining Honeywell, Ms. Congdon was2014 following its spin-off from ITT Corporation. From 1998 to 2012, Mr. Dhawan served in a Human Resources Manager with Cisco Systems, Inc. and worked as a human resources consultant.number of progressively more senior leadership positions within ITT Corporation.
Kenneth R. Lepage has served as General Counsel Executive Vice President and Secretary of the Company since August 2008. He2008 and as Chief Sustainability Officer since May 2021. Mr. Lepage also previously served as Executive Vice PresidentChief Human Resources Officer of Human Resourcesthe Company from April 2020 to October 2021 and from December 2009 to October 2015. Mr. Lepage originally joined ourthe Company in September 2003 as Assistant General Counsel and Assistant Secretary. Prior to joining ourthe Company, heMr. Lepage was a junior partnerJunior Partner at the law firm of Hale and Dorr LLP (now Wilmer Cutler Pickering Hale and Dorr LLP).
Elie A. Melhem has served as President, Asia‑Asia Pacific, Middle East & Africa since February 2016. Mr. Melhem originally joined ourthe Company in July 2011 as President, Asia‑Asia Pacific. Mr. Melhem was previously the Managing Director of China for Ariston Thermo Group, a global manufacturer of heating and hot water products, from 2008 to July 2011. Prior to joining Ariston, Mr. Melhem spent eleven years with ITT Industries in China where he held several management positions, including serving as President of ITT’s Residential and Commercial Water Group in China and President of ITT’s Water Technology Group in Asia.
Munish Nanda has served as President, Americas & Europe since February 2016. Mr. Nanda originally joined our Company in April 2015 as President, Americas. Mr. Nanda previously served as President13
RobertChristopher L. AyersConway has served as a director of our Company since October 2006. He was Senior Vice President of ITT Industries and President of ITT Industries’ Fluid Technology from October 1999 until September 2005. Mr. Ayers continued to be employed by ITT Industries from September 2005 until his retirement in September 2006, during which time he focused on special projects for the company. Mr. Ayers joined ITT Industries in 1998 as President of ITT Industries’ Industrial Pump Group. Before joining ITT Industries, he was President of Sulzer Industrial USA and Chief Executive Officer of Sulzer Bingham, a pump manufacturer. Mr. Ayers served as a director of T‑3 Energy Services, Inc. from August 2007 to January 2011.
Christopher L. Conway has served as a director of our Company since June 2015. Mr. Conway was President, Chief Executive Officer and Chairman of the Board of CLARCOR Inc. from December 2011 until it was acquired in February 2017. Mr. Conway is now retired. Mr. Conway originally joined CLARCOR in 2006 and served in several senior management roles prior to becoming President and Chief Executive Officer, including Chief Operating Officer, President of CLARCOR’s PECOFacet division, President of Facet USA, Inc., an affiliate of CLARCOR, and Vice President of Manufacturing of Baldwin Filters, Inc., another affiliate of CLARCOR. CLARCOR was a diversified marketer and manufacturer of mobile, industrial and environmental filtration products sold in domestic and international markets. Prior to joining CLARCOR, Mr. Conway served for two years as the Chief Operating Officer of Cortron Corporation, Inc., a manufacturing start-up based in Minneapolis, Minnesota. Mr. Conway also served for seven years in various management positions at Pentair, Inc., an international provider of products, services, and solutions for its customers' diverse needs in water and other fluids, thermal management, and equipment protection.
David A. DunbarMichael J. Dubose has served as a director of ourthe Company since December 2020. Mr. Dubose has served as President of the Fisher Healthcare Division of Thermo Fisher Scientific Inc. since March 2019. Thermo Fisher Scientific engages in the provision of analytical instruments, equipment, reagents and consumables, software and services for research, analysis, discovery, and diagnostics. Mr. Dubose previously served as Vice President of National Accounts and Cross Border Business Globally for W.W. Grainger, Inc. from 2010 to March 2019. W. W. Grainger is a leading broad line supplier of maintenance, repair and operating (MRO) products, with operations primarily in North America, Japan and Europe. Prior to this position, he served as a Regional Vice President of Staples, Inc. from 2008 to 2010. Prior to 2008, Mr. Dubose held senior management positions with Corporate Express Inc., Alliant Foodservice Inc. and Baxter International Inc.
David A. Dunbar has served as a director of the Company since February 2017. Mr. Dunbar has served as President and Chief Executive Officer and a member of the Board of Directors of Standex International Corporation since January 2014, and as Chairman since October 2016. Standex is a global, multi-industry manufacturer incomprised of five broad business
segments: Food Service Equipment Group,Electronics, Engraving, Scientific, Engineering Technologies Group, Engraving Group, Electronics Group, and Hydraulics Group.Specialty Solutions. Mr. Dunbar previously served as President of the valves and controls global business unit of Pentair Ltd. from October 2009 to December 2013. The unit was initially owned by Tyco Flow Control and Tyco Flow Control and Pentair merged in 2012. Pentair is a global provider of products and services relating to energy, water, thermal management and equipment protection. Prior to his tenure at Pentair, Mr. Dunbar held a number of senior positions at Emerson Electric Co., including President of each of the following: Emerson Process Management Europe; Machinery Health Management; and Emerson Climate Technologies Refrigeration.
Jes Munk HansenLouise K. Goeser has served as a director of ourthe Company since February 2017. Mr. Hansen wasMarch 2018. Ms. Goeser served as President and Chief Executive Officer of LEDVANCE GmbHGrupo Siemens S.A. de C.V. from July 2015 to December 2017. LEDVANCEMarch 2009 until her retirement in May 2018. In this position, Ms. Goeser was responsible for Siemens Mesoamérica, which is the general lighting lamps businessMexican, Central American and Caribbean unit of OSRAM GmbH. Mr. Hansenmultinational Siemens AG, a global engineering company operating in the industrial, energy and healthcare sectors. Ms. Goeser previously served as President and Chief Executive Officer of the classical lamps and ballast business unitFord of OSRAMMexico from January 2005 to November 2008. Prior to this position, she served as Vice President, Global Quality for Ford Motor Company from 1999 to 2005. Prior to 1999, Ms. Goeser served as General Manager, Refrigeration and Vice President, Corporate Quality at Whirlpool Corporation and held various leadership positions with Westinghouse Electric Corporation. Ms. Goeser has served as a member of the Board of Directors of MSC Industrial Direct Co., Inc. since December 2009. MSC is a North American distributor of metal working and maintenance, repair, and operations products and services. Ms. Goeser previously served as a member of the boards of directors of Talen Energy from June 2015 to JulyDecember 2016, PPL Corporation from March 2003 to June 2015, and as Chief Executive Officer of OSRAM Americas and President of OSRAM SylvaniaWitco Corporation from October 20131997 to January 2015. OSRAM is a leading global lighting manufacturer. Prior to his tenure at OSRAM, Mr. Hansen served in several senior management roles with Grundfos from 2000 to October 2013, including as Chief Executive Officer and President of Grundfos North America from 2007 to October 2013. Grundfos is a leading global manufacturer of pumps as well as motors and electronics for monitoring and controlling pumps.1999.
W. Craig Kissel has served as a director of ourthe Company since NovemberOctober 2011. Mr. Kissel has served as Lead Independent Director of our Board of Directors since February 2022 and served as the Chairperson of our Board of Directors from October 2014 to February 2022. Mr. Kissel previously was employed by American Standard Companies Inc. from 1980 until his retirement in September 2008. American Standard was a leading worldwide supplier of air conditioning and heating systems, vehicle control systems, and bathroom china and faucet‑faucet ware. During his time at American Standard, Mr. Kissel served as President of Trane Commercial Systems from 2004 to June 2008, President of WABCO Vehicle Control Systems from 1998 to 2003, President of the Trane North American Unitary Products Group from 1994 to 1997, Vice President of Trane Marketing of the North American Unitary Products Group from 1992 to 1994 and he held various other management positions at Trane from 1980 to 1991. From 2001 to 2008, Mr. Kissel served as Chairman of American Standard’s Corporate Ethics and Integrity Council, which was responsible for developing the company’s ethical business standards. Mr. Kissel also served in the U.S. Navy from 1973 to 1978. Mr. Kissel served as a director of
Chicago Bridge & Iron Company from May 2009 until its merger with McDermott International, Inc. in May 2018 and then Mr. Kissel served as a member of the board of directors of McDermott International until June 2020. McDermott International is a global provider of technology, engineering and construction solutions for the energy industry.
Joseph T. Noonanhas served as a director of Chicago Bridge & Iron Company since May 2009. Chicago Bridge & Iron Company engineers and constructs some of the world’s largest energy infrastructure projects.
Joseph T. Noonan has served as a director of our Company since May 2013. Mr. Noonan hasis currently an angel investor and advisor to consumer, software and technology-enabled companies. Mr. Noonan served as Founder and Chief Executive Officer of Linger Home, Inc., a direct-to-consumer home textile brand, from August 2018 to January 2020. From November 2013 to January 2018, Mr. Noonan served as Chief Executive Officer of Homespun Design, Inc. since November 2013. Homespun Design is a start‑up phase, an online retailer of American‑mademarketplace for American-made furniture and design founded by Mr. Noonan.home accents. Mr. Noonan previously worked as an independent digital strategy consultant from November 2012 to November 2013. Mr. Noonan was employed by Wayfair LLC from April 2008 to November 2012. During his time at Wayfair, Mr. Noonan served as Senior Director of Wayfair International from June 2011 to November 2012, Director of Category Management and Merchandising from February 2009 to June 2011 and Manager of Wayfair’s Business‑to‑BusinessBusiness-to-Business Division from April 2008 to February 2009. Wayfair is an online retailer of home furnishings, décor and home improvement products. Prior to joining Wayfair, Mr. Noonan worked as a venture capitalist at Polaris Partners and as an investment banker at Cowen & Company.
Merilee Raines has served as a director of ourthe Company since February 2011. Ms. Raines served as Chief Financial Officer of IDEXX Laboratories, Inc. from October 2003 until her retirement in May 2013. Prior to becoming Chief Financial Officer, Ms. Raines held several management positions with IDEXX Laboratories, including Corporate Vice President of Finance, Vice President of Finance and Treasurer, of Finance, Director of Finance, and Controller. IDEXX Laboratories develops, manufactures and distributes diagnostic and information technology‑based products and provides services primarily for the companion animals,animal veterinary, livestock and poultry, dairy and water quality and food safety, and human point‑of‑care diagnostics.testing industries. Ms. Raines served as a member of the Board of Directors of Affymetrix, Inc., a provider of life science and molecular diagnostic products that enable analysis of biological systems at the gene, protein and cell level, from January 2015 until it was acquired in March 2016. Ms. Raines is currentlyalso served as a member of the Board of Directors of Aratana Therapeutics, Inc., a pet therapeutics company focused on licensing, developing and commercializing biopharmaceutical products for companion animals.animals, from February 2014 until it was acquired in July 2019. Ms. Raines served as a member of the Board of Directors of Benchmark Electronics, Inc., a worldwide provider of engineering services, integrated technology solutions and electronic manufacturing services from May 2018 to June 2021. Ms. Raines has served as a member of the Board of Directors of TransMedics Group, Inc., a medical technology company providing novel systems for the preservation and transport of organs to be used for transplant, since January 2021, and as a member of the Board of Directors of Ocular Therapeutix, Inc., a biopharmaceutical company focused on the formulation, development and commercialization of innovative therapies for diseases and conditions of the eye, since September 2021.
Joseph W. Reitmeier has served as a director of ourthe Company since February 2016. Mr. Reitmeier has served as Executive Vice President & Chief Financial Officer of Lennox International Inc. since July 2012. Mr. Reitmeier had served as Vice President of Finance for the LII Commercial business segment of Lennox International from 2007 to July 2012 and as Director of Internal Audit from 2005 to 2007. Lennox International is a leading global provider of climate control solutions and designs, manufactures and markets a broad range of products for the heating, ventilation, air
conditioning and refrigeration markets. Before joining Lennox International, Mr. Reitmeier held financial leadership roles at Cummins Inc. and PolyOne Corporation.
Item 1A. RISK FACTORS.FACTORS.
Industry Risk Factors
Economic cycles, particularly those involving reduced levels of commercial and residential starts and remodeling, may have adverse effects on our revenues and operating results.
We have experienced and expect to continue to experience fluctuations in revenues and operating results due to economic and business cycles. The businesses of most of our customers, particularly plumbing and heating wholesalers and OEM manufacturers, are cyclical. Therefore, the level of our business activity has been cyclical, fluctuating with economic cycles. An economic downturn may also affect the financial stability of our customers, which could affect their ability to pay amounts owed to their vendors, including us. We also believe our level of business activity is influenced by commercial and residential starts and renovation and remodeling, which are, in turn, heavily influenced by interest rates, consumer debt levels, changes in disposable income, employment growth and consumer confidence. Credit market conditions may prevent commercial and residential builders or developers from obtaining the necessary capital to
continue existing projects or to start new projects. This may result in the delay or cancellation of orders from our customers or potential customers and may adversely affect our revenues and our ability to manage inventory levels, collect customer receivables and maintain profitability. Economic conditions and financial markets in the United States and globally have experienced significant volatility. Central banks have raised interest rates to slow inflationary conditions. The economic conditions for fiscal year 2023 are predicted to be very challenging as a result of the inflationary environment, higher interest rates, labor challenges and potential recession. We cannot predict how ongoing inflation, risk of recession, 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.If these market conditions persist, we may see diminished liquidity and credit availability, inability to access capital markets, and the bankruptcy, failure, collapse, or sale of various entities that could directly or indirectly impact our business, including certain of our customers and suppliers. If economic conditions worsen in the future, or if economic recovery were to dissipate, our revenues and profits could decrease or trigger additional goodwill, indefinite‑livedindefinite-lived intangible assets, or long‑livedlong-lived asset impairments and could have a material adverse effect on our financial condition and results of operations.
Changes in the costs of raw materials and purchased components, including imposition of or changes in tariff rates, as well as supply chain and logistics disruptions, could reduce our profit margins and adversely affect our ability to meet our customer delivery commitments.
Our products are made using various purchased components and raw materials, including primarily bronze, brass, cast iron, stainless steel, steel and plastic. Substantially all of the raw materials we require to manufacture our products are purchased from outside sources. The costs and availability of raw materials and components may be subject to change due to, among other things, interruptions in production by suppliers, changes in worldwide price, demand levels, exchange rates and imposition of or changes in tariff rates. We typically do not enter into long-term supply agreements. Our inability to obtain supplies of raw materials and purchased components for our products at favorable costs could have a material adverse effect on our business, financial condition or results of operations by decreasing our profit margins. Commodity prices, particularly copper and stainless-steel prices, have experienced tremendous volatility over the past several years, mainly due to global macroeconomic trends, including global price inflation, supply chain disruption and the war in Ukraine. Should commodity costs or purchased component costs increase substantially, we may not be able to recover such costs, through selling price increases to our customers or other product cost reductions, which would have a negative effect on our financial results. If commodity costs or purchased component costs decline, we may experience pressure from customers to reduce our selling prices. Additionally, we continue to purchase components and finished goods from international sources. In limited cases, these components or finished goods are single-sourced. The availability of components and finished goods from international sources could be adversely impacted by, among other things, interruptions in production by suppliers including due to pandemics or other public health crises, suppliers’ allocations to other purchasers, threats of wars and global geo-political instability, and new laws, tariffs or regulations.
As a global manufacturer and distributor, we are facing additional risks related to ongoing disruptions and increased costs in our supply chain and logistics. Although the global supply chain disruptions have shown signs of easing, some logistics issues and electronic component shortages remain. We are experiencing inflation across our cost of materials, labor, transportation, and energy. 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.
We face intense competition and, if we are not able to respond to competition in our markets, our revenues and profits may decrease.
Competitive pressures in our markets could adversely affect our competitive position, leading to a possible loss of market share or a decrease in prices, either of which could result in decreased revenues and profits. We encounter intense competition in all areas of our business. Additionally, we believe our customers are attempting to reduce the number of vendors from which they purchase in order to reduce the size and diversity of their inventories and their transaction costs. To remain competitive, we will need to invest continually in manufacturing, product development, marketing, customer service and support and our distribution networks. We may not have sufficient resources to continue to make such investments and we may be unable to maintain our competitive position. In addition, we may have to reduce the prices of some of our products to stay competitive, potentially resulting in a reduction in the profit margin for, and inventory valuation of, these products. Some of our competitors are based in foreign countries and have cost structures and prices in foreign currencies. Accordingly, currency fluctuations could cause our U.S. dollar costed products to be less competitive than our competitors’ products costed in other currencies.
Changes in the costs of raw materials could reduce our profit margins. Reductions or interruptions in the supply of components or finished goods from international sources could adversely affect our ability to meet our customer delivery commitments.
We require substantial amounts of raw materials, including bronze, brass, cast iron, stainless steel and plastic, and substantially all of the raw materials we require are purchased from outside sources. The costs of raw materials may be subject to change due to, among other things, interruptions in production by suppliers and changes in exchange rates and worldwide price and demand levels. We typically do not enter into long‑term supply agreements. Our inability to obtain supplies of raw materials for our products at favorable costs could have a material adverse effect on our business, financial condition or results of operations by decreasing our profit margins. The commodity markets have experienced tremendous volatility over the past several years, particularly copper. Should commodity costs increase substantially, we may not be able to recover such costs, through selling price increases to our customers or other product cost reductions, which would have a negative effect on our financial results. If commodity costs decline, we may experience pressure from customers to reduce our selling prices. Additionally, we continue to purchase increased levels of components and finished goods from international sources. In limited cases, these components or finished goods are single‑sourced. The availability of components and finished goods from international sources could be adversely impacted by, among other things, interruptions in production by suppliers, suppliers’ allocations to other purchasers and new laws, tariffs, or regulations.
We are subject to risks associated with changing technology, product innovation, manufacturing techniques, distribution channelsoperational flexibility and business continuity, which could place us at a competitive disadvantage.
The successful implementation of our business strategy requires us to continually evolve our existing products and introduce new products to meet customers’ needs in the industries we serve. Ourserve, as evidenced by our investments in our smart and connected strategy. Many of our products are characterized by stringent performance and specification requirements that mandate a high degree of manufacturing, engineering, and engineeringtechnological expertise. If we fail to meet these requirements, or if our product offerings, including our smart and connected products, are not accepted by the market, our business could be at risk. We believe that our customers rigorously evaluate their suppliers on the basis of a number of factors, including product quality, price competitiveness, technical and manufacturing expertise, development and product design capability, new product innovation, reliability and timeliness of delivery, operational flexibility, customer service and overall management. Our success will depend on our ability to continue to meet customers’ changing specifications with respect to these criteria. We cannot ensure that we will be able to address technological advances or introduce new products that may be necessary to remain competitive within our business. We cannot ensure that we can adequately protect any of our technological developments to produce a sustainable competitive advantage. Furthermore, we may be subject to business continuity risk in the event of an unexpected loss of a material facility or operation. We cannot ensure that we adequately protect against such loss.
Changes in regulations or standardsEconomic and other risks associated with international sales and operations could adversely affect our business.business and future operating results.
Since we sell and manufacture our products worldwide, our business is subject to risks associated with doing business internationally. Our business and future operating results could be harmed by a variety of factors, including:
| ● | unexpected geo-political events in foreign countries in which we operate, which could adversely affect manufacturing and our ability to fulfill customer orders; and threats of war, terrorism or governmental instability, including the war in Ukraine; |
| ● | our failure to comply with anti-corruption laws and regulations of the U.S. government and various international jurisdictions, such as the U.S. Foreign Corrupt Practices Act and the United Kingdom’s Bribery Act of 2010; |
| ● | trade protection measures and import or export duties or licensing requirements, which could increase our costs of doing business internationally; |
| ● | potentially negative consequences from changes in tax laws, which could have an adverse impact on our profits; |
| ● | difficulty in staffing and managing widespread operations, which could reduce our productivity; |
| ● | costs of compliance with differing labor regulations, especially in connection with restructuring our overseas operations; |
| ● | laws of some foreign countries, which may not protect our intellectual property rights to the same extent as the laws of the U.S.; |
| ● | unexpected changes in regulatory requirements, which may be costly and require time to implement; and |
| ● | foreign exchange rate fluctuations, which could also materially affect our reported results. A portion of our net sales and certain portions of our costs, assets and liabilities are denominated in currencies other than U.S. dollars. Approximately 34%, 38% and 37% of our net sales in 2022, 2021 and 2020, respectively, were from sales outside of the U.S. The U.S. dollar strengthened as compared to many foreign currencies, including the Euro, during fiscal 2022, which adversely affected reported revenues of our international subsidiaries. We cannot predict whether currencies such as the euro, Canadian dollar, Chinese yuan, or other currencies in which we transact 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 reported results. |
The COVID-19 pandemic has adversely affected, and may continue to adversely affect, our business, financial condition, results of operations and prospects.
The COVID-19 pandemic, the resulting global economic slowdown, and the reopening of global economies that has followed have created a number of macroeconomic challenges that have impacted our business, including volatility and uncertainty in business planning, disruptions in global supply chains, material, freight and labor inflation, shortages of and delays in obtaining certain materials and component parts, and labor shortages. New variants of COVID-19 and other future public health crises and pandemics may affect our operating and financial results in a manner that is not presently known to us or not presently considered to be a significant risk to our operations. The impact of the COVID-19 pandemic and other future public health crises and pandemics may also have the effect of heightening many of the other risks and uncertainties described in this “Risk Factors” section.
Company Risk Factors
Our business and financial performance may be adversely affected by information technology and other business disruptions.
Our productsbusiness may be impacted by disruptions, including information technology attacks or failures, threats to physical security, as well as damaging weather, fire or other acts of nature. We depend heavily on information technology infrastructure including third-party data centers and other third-party cloud services to manage our business are subjectobjectives and operations, support our customers’ requirements and protect sensitive information. Any damage to, or failure of, our systems or the third-party hosting facility or other service that we use, could severely impact our ability to conduct our business operations, attract new customers, maintain existing customers, or result in a wide variety of statutory, regulatory and industry standards and requirements. A significant change to regulatory requirements, whether federal, foreign, state or local, or to industry standards, could substantially increase manufacturing costs, impact the size and timing of demand formaterial weakness in our products, or put us at a competitive disadvantage,internal control over financial reporting, any of which could materially adversely affect our future operating results. While we have taken steps to reduce interruptions by implementing additional internal controls, network and data center resiliency, redundancy and recovery processes, these measures may be inadequate. Our information technology risks also relate to cyber security attacks and disruptions caused by potential failures in the performance of our primary enterprise resource planning (ERP) system.
Cyber security attacks, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. Cyber security may also be breached due to employee error, malfeasance, system errors or vulnerabilities, including vulnerabilities of our customers, distributors, vendors, suppliers, and their products. We have experienced certain cyber security attacks and may continue to experience them going forward, potentially with more frequency. We have a portion of our workforce working remotely, which may heighten these risks. In addition, we have designed products and services that connect to and are part of the “Internet of Things” which may also be vulnerable to cyber security breaches. As we continue to design and develop smart and connected products, services and solutions that leverage our hosted or cloud-based resources, the Internet-of-Things and other wireless/remote technologies, and include networks of distributed and interconnected devices that contain sensors, data transfers and other computing capabilities, our customers' data and systems may be subjected to harmful or illegal content or attacks, including potential cybersecurity threats. Additionally, we may not have adequately anticipated or precluded such cybersecurity threats through our product design or development. Consequently, these products, services and solutions also may be subjected to harmful or illegal content or attacks that develop vulnerabilities or critical security issues that cannot be disclosed without compromising security. If we need to address multiple vulnerabilities simultaneously, we may also need to make prioritization decisions in determining which vulnerabilities or security defects to fix first, and the timing of these fixes, which could result in compromised security. These vulnerabilities and security defects could expose us or our customers to a risk of loss, disclosure, or misuse of data; adversely affect our operating results; result in litigation, liability, or regulatory action (including under laws related to privacy, data protection, data security, network security, and consumer protection); deter customers or sellers from using our products, services and solutions; and otherwise harm our business and reputation. We have adopted measures and incurred cost to mitigate potential risks associated with information technology disruptions and cybersecurity threats; however, there is no assurance that these measures will prevent cyber-attacks or security breaches. In addition, cybersecurity and data privacy and protection laws and regulations are evolving and present increasing compliance challenges, which may increase our costs, affect our competitiveness and expose us to substantial fines or other penalties.
We also may experience unplanned system interruptions or outages of our primary ERP system as it continues to age, which may affect our ability to support and maintain the system in an effective manner. Any disruptions, delays or deficiencies related to our primary ERP system could lead to substantial business interruption, including our ability to perform routine business transactions, which could have a material adverse effect on our financial condition,results.
Given the unpredictability of the timing, nature and scope of such disruptions, we could potentially be subject to production downtimes, operational delays, other detrimental impacts on our operations or ability to provide products to our customers, the compromising of confidential or otherwise protected information, misappropriation, destruction or corruption of data, security breaches, other manipulation or improper use of our systems, networks or our products, financial losses from remedial actions, loss of business or potential liability, and/or damage to our reputation, any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.
We plan to replace our current primary ERP system with a new ERP system, and this system implementation is expected to occur in phases over the next several years. Any software implementation requires significant investment of human and financial resources and we may experience significant delays, increased costs and other difficulties. Any significant disruption or deficiency in the design and implementation of our software systems, including our new ERP, could adversely affect our ability to process orders, ship product, send invoices and track payments, fulfill contractual obligations or otherwise operate our business. While we invest significant resources in planning and project management, significant issues may arise, which could have a material adverse effect on our competitive position, results of operations, cash flow.flows or financial condition. In addition, our current primary ERP system will continue to be used over the course of the phased implementation and we may experience system interruptions or deficiencies as described in the paragraph above.
Implementation of our acquisition strategy may not be successful, which could affect our ability to increase our revenues or our profitability.
One of our strategies is to increase our revenues and profitability and expand our business through acquisitions that will provide us with complementary products and solutions and increase market share for our existing product lines.categories. We cannot be certain that we will be able to identify, acquire or profitably manage additional companies or successfully integrate such additional companies without substantial costs, delays or other problems. Also, companies acquired recently and in the future may not achieve anticipated revenues, cost synergies, profitability or cash flows that justify our investment in them. We have faced increasing competition for acquisition candidates, which has resulted in significant increases in the purchase prices of many acquisition candidates. This competition, and the resulting purchase price increases, may limit the number of acquisition opportunities available to us, possibly leading to a decrease in the rate of growth of our revenues and profitability. In addition, acquisitions may involve a number of risks, including, but not limited to:
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● | | inadequate internal controlscontrol over financial reporting and our ability to bring such controls into compliance with the requirements of Section 404 of the Sarbanes‑OxleySarbanes-Oxley Act of 2002 in a timely manner; |
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● | | adverse short‑termshort-term effects on our reported operating results; |
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● | | diversion of management’s attention; |
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● | | investigations of, or challenges to, acquisitions by competition authorities; |
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● | | loss of key personnel at acquired companies; |
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● | | unanticipated management or operational problems or legal liabilities; and |
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● | | potential goodwill, indefinite‑livedindefinite-lived intangible assets, or long‑long- lived asset impairment charges. |
We are subject to risks related to product defects, which could result in product recalls and could subject us to warranty claims in excess of our warranty provisions or which are greater than anticipated due to the unenforceability of liability limitations.
We cannot be certain that our quality controls and procedures, including the testing of raw materials and safety testing of selected finished products, will reveal latent defects in our products or the materials from which they are made, which may not become apparent until after the products have been sold into the market. We also cannot be certain that our
suppliers will always eliminate latent defects in products we purchase from them. Accordingly, there is a risk that product defects will occur, which could require a product recall. Product recalls can be expensive to implement and, if a product recall occurs during the product’s warranty period, we may be required to replace the defective product. In addition, a product recall may damage our relationship with our customers and we may lose market share with our customers. Our insurance policies may not cover the costs of a product recall.
Our standard warranties contain limits on damages and exclusions of liability for consequential damages and for misuse, improper installation, alteration, accident or mishandling while in the possession of someone other than us. We may incur additional operating expenses if our warranty provision does not reflect the actual cost of resolving issues related to defects in our products. If these additional expenses are significant, it could adversely affect our business, financial condition and results of operations.
We face risks from product liability and other lawsuits, which may adversely affect our business.
We have been and expect to continue to be subject to various product liability claims or other lawsuits, including, among others, that our products include inadequate or improper instructions for use or installation, inadequate warnings concerning the effects of the failure of our products, alleged manufacturing or design defects, or allegations that our products containedcontain asbestos. If we do not have adequate insurance or contractual indemnification, damages from these claims would have to be paid from our assets and could have a material adverse effect on our results of operations, liquidity and financial condition. Like other manufacturers and distributors of products designed to control and regulate fluids and gases, we face an inherent risk of exposure to product liability claims and other lawsuits in the event that the use of our products results in personal injury, property damage or business interruption to our customers. We cannot be certain that our products will be completely free from defect. In addition, in certain cases, we rely on third‑partythird-party manufacturers for our products or components of our products. We cannot be certain that our insurance coverage will continue to be available to us at a reasonable cost, or, if available, will be adequate to cover any such liabilities. For more information, see “ItemItem 1. Business—“Business—Product Liability, Environmental and Other Litigation Matters.”Matters” and Note 15 of the Notes to the Consolidated Financial Statements, both of which are incorporated herein by reference.
EconomicWe face risks from costs for environmental compliance and/or to address potential liabilities under environmental laws and regulations.
Our operations and facilities worldwide are subject to laws and regulations related to pollution and the protection of the environment, health and safety, including, but not limited to those governing air emissions, discharges to water, the generation, handling, storage, treatment and disposal of hazardous wastes and other risks associatedmaterials, and the remediation of contaminated sites. A failure by us to comply with internationalapplicable requirements or maintain the permits required for our operations could result in civil or criminal fines, penalties, enforcement actions, third-party claims for property damage and personal injury, requirements to clean up property or to pay for the costs of cleanup or regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, including the installation of pollution control equipment or remedial actions.
Certain environmental laws and regulations impose on present and former owners and operators of facilities and sites, and on potentially responsible parties (“PRPs”) for sites to which such parties may have sent waste for disposal, requirements to investigate and remediate contamination. Such liability can be imposed without regard to fault and, under certain circumstances, may be joint and several, resulting in one PRP being held responsible for the entire obligation. Liability may also include damages to natural resources. On occasion we are involved in such investigations and/or cleanup, and also have been and could continue to be named as a PRP in environmental matters.
The discovery of additional contamination, including at acquired facilities, the imposition of more stringent environmental, health and safety laws and regulations, including cleanup requirements, or the insolvency, or other grounds for refusing to participate, of other responsible parties could require us to incur capital expenditures or operating costs materially in excess of our accruals. Future investigations we undertake may lead to discoveries of contamination that must be remediated, and decisions to close facilities may trigger remediation requirements that are not currently applicable. We may also face liability for alleged personal injury or property damage due to exposure to hazardous substances used or disposed of by us, contained within our current or former products, or present in the soil or groundwater at our current or former facilities. We could incur significant costs in connection with such liabilities. See Item 1. “Business—Product Liability, Environmental and Other Litigation Matters” and Note 15 of the Notes to the Consolidated Financial Statements, both of which are incorporated herein by reference.
Climate change, and legislation or regulations addressing climate change, may have an adverse impact on our business and results of operations.
The impacts of climate change are highly unpredictable and vary depending on geographical location, but could include changing temperatures, droughts, water shortages, wildfires, changes in weather and rainfall patterns, changes in sea levels, and changing storm patterns and intensities. These impacts present several potential challenges to water and energy related products, such as potential degradation of water quality and changes in water conservation or energy efficiency requirements, particularly during periods of increased precipitation, flooding, or water shortages. Inclement weather and extreme weather events may have varying impacts on our business. Certain events may disrupt the operations of our customers, creating customer shutdowns that prevent or defer sales of our product, while other events may drive increased demand for our products, which may create volatility in our financial results. Additionally, these events may disrupt our own operations and the operations couldof our suppliers, including the operation of manufacturing plants, the transportation of raw materials from our suppliers, and the transportation of products to our customers, any of which may increase our costs, reduce our productivity and adversely affect our business, financial condition, results of operations and future operating results.
Since we sellprospects. Additionally, concern over climate change may result in new or increased legal and manufactureregulatory requirements to reduce or mitigate the effects of climate change, including limitations on greenhouse gas emissions, which could increase our costs or require additional investments in our facilities and equipment, and require us to make significant new disclosures regarding the climate-related impacts of our business. New legislation and regulatory requirements may also impact our customers and suppliers, which could affect demand for our products worldwide,or our ability to source key materials. In addition, our customers and suppliers may impose their own requirements with respect to climate change and greenhouse gas emissions, that may require us to incur additional costs to comply with such requirements. Any failure to comply with those requirements may also affect demand for our products or our ability to source key materials. We establish our own goals with respect to reducing our impact on the environment. Any failure to achieve our own goals, or any perception of a failure to act responsibly with respect to the environment or to effectively respond to regulatory requirements concerning climate change can lead to adverse publicity, resulting in an adverse effect on our business is subjector damage to risks associated with doing business internationally. Our business and future operating results could be harmed by a variety of factors, including:our reputation.
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| | unexpected geo‑political events in foreign countries in which we operate, which could adversely affect manufacturing and our ability to fulfill customer orders;
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| | our failure to comply with anti‑corruption laws and regulations of the U.S. government and various international jurisdictions, such as the U.S. Foreign Corrupt Practices Act and the United Kingdom’s Bribery Act of 2010;
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| | trade protection measures and import or export duties or licensing requirements, which could increase our costs of doing business internationally;
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| | potentially negative consequences from changes in tax laws, including the Tax Cuts and Jobs Act of 2017, which could have an adverse impact on our profits;
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| | difficulty in staffing and managing widespread operations, which could reduce our productivity;
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| | costs of compliance with differing labor regulations, especially in connection with restructuring our overseas operations;
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| | laws of some foreign countries, which may not protect our intellectual property rights to the same extent as the laws of the U.S.;
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| | unexpected changes in regulatory requirements, which may be costly and require time to implement; and
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| | foreign exchange rate fluctuations, which could also materially affect our reported results. A portion of our sales and certain portions of our costs, assets and liabilities are denominated in currencies other than U.S. dollars. Approximately 39% of our sales during the year ended December 31, 2017 were from sales outside of the U.S. compared to 40% and 38% for the years ended December 31, 2016 and 2015, respectively. We cannot predict whether currencies such as the euro, Canadian dollar, Chinese yuan, or other currencies in which we transact 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 reported results.
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Our ability to achieve savings through our restructuring and business transformation activities may be adversely affected by management’s ability to fully execute the plans as a result of local regulations, geo‑politicalgeo-political risk or other factors within or beyond the control of management.
We have implemented a number of restructuring and business transformation activities, which include steps that we believe are necessary to enhance the value and performance of the Company, including reducing operating costs and increasing efficiencies throughout our manufacturing, sales and distribution footprint. Factors within or beyond the control of management, or factors beyond management’s control such as local labor regulations or legal or political intervention, may change the total estimated costs or the timing of when the savings will be achieved under the plans. Further, if we are not successful in completing the restructuring or business transformation activities timely or if additional or unanticipated issues such as labor disruptions, inability to retain key personnel during and after the transformation or higher exit costs arise, our expected cost savings may not be met and our operating results could be negatively affected. In addition, our restructuring and transformation activities may place substantial demands on our management, which could lead to diversion of management’s attention from other business priorities and result in a reduced customer focus.
Our operating results could be negatively affected by changes in tax rates, the adoption of new tax legislation, or exposure to additional tax liabilities.
As a global company, we are subject to taxation in numerous countries, states and other jurisdictions. As a result, our effective rate is derived from a combination of applicable tax rates in the various places that we operate. Our future taxes could be affected by numerous factors including changes in the mix of our profitability from country to country, the results of examinations and audits of our tax filings, adjustments to our uncertain tax positions, changes in accounting for income taxes and changes in tax laws.
In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Significant judgment is required in determining our global provision for income taxes, deferred tax assets or liabilities, and in evaluating our tax positions. Although we believe our estimates are reasonable, our tax filings are regularly under audit by tax authorities and the ultimate tax outcome may differ from the amounts recorded and may materially affect our financial results in the period or periods for which such determination is made.
The U.S. federal government enacted the Tax Cuts and Jobs Act (“2017 Tax Act”) on December 22, 2017. The 2017 Tax Act has resulted in significant changes to the U.S. corporate income tax system. These changes include lowering the corporate tax rate, implementing a territorial tax system, and imposing a one-time deemed repatriation toll tax on cumulative undistributed foreign earnings.
Due to the timing of the enactment and the complexity involved applying the provisions of the 2017 Tax Act, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. As additional regulatory guidance is issued by the applicable taxing authorities, as accounting treatment is clarified, as we perform additional analysis on the application of the law, and as we refine estimates in calculating the effect, our final analysis, which will be recorded in the period completed, may be different from our current provisional amounts, which could materially affect our tax obligations and effective tax rate in the period or periods in which the adjustments are made.
We are currently a decentralized company, which presents certain risks.
We are currently a decentralized company, which sometimes places significant control and decision‑making powers in the hands of local management. This presents various risks such as the risk of being slower to identify or react to problems affecting a key business. Additionally, we are implementing in a phased approach a company‑wide initiative to standardize and upgrade our enterprise resource planning (ERP) systems. This initiative could be more challenging and costly to implement because divergent legacy systems currently exist. Further, if the ERP updates are not successful, we could incur substantial business interruption, including our ability to perform routine business transactions, which could have a material adverse effect on our financial results.
Our business and financial performance may be adversely affected by information technology and other business disruptions.
Our business may be impacted by disruptions, including information technology attacks or failures, threats to physical security, as well as damaging weather or other acts of nature, pandemics or other public health crises. Cyber security attacks, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. Cyber security may also be breached due to employee error, malfeasance, system errors or vulnerabilities, including vulnerabilities of our vendors, suppliers, and their products. We have experienced cyber security attacks and may continue to experience them going forward, potentially with more frequency. Given the unpredictability of the timing, nature and scope of such disruptions, we could potentially be subject to production downtimes, operational delays, other detrimental impacts on our operations or ability to provide products to our customers, the compromising of confidential or otherwise protected information, misappropriation, destruction or corruption of data, security breaches, other manipulation or improper use of our systems or networks, financial losses from remedial actions, loss of business or potential liability, and/or damage to our reputation, any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.
The requirements to evaluate goodwill, indefinite‑livedindefinite-lived intangible assets and long‑livedlong-lived assets for impairment may result in a write‑offwrite-off of all or a portion of our recorded amounts, which would negatively affect our operating results and financial condition.
As of December 31, 2017,2022, our balance sheet included goodwill, indefinite‑livedindefinite-lived intangible assets, amortizable intangible assets and property, plant and equipment of $550.5$592.4 million, $37.3$35.0 million, $147.9$78.7 million and $198.5$196.8 million, respectively. In lieu of amortization, we are required to perform an annual impairment review of both goodwill and indefinite‑livedindefinite-lived intangible assets. In 20172022, 2021 and 2016,2020, none of our goodwill reporting units were impaired. In 2015, we recognized a pre‑tax non‑cash goodwill impairment charge of $129.7 million. The $129.7 million charge in 2015 related to an impairment within the Europe reporting unit and represented approximately 74% of the reporting unit’s goodwill balance. In 2017, none ofor our indefinite-livedindefinite lived tradenames were impaired. In performing our annual reviews in 2016 and 2015, we recognized pre‑tax non‑cash indefinite‑lived intangible asset impairment charges of approximately $0.4 million and $0.6 million, respectively. We are also required to perform an impairment review of our long‑livedlong-lived assets if indicators of impairment exist. In 2017, 2016, and 2015,2022, we recognized pre‑tax non‑cash chargesa pre-tax non-cash impairment charge of $1.0$1.3 million $0.1related to a technology intangible asset. In 2020, we recognized a pre-tax non-cash impairment charge of $1.4 million related to a long-lived asset and $0.3 million, respectively.a technology intangible asset. These impairments were due to market value expectations indicating the carrying amounts of these assets were in excess of the fair value. In 2021 none of our long-lived assets were impaired.
There can be no assurances that future goodwill, indefinite‑livedindefinite-lived intangible assets or other long‑livedlong-lived asset impairments will not occur. We perform our annual test for indications of goodwill and indefinite‑livedindefinite-lived intangible assets impairment in the fourth quarter of our fiscal year or sooner if indicators of impairment exist.
The loss or financial instability of major customers could have an adverse effect on our results of operations.
In 2017,2022, our top ten customers accounted for approximately 21%22% of our total net sales with no one customer accounting for more than 10% of our total net sales. Our customers generally are not obligated to purchase any minimum volume of products from us and are able to terminate their relationships with us at any time. In addition, increases in the prices of our products could result in a reduction in orders from our customers. A significant reduction in orders from, or change in terms of contracts with, any significant customers could have a material adverse effect on our future results of operations.
Certain indebtednessOur credit facility may limit our ability to pay dividends, incur additional debt and make acquisitions and other investments.
Our revolving credit facility and other senior indebtedness containcontains operational and financial covenants that restrict our ability to make distributions to stockholders, incur additional debt and make acquisitions and other investments unless we satisfy certain financial tests and comply with various financial ratios. If we do not maintain compliance with these covenants, our creditors could declare a default under our revolving credit facility, or senior notes and our indebtedness could be declared immediately due and payable. Our ability to comply with the provisions of our indebtedness may be affected by changes in economic or business conditions beyond our control. Further, one of our strategies is to increase our revenues and profitability and expand our business through acquisitions. We may require capital in excess of our available cash and the unused portion of our revolving credit facility to make large acquisitions, which we would generally obtain from access to the credit markets. There can be no assurance that if a large acquisition is identified that we would have access to sufficient capital to complete such acquisition. Should we require additional debt financing above our existing credit limit, we cannot be assured such financing would be available to us or available to us on reasonable economic terms.terms
Our inability to attract and retain key personnel may adversely affect our business.
Our success depends on our ability to recruit, retain and develop highly-skilled management and key personnel. Competition for these individuals in our industry is intense and we may not be able to successfully recruit, train or retain qualified personnel, or to effectively implement successions to existing personnel. If we fail to retain and recruit the necessary personnel or arrange for successors to key personnel, our business could materially suffer.
Investment Risk Factors
One of our stockholders can exercise substantial influence over our Company.
As of January 28, 2018,December 31, 2022, Timothy P. Horne beneficially owned 6,329,2905,938,290 shares of Class B common stock. Our Class B common stock entitles its holders to ten votes for each share, and our Class A common stock entitles its holders to one vote per share. As of January 28, 2018,December 31, 2022, Timothy P. Horne beneficially owned approximately 18.6%18.0% of our outstanding shares of Class A common stock (assuming conversion of all shares of Class B common stock beneficially owned by Mr. Horne into Class A common stock) and approximately 99.2%99.7% of our outstanding shares of Class B common stock, which represents approximately 69.2%68.4% of the total outstanding voting power. As long as Mr. Horne controls shares representing at least a majority of the total voting power of our outstanding stock, Mr. Horne will be able to unilaterally determine the outcome of most stockholder votes, and other stockholders will not be able to affect the outcome of any such votes.
Conversion and subsequent sale of a significant number of shares of our Class B common stock could adversely affect the market price of our Class A common stock.
As of January 28, 2018,December 31, 2022, there were outstanding 27,690,78127,314,679 shares of our Class A common stock and 6,379,2905,958,290 shares of our Class B common stock. Shares of our Class B common stock may be converted into Class A common stock at any time on a one for one basis. Under the terms of a registration rights agreement with respect to outstanding shares of our Class B common stock, the holders of our Class B common stock have rights with respect to the registration of the underlying Class A common stock. Under these registration rights, the holders of Class B common stock may require, on
up to two occasions that we register their shares for public resale. If we are eligible to use Form S‑3S-3 or a similar short‑formshort-form registration statement, the holders of Class B common stock may require that we register their shares for public resale up to two times per year. If we elect to register any shares of Class A common stock for any public offering, the holders of Class B common stock are entitled to include shares of Class A common stock into which such shares of Class B common stock may be converted in such registration. However, we may reduce the number of shares proposed to be registered in view of market conditions. We will pay all expenses in connection with any registration, other than underwriting discounts and commissions. If all of the available registered shares are sold into the public market the trading price of our Class A common stock could decline.
General Risk Factors
Changes in regulations or standards could adversely affect our business.
Our products and business are subject to a wide variety of statutory, regulatory and industry standards and requirements. A significant change to regulatory requirements, whether federal, foreign, state or local, or to industry standards, could substantially increase manufacturing costs, impact the size and timing of demand for our products, or put us at a competitive disadvantage, any of which could harm our business and have a material adverse effect on our financial condition, results of operations and cash flow.
Our operating results could be negatively affected by changes in tax rates, the adoption of new tax legislation, or exposure to additional tax liabilities.
As a global company, we are subject to taxation in numerous countries, states and other jurisdictions. As a result, our effective rate is derived from a combination of applicable tax rates in the various places that we operate. Our future taxes could be affected by numerous factors, including changes in the mix of our profitability from country to country, the results of examinations and audits of our tax filings, adjustments to our uncertain tax positions, changes in accounting for income taxes and changes in tax laws.
In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Significant judgment is required in determining our global provision for income taxes, deferred tax assets or liabilities, and in evaluating our tax positions. Our tax filings are regularly under audit by tax authorities and the ultimate tax outcome may differ from the amounts recorded and may materially affect our financial results in the period or periods for which such determination is made.
In October 2021, the Organization for Economic Co-operation and Development (“OECD”) issued model rules for a new global minimum tax framework. In 2022, several countries have announced the intention to bring these into effect starting from 2024. While the overarching framework has been published, we are awaiting legislation and detailed guidance to assess the full implications.
The U.S. enacted the Inflation Reduction Act of 2022 ("IRA") in August 2022, which, among other provisions, creates a new corporate alternative minimum tax (CAMT) of at least 15% for certain large corporations that have at least an average of $1 billion in adjusted financial statement income over a consecutive three-year period effective in tax years beginning after December 31, 2022. The IRA also includes a 1% excise tax on new corporate stock repurchases beginning in 2023. We do not expect to meet the CAMT threshold in the near term nor expect the IRA to have a material impact on our financial statements. However, it is possible that the U.S. Congress could advance other tax legislation proposals in the future that could have a material impact on our financial statements and we will continue to evaluate the impact of the IRA as additional information becomes available.
Item 1B. UNRESOLVED STAFF COMMENTS.
None.
Item 2. PROPERTIES.
We maintain 3132 principal manufacturing, warehouse and distribution centers worldwide, including our corporate headquarters located in North Andover, Massachusetts. Additionally, we maintain numerous sales offices and other smaller manufacturing facilities and warehouses. The principal properties in each of our three geographic segments and their location, principal use and ownership status are set forth below:
Americas:
Americas:
| | | | |
Location |
| Principal Use |
| Owned/Leased |
North Andover, MA | | Corporate Headquarters | | Owned |
Burlington, ON, Canada | | Distribution Center | | Owned |
Export, PA | | Manufacturing | | Owned |
Franklin, NH | | Manufacturing/Distribution | | Owned |
St. Pauls, NC | | Manufacturing | | Owned |
San Antonio, TX | | Warehouse/Distribution | | Owned |
Spindale, NC | | Distribution Center | | Owned |
Fort Worth, TX | | Manufacturing/Distribution | | OwnedLeased
|
San Antonio, TXFort Myers, FL
| | Warehouse/Manufacturing/Distribution
| | Owned
|
Spindale, NC
| | Distribution Center
| | OwnedLeased
|
Blauvelt, NY | | Manufacturing/Distribution | | Leased |
Peoria, AZ
| | Manufacturing/Distribution
| | Leased
|
Reno,Sparks, NV
| | Distribution Center | | Leased |
Vernon, BC, Canada | | Manufacturing/Distribution | | Leased |
Woodland, CA | | Manufacturing | | Leased |
Groveport, OH | | Distribution Center | | Leased |
Europe:
Europe
| | | | |
Location |
| Principal Use |
| Owned/Leased |
Biassono, Italy | | Manufacturing/Distribution | | Owned |
Hautvillers, France | | Manufacturing | | Owned |
Landau, Germany | | Manufacturing/Distribution | | Owned
|
Mery, France
| | Manufacturing
| | Owned |
Plovdiv, Bulgaria | | Manufacturing | | Owned |
Sorgues, France | | Distribution Center | | Owned |
Vildbjerg, Denmark | | Manufacturing/Distribution | | Owned |
Virey‑le‑Grand,Virey-le-Grand, France
| | Manufacturing/Distribution | | Owned |
Amsterdam, Netherlands
| | Europe Headquarters
| | Leased
|
Gardolo, Italy
| | Manufacturing
| | Leased
|
Monastir, Tunisia
| | Manufacturing
| | Leased
|
Rosières, France | | Manufacturing/Distribution | | Owned |
Gardolo, Italy | | Manufacturing | | Owned |
Monastir, Tunisia | | Manufacturing | | Leased |
St. Neots, United Kingdom | | Manufacturing/Distribution
| | Leased |
Asia‑Pacific,Asia-Pacific, Middle East, and Africa:
| | | | |
Location |
| Principal Use |
| Owned/Leased |
Ningbo, Beilun, China | | Manufacturing | | Owned |
Shanghai, China | | Asia‑PacificAPMEA Headquarters
| | Leased |
Ningbo, Beilun District, China | | Distribution Center | | Leased |
Auckland, New Zealand | | Manufacturing/Distribution | | Leased |
Dubai, United Arab Emirates | | Sales Office/Distribution | | Leased |
Perth, Australia | | Distribution | | Leased |
Melbourne, Australia | | Distribution | | Leased |
Certain of our facilities are subject to capital lease arrangements and collateral assignments under loan agreements with long‑term lenders. In general, weWe believe that our properties, including machinery, tools and equipment, are in good condition, well maintained and adequate and suitable for their intended uses.
Item 3. LEGAL PROCEEDINGS.
We are from time to time involved in various legal and administrative proceedings. See Item 1. “Business—Product Liability, Environmental and Other Litigation Matters,” and Note 15 of the Notes to Consolidated Financial Statements, both of which are incorporated herein by reference.
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The following table sets forth the high and low sales prices of ourOur Class A common stock is traded on the New York Stock Exchange during 2017 and 2016 and cash dividends declared per share.under the trading symbol “WTS.”
| | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | |
| | High | | Low | | Dividend | | High | | Low | | Dividend | |
First Quarter | | $ | 67.70 | | $ | 60.10 | | $ | 0.18 | | $ | 55.70 | | $ | 44.94 | | $ | 0.17 | |
Second Quarter | | | 65.90 | | | 59.35 | | | 0.19 | | | 60.55 | | | 53.95 | | | 0.18 | |
Third Quarter | | | 70.65 | | | 60.70 | | | 0.19 | | | 65.90 | | | 57.11 | | | 0.18 | |
Fourth Quarter | | | 77.55 | | | 66.80 | | | 0.19 | | | 70.60 | | | 59.25 | | | 0.18 | |
There is no established public trading market for our Class B common stock, which is held by members of the Horne family. The principal holders of such stock are subject to restrictions on transfer with respect to their shares. Each share of our Class B common stock (10 votes per share) is convertible into one share of Class A common stock (1 vote per share).
On February 8, 2018, we declared a quarterly dividendThe number of nineteen cents ($0.19) per share on each outstanding sharerecord holders of our Class A common stock andas of January 22, 2023 was 61. The number of record holders of our Class B common stock.stock as of January 22, 2023 was 10.
Aggregate common stock dividend payments in 20172022 were $25.9$39.5 million, which consisted of $21.1$32.5 million and $4.8$7.0 million for Class A shares and Class B shares, respectively. Aggregate common stock dividend payments in 20162021 were $24.5$34.3 million, which consisted of $20.0$28.2 million and $4.5$6.1 million for Class A shares and Class B shares, respectively. While we presently intend to continue to pay comparable cash dividends, the payment of future cash dividends depends upon the Board of Directors’ assessment of our earnings, financial condition, capital requirements and other factors.
The number of record holders of our Class A common stock as of January 30, 2018 was 160. The number of record holders of our Class B common stock as of January 30, 2018 was 10.
We satisfy the minimum withholding tax obligation due upon the vesting of shares of restricted stock and the conversion of deferred stock awards and 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 quarter ended December 31, 2017.2022.
| | | | | | | | | | |
| | 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 | |
October 2, 2017 - October 29, 2017 | | 101 | | $ | 67.60 | | — | | — | |
October 30, 2017 - November 26, 2017 | | — | | $ | — | | — | | — | |
November 27, 2017 - December 31, 2017 | | 497 | | $ | 73.99 | | — | | — | |
Total | | 598 | | $ | 70.80 | | — | | — | |
| | | | | | | | | |
| | 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 |
September 26, 2022 – October 23, 2022 | | 293 | | $ | 129.82 | | — | | — |
October 24, 2022 – November 20, 2022 | | 200 | | $ | 143.37 | | — | | — |
November 21, 2022 – December 31, 2022 | | 298 | | $ | 146.23 | | — | | — |
Total | | 791 | | $ | 139.43 | | — | | — |
The following table includes information with respect to repurchases of our Class A common stock during the three‑monththree-month period ended December 31, 20172022 under our 2019 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 |
September 26, 2022 – October 23, 2022 | | 10,004 | | $ | 127.00 | | 10,004 | | $ | 31,036,028 |
October 24, 2022 – November 20, 2022 | | 8,706 | | $ | 142.60 | | 8,706 | | $ | 29,794,519 |
November 21, 2022 – December 31, 2022 | | 12,067 | | $ | 151.37 | | 12,067 | | $ | 27,967,967 |
Total | | 30,777 | | $ | 140.94 | | 30,777 | | | |
| | | | | | | | | | | |
| | Issuer Purchases of Equity Securities | |
| | | | | | | | | (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 | |
October 2, 2017 - October 29, 2017 | | 2,270 | | $ | 69.96 | | 2,270 | | $ | 42,575,148 | |
October 30, 2017 - November 26, 2017 | | 20,407 | | $ | 70.29 | | 20,407 | | $ | 41,140,737 | |
November 27, 2017 - December 31, 2017 | | 40,754 | | $ | 74.69 | | 40,754 | | $ | 37,779,401 | |
Total | | 63,431 | | $ | 73.10 | | 63,431 | | | | |
| (1) | (1)
| | On July 27, 2015,February 7, 2019, we announced that the Board of Directors authorizedhad approved a stock repurchase program of up to $100$150 million of the Company’sour 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. |
Performance Graph
Set forth below is a line graph comparing the cumulative total shareholder return on our Class A common stock for the last five years with the cumulative return of companies on the Standard & Poor’s 500 Stock Index and the Russell 2000 Index. We chose the Russell 2000 Index because it represents companies with a market capitalization similar to that of
Watts Water. The graph assumes that the value of the investment in our Class A common stock and each index was $100 at December 31, 20122017 and that all dividends were reinvested.
*$100 invested on 12/31/12 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Cumulative Total Return
| | | | | | | | | | | | | | |
| | 12/31/12 | | 12/31/13 | | 12/31/14 | | 12/31/15 | | 12/31/16 | | 12/31/17 | | |
| | | | | | | | | | | | | |
| | | 12/31/17 | | 12/31/18 | | 12/31/19 | | 12/31/20 | | 12/31/21 | | 12/31/22 |
Watts Water Technologies, Inc. | | 100.00 | | 145.33 | | 150.49 | | 119.23 | | 158.37 | | 186.62 | | | 100.00 | | 85.88 | | 134.14 | | 165.20 | | 265.38 | | 201.49 |
S & P 500 | | 100.00 | | 132.39 | | 150.51 | | 152.59 | | 170.84 | | 208.14 | | | 100.00 | | 95.62 | | 125.72 | | 148.85 | | 191.58 | | 156.89 |
Russell 2000 | | 100.00 | | 138.82 | | 145.62 | | 139.19 | | 168.85 | | 193.58 | | | 100.00 | | 88.99 | | 111.70 | | 134.00 | | 153.85 | | 122.41 |
The above Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
Item 6. [Reserved]
Item 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below should be read in conjunction with our consolidated financial statements, related Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein.
FIVE‑YEAR FINANCIAL SUMMARY
(Amounts in millions, except per share and cash dividend information)
| | | | | | | | | | | | | | | | |
| | Year Ended | | Year Ended | | Year Ended | | Year Ended | | Year Ended | |
| | 12/31/17(1) | | 12/31/16(2) | | 12/31/15(3) | | 12/31/14(4) | | 12/31/13(5)(6) | |
Statement of operations data: | | | | | | | | | | | | | | | | |
Net sales | | $ | 1,456.7 | | $ | 1,398.4 | | $ | 1,467.7 | | $ | 1,513.7 | | $ | 1,473.5 | |
Net income (loss) from continuing operations | | | 73.1 | | | 84.2 | | | (112.9) | | | 50.3 | | | 60.9 | |
Loss from discontinued operations, net of taxes | | | — | | | — | | | — | | | — | | | (2.3) | |
Net income (loss) | | | 73.1 | | | 84.2 | | | (112.9) | | | 50.3 | | | 58.6 | |
DILUTED EPS | | | | | | | | | | | | | | | | |
Income (loss) per share: | | | | | | | | | | | | | | | | |
Continuing operations | | | 2.12 | | | 2.44 | | | (3.24) | | | 1.42 | | | 1.71 | |
Discontinued operations | | | — | | | — | | | — | | | — | | | (0.07) | |
NET INCOME (LOSS) | | | 2.12 | | | 2.44 | | | (3.24) | | | 1.42 | | | 1.65 | |
Cash dividends declared per common share | | $ | 0.75 | | $ | 0.71 | | $ | 0.66 | | $ | 0.58 | | $ | 0.50 | |
Balance sheet data (at year end): | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,736.5 | | $ | 1,763.2 | | $ | 1,692.8 | | $ | 1,948.0 | | $ | 1,740.2 | |
Long-term debt, net of current portion | | | 474.6 | | | 511.3 | | | 576.2 | | | 577.8 | | | 305.5 | |
| (1)
| | For the year ended December 31, 2017, net income includes the following pre-tax costs: long-lived asset impairment charges of $1.0 million, deployment costs related to the Americas and Europe transformation programs of $2.9 million, restructuring charges of $6.8 million, and acquisition costs of $0.2 million. The net after‑tax cost of these items was $7.3 million. Net income also includes a tax charge of $25.1 million related to the impact of the 2017 Tax Act.
|
| (2)
| | For the year ended December 31, 2016, net income includes the following net pre‑tax costs: long-lived asset impairment charges of $0.5 million, acquisition costs of $2.0 million, purchase accounting adjustments of $2.0 million, restructuring charges of $4.7 million, deployment costs related to the Americas, APMEA, and Europe transformation programs of $14.2 million, and debt issuance costs of $0.3 million. Net income also includes a pre-tax gain of $8.7 million related to the disposition of a subsidiary in China. The net after‑tax cost of these items was $6.2 million.
|
| (3)
| | For the year ended December 31, 2015, net loss includes the following net pre‑tax costs: goodwill and other long‑lived asset impairment of $130.5 million, acquisition related costs of $1.6 million, restructuring related costs of $21.4 million, Americas, APMEA, and Europe transformation deployment costs of $14.3 million, a $3.5 million charge for a settlement in principle relating to two class action lawsuits, a $2.5 million charge related to the resolution of certain product liability legacy claims for non-core products which we have exited, and long‑term obligations settlements, including our pension plan and supplemental employee retirement plan obligations of $64.7 million. The net after‑tax cost of these items was $197.3 million.
|
| (4)
| | For the year ended December 31, 2014, net income includes the following net pre‑tax costs: goodwill and other long‑lived asset impairment of $14.2 million, acquisition related costs of $5.8 million, restructuring and severance related costs of $16.4 million, Europe and Americas transformation deployment costs of $9.3 million, and customs settlement costs of $1.9 million. The net after‑tax cost of these items was $38.5 million.
|
| (5)
| | For the year ended December 31, 2013, net income from continuing operations includes the following net pre‑tax costs: legal costs of $15.3 million, restructuring charges of $8.7 million, goodwill and other long‑lived asset impairment of $2.3 million (of which $1.1 million is recorded in cost of goods sold), Europe transformation deployment costs of $1.2 million, earn‑out adjustments of $0.9 million, acceleration of executive share based compensation expense of $0.9 million and an adjustment to the disposal of the business related to the sale of Tianjin
|
Watts Valve Company Ltd. (TWVC) of $0.6 million. The net after‑tax cost of these items was $18.3 million.
|
| (6)
| | In August 2013, we disposed of 100% of the stock of Austroflex. Results from operations and a loss on disposal are recorded in discontinued operations for 2013.
|
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
Overview
We are a leading supplier of products and solutions that conserve watermanage and manageconserve the flow of fluids and energy into, through and out of buildings in the commercial, industrial and residential and commercial markets ofin the Americas, Europe and APMEA.Asia-Pacific, Middle East and Africa (“APMEA”). For over 140nearly 150 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 linescategories include:
| ·
● | | Residential & commercial flow control and protection products—includes products typically sold into plumbing and hot water applications such as backflow preventers, water pressure regulators, temperature and pressure relief valves, and thermostatic mixing valves. valves and leak detection and protection products. Many of our flow control and protection products are now smart and connected warning of leaks and floods with alerts to Business Management Systems (BMS) and/or personal devices giving our customers greater insight into their water management and the ability to shut off the water supply to avoid waste and mitigate damage. |
| ·
● | | HVAC & gas products—includes commercial high‑efficiencyhigh-efficiency boilers, water heaters and heating solutions, hydronic and electric heating systems for under‑floorunder-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. Most of our HVAC products feature advanced controls enabling customers to easily connect to the Building Automation System for better monitoring, control and operation. HVAC is an acronym for heating, ventilation and air conditioning. |
| ·
● | | Drainage & water re‑usere-use products—includes drainage products and engineered rain water harvesting solutions for commercial, industrial, marine and residential applications. applications, including connected roof drain systems. |
| ·
● | | Water quality products—includes point‑of‑usepoint-of-use and point‑of‑entrypoint-of-entry water filtration, monitoring, conditioning and scale prevention systems for both commercial, marine and residential applications. |
Our business is reported in three geographic segments: Americas, Europe, and APMEA. We distribute our products through four primary distribution channels: wholesale, original equipment manufacturers (OEMs), specialty, and do-it-yourself (DIY). In September 2015, we divested a substantial portion of our DIY business in the Americas, which reduced the significance of DIY as a distribution channel for our products in 2017 and 2016.
Prior to 2017, our Europe segment was formerly referred to as EMEA (Europe, Middle East, and Africa) and our APMEA segment was formerly referred to as Asia-Pacific. As of January 1, 2017, we began reporting the results of Watts Industries Middle East, an indirect, wholly owned subsidiary, within our APMEA segment to align with internal operating changes. These results had previously been reported within our former EMEA segment. This change does not affect our reportable segments but represents only a change in composition that better aligns with the structure of our internal organization. The 2016 and 2015 results by segment have been retrospectively revised for comparative purposes.
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 new 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; and a healthy economic environment.codes. We have completed 1012 acquisitions in the last decade.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, including smart and connected technologies, advanced production capabilities or complementary solution offerings.
We believe that sustainability guides and permeates every aspect of our business, including our product development strategy and design, and how we structure our operations. Our innovation strategy is focused on differentiated products and solutions that will provide greater opportunity to distinguish ourselves in the market place. Conversely, we wantmarketplace, while at the same time creating innovative products and smart solutions to protect, control, and conserve critical resources, and help our customers with their sustainability efforts through the use of our products. 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. Together with our commissioned manufacturers’ representatives, weWe 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 advantage of the resulting demand for compliant products. We believe that the 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.us.
Market activity levels have generally recovered from the COVID-19 pandemic. In 2017, 2022, we successfully completedexperienced some disruptions to our transformation programsbusiness in China due to government-mandated lockdowns, though these shutdowns and realizedrestrictions did not have a material adverse effect on our operations or financial results. We continue to focus on the benefitshealth and safety of our product portfolio rationalization, footprint optimization,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 safety requirements.
The global supply chain disruptions have shown signs of easing; however, some logistics issues and electronic component shortages remain. We are experiencing inflation across our cost of materials, labor, transportation, and energy. 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. While we believe we were able to effectively manage these disruptions during 2022 by various measures, including raising prices to address cost inflation and taking certain cost reduction actions, we cannot predict how ongoing inflation, risk of recession, the war in Ukraine, supply chain disruptions and related costs may impact our ability to service our customers or the potential impact on our profit margins going forward.
We expect that economic conditions in 2023 will be challenging. Higher interest rates and inflation have significantly slowed new residential construction and global sourcing initiatives, while simultaneously reinvestingGDP is declining, which could impact repair and replacement activity and may reduce the demand for our products. Non-residential new construction may be more resilient, at least through the first half of 2023. Starting in the business.third quarter of 2022 and continuing into the fourth quarter of 2022 we experienced some channel destocking in Europe. We continuedalso saw some destocking In North America in the fourth quarter of 2022 by customers in the residential OEM channel. Our expectation is that it may continue in the first quarter of 2023 and we will monitor this as the year progresses. Despite these anticipated challenges, we continue to drive commercialinvest in our business, including new products, our smart and operational excellence.connected solutions and our growth and productivity initiatives. We completed the integration of PVI Industries, LLC (“PVI”) to our portfolio during the year. We continued to streamline our product portfolio across the regions as we focusremain focused on our core product linescustomers’ needs and rationalize certain low-margin, non-core products. Our financial performance in 2017 was solid, driven by growth in the Americas and Europe segments and realization ofexecuting on our productivity and transformation savings.long-term strategy.
The 2017 Tax Act has resulted in significant changesDue to the U.S. corporate income tax systemabove circumstances and was enacted on December 22, 2017. These changes include a federal statutory rate reduction from 35% to 21% effective on January 1, 2018, the elimination or reductionas described generally in this Form 10-K, our results of certain domestic deductions and credits, and limitations on the deductibility of interest expense and executive compensation. The 2017 Tax Act transitions international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures on non-U.S. earnings. The 2017 Tax Act also includes a one-time mandatory deemed repatriation tax on accumulated foreign subsidiaries' previously untaxed foreign earnings (“Toll Tax”).
Changes in tax rates and tax laws are accountedoperations for in the period of enactment and deferred tax assets and liabilities are measured at the enacted tax rate. Therefore, during the year ended December 31, 2017, we recorded a charge totaling $25.1 million related to our current estimate2022 are not necessarily indicative of future results. Management cannot predict the full impact of the provisionsuncertainties discussed above. For further information regarding the impact on the Company, see Item 1A, “Risk Factors.”
Financial Overview
We delivered record results for 2022 while facing unprecedented inflationary pressures and supply chain disruptions. Net sales for 2022 increased 9.4%, or $170.3 million, on a reported basis and 13.0%, or $235.6 million, on an organic basis, compared to 2021, primarily driven by incremental price across all of our operating segments. The reported sales increase included the unfavorable impact of foreign exchange of 3.9%, or $71.5 million, primarily driven by the appreciation of the 2017 Tax Act, including an estimated $23.3 million expense underU.S. dollar against the Toll Tax. The Toll Tax will be paid over an eight-year period, starting in 2018,euro and will not accrue interest. The provisions of the 2017 Tax Act allows us more flexibility in deploying our global cash resources as we continue to drive a balanced capital allocation strategy. We expect that the 2017 Tax Act will have a positive effect on our income tax rate in 2018.
Overall, reported sales for 2017 increased 4.2%, or $58.3 million, primarily related to an increase inChinese yuan, and acquired sales of $47.0 million, or 3.3%, relating to the acquisitions of PVI and Watts Korea, an increase in organic sales of $7.0 million, or 0.5%, and an increase in sales due to foreign exchange of $7.8 million, or 0.7%.This increase was partially offset by a decrease in sales of $3.5 million related to product lines we divested by the first quarter of 2016 in the Americas segment as part of our Americas transformation program. Compared to 2016, reported sales as a percentage of segment sales in the Americas and Europe increased by 5.6% and 2.1%, respectively, while reported sales in APMEA declined by 2.6%. As a percentage of segment sales, organic sales in the Americas and Europe increased 0.8% and 0.6% respectively, while organic sales in APMEA declined by 4.6% compared to 2016. The increase in organic sales in the Americas was primarily driven by increased sales in our valve, HVAC, and drainage products, partially offset by declines in our tankless water heater and condensing boiler products. In Europe, the increase was primarily driven by our drains and electronics products, offset by a decline in our plumbing products due to the impact of product rationalization. The decline in APMEA sales primarily related to the impact of product rationalization, partially offset by increased demand for our underfloor heating products and commercial valves and growth in Korea. Operating income of $162.3 million increased by $17.3 million, or 11.9% compared to 2016. This increase is driven by incremental transformation and productivity savings, lower transformation costs, the acquisition of PVI, and higher sales volume.
$6.1 million. Organic sales is a non-GAAP financial measure that excludes the impacts of acquisitions, divestitures and foreign exchange from year-over-year comparisons. Divested sales includes the exit of our non-core products through sale and through the discontinuation of product lines. Management believes reporting organic sales growth provides useful information to investors, potential investors and others, because it allows for a more complete understanding ofadditional 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 $315.0 million increased by $75.4 million, or 31.5%, in 2022 compared to 2021.
This increase was primarily driven by incremental price, savings from productivity and restructuring actions, partially offset by inflation and incremental investments.
In December 2017, we concluded our transformation program relating to our AmericasManagement’s discussion and APMEA businesses, which primarily involved the exit and discontinuation of low-margin, non-core product lines, enhancing global sourcing capabilities and the reduction of the square footageanalysis of our Americas facilities. The transformation program was approved by our Boardfinancial condition, results of Directors in 2015. Over the course of the program, we eliminated approximately $165 million of the combined Americasoperations and APMEA net sales, primarily within our do-it-yourself (DIY) distribution channel. As part of the exit of non-core product lines, we entered into an agreement to sell an operating subsidiary in China that was dedicated exclusively to the manufacturing of products being discontinued. The sale was finalized in the second quarter of 2016, and we recognized a pre-tax gain of $8.7 million and received proceeds from the sale of $8.4 million. The program also involved the consolidation of manufacturing facilities and distribution center network optimization, reducing the square footage of our Americas facilities net operating footprint by approximately 30%. The footprint focus of the program was designed to improve the utilization of our remaining facilities, better leverage our cost structure, reduce working capital, and improve execution of customer delivery requirements.
The total pre-tax cost for our transformation program related to our Americas and APMEA businesses was $59.8 million, including restructuring costs of $18.1 million, goodwill and intangible asset impairments of $13.5 million and other transformation and deployment costs of approximately $28.3 million. The other transformation and deployment costs included consulting and project management fees, inventory write-offs, and other associated costs. The program originally included estimated pre-tax charges totaling approximately $65 million. In the third quarter of 2017, the total expected costs of the planned actions were reduced to approximately $60 million, primarily related to reduced expected facility exit costs and reduced other transformation and deployment costs. All costs associated with the Americas and APMEA transformation program were incurredcash flows as of and for the year ended December 31, 2017. Refer to Note 32020 can be found in Item 7 of Part II, “Management’s Discussion and Note 4Analysis of the Notes to Consolidated Financial StatementsCondition and Results of Operations,” in thisour Annual Report on Form 10-K for further details.the year ended December 31, 2021.
Acquisitions and DisposalsRecent Developments
On November 2, 2016, we acquired 100% of the shares of PVI Riverside Holdings, Inc., the parent company of PVI. The aggregate purchase price, including the final working capital adjustment, was approximately $79.1 million. PVI is a leading manufacturer of commercial stainless steel water heating equipment, focused on the high capacity market in North America and is based in Fort Worth, Texas. PVI’s water heater product offering complements AERCO’s boiler products, allowing us to address customers’ heating and hot water requirements.
On February 26, 2016, we acquired an additional 50% of the outstanding shares of Watts Korea for an aggregate purchase price of approximately $4 million. Prior to February 26, 2016, the Company held a 40% interest in Watts Korea, which operated as a joint venture. We acquired the remaining 10% ownership in the fourth quarter of 2016 and now own 100% of Watts Korea. Watts Korea strengthens our strategic vision to expand solutions sales into the Korean market. We accounted for the transaction as a step acquisition within a business combination. We recognized a $1.7 million pre-tax gain on the previously held 40% ownership interest in the first quarter of 2016.
On September 22, 2015, we signed an agreement to sell an operating subsidiary in China that was dedicated to the production of non-core products. The sale was finalized in the second quarter of 2016, and we received total proceeds of approximately $8.4 million from the sale as of the fourth quarter of 2016. We recognized a pre-tax gain of $8.7 million, which includes a non-cash accumulated currency translation adjustment of $7.3 million. The net after-tax gain was approximately $8.3 million.
On November 30, 2015, we acquired 80% of the outstanding shares of Apex Valves Limited (“Apex”). Apex specializes in the design and manufacturing of control valves for low and high pressure hot water and filtration systems. Apex also produces an extensive range of float and reservoir valves for the agricultural industry. The aggregate purchase price was approximately $20.4 million and we recorded a long-term liability of $5.5 million as the estimate of the acquisition date fair value on the contractual call option to purchase the remaining 20% within three years of closing. Apex manufactures high‑end valves for the New Zealand market that we believe could be introduced in the China market and other countries in South East Asia. We acquired an additional 10% ownership in the first quarter of 2017 for approximately $2.9 million and now own 90% of the outstanding shares of Apex. We maintain a current liability of approximately $2.9 million for the estimated fair value on the remaining 10% contractual call option, which is expected to be exercised in 2018.
Recent Developments
On February 8, 2018,6, 2023, we declared a quarterly dividend of nineteenthirty cents ($0.19)0.30) per share on each outstanding share of Class A common stock and Class B common stock payable on March 16, 201815, 2023 to stockholders of record on March 2, 2018.1, 2023.
Results of Operations
Year Ended December 31, 20172022 Compared to Year Ended December 31, 20162021
Net Sales. Our business is reported in three geographic segments: Americas, Europe and APMEA. Our net sales in each of these segments for the years ended December 31, 20172022 and December 31, 20162021 were as follows:
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | Year Ended | | | | | % Change to | |
| | | December 31, 2022 | | December 31, 2021 | | | | | Consolidated | |
| | | Net Sales | | % Sales | | Net Sales | | % Sales | | Change | | Net Sales | |
| | | | | | | | | | | | | | | | | |
| | Year Ended | | Year Ended | | | | | % Change to | | |
| | December 31, 2017 | | December 31, 2016 | | | | | Consolidated | | |
| | Net Sales | | % Sales | | Net Sales | | % Sales | | Change | | Net Sales | | |
| | (dollars in millions) | | |
| | | (dollars in millions) | |
Americas | | $ | 951.9 | | 65.4 | % | $ | 900.9 | | 64.5 | % | $ | 51.0 | | 3.6 | % | | $ | 1,390.0 | | 70.2 | % | $ | 1,207.2 | | 66.7 | % | $ | 182.8 | | 10.1 | % |
Europe | | | 440.3 | | 30.2 | | | 431.3 | | 30.8 | | | 9.0 | | 0.7 | | | | 499.1 | | 25.2 | | | 517.4 | | 28.6 | | | (18.3) | | (1.0) | |
APMEA | | | 64.5 | | 4.4 | | | 66.2 | | 4.7 | | | (1.7) | | (0.1) | | | | 90.4 | | 4.6 | | | 84.6 | | 4.7 | | | 5.8 | | 0.3 | |
Total | | $ | 1,456.7 | | 100.0 | % | $ | 1,398.4 | | 100.0 | % | $ | 58.3 | | 4.2 | % | | $ | 1,979.5 | | 100.0 | % | $ | 1,809.2 | | 100.0 | % | $ | 170.3 | | 9.4 | % |
The change in net sales was attributable to the following:
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| | | | | | | | | | | | | | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | 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) | | |
| | | (dollars in millions) | |
Organic | | $ | 7.4 | | $ | 2.5 | | $ | (2.9) | | $ | 7.0 | | 0.5 | % | 0.2 | % | (0.2) | % | 0.5 | % | 0.8 | % | 0.6 | % | (4.6) | % | | $ | 180.1 | | $ | 44.1 | | $ | 11.4 | | $ | 235.6 | | 10.0 | % | 2.4 | % | 0.6 | % | 13.0 | % | 14.9 | % | 8.5 | % | 13.5 | % |
Foreign exchange | | | 1.4 | | | 6.5 | | | (0.1) | | | 7.8 | | 0.1 | | 0.5 | | — | | 0.6 | | 0.1 | | 1.5 | | — | | | | (3.4) | | | (62.4) | | | (5.7) | | | (71.5) | | (0.2) | | (3.4) | | (0.3) | | (3.9) | | (0.3) | | (12.0) | | (6.6) | |
Divested | | | (3.5) | | | — | | | — | | | (3.5) | | (0.3) | | — | | — | | (0.3) | | (0.4) | | — | | — | | |
Acquisition | | | 45.7 | | | — | | | 1.3 | | | 47.0 | | 3.3 | | — | | 0.1 | | 3.4 | | 5.1 | | | | 2.0 | | |
Acquired | | | | 6.1 | | | — | | | — | | | 6.1 | | 0.3 | | — | | — | | 0.3 | | 0.5 | | — | | — | |
Total | | $ | 51.0 | | $ | 9.0 | | $ | (1.7) | | $ | 58.3 | | 3.6 | % | 0.7 | % | (0.1) | % | 4.2 | % | 5.6 | % | 2.1 | % | (2.6) | % | | $ | 182.8 | | $ | (18.3) | | $ | 5.7 | | $ | 170.2 | | 10.1 | % | (1.0) | % | 0.3 | % | 9.4 | % | 15.1 | % | (3.5) | % | 6.9 | % |
The change in organic net sales as a percentage of consolidated net sales and of segment net sales in the Americas excludes divested sales for both periods presented.
Our products are sold to wholesalers, OEMs, DIY chains, and through various specialty channels, and DIY chains.channels. The change in organic net sales by channel was attributable to the following:
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| | | | | | | | | | | | | | | | | | Change As a % | |
| | | | | | | | | | | | | | | | | | of Prior Year Sales | |
| | | Wholesale | | OEMs | | DIY | | Specialty | | Total | | Wholesale | | OEMs | | DIY | | Specialty | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Change As a % | | |
| | | | | | | | | | | | | | | | | of Prior Year Sales | | |
| | Wholesale | | OEMs | | Specialty | | | DIY | | Total | | Wholesale | | OEMs | | Specialty | | DIY | | |
| | (dollars in millions) | | |
| | | (dollars in millions) | |
Americas | | $ | 19.9 | | $ | 1.9 | | $ | (9.4) | | $ | (5.0) | | $ | 7.4 | | 3.9 | % | 2.6 | % | (3.7) | % | (8.4) | % | | $ | 99.2 | | $ | 7.8 | | $ | 5.6 | | $ | 67.5 | | $ | 180.1 | | 14.3 | % | 8.1 | % | 7.1 | % | 20.0 | % |
Europe | | | 7.6 | | | (3.3) | | | — | | | (1.8) | | | 2.5 | | 2.7 | | (2.3) | | — | | (32.9) | | | | 21.0 | | | 23.2 | | | (0.1) | | | — | | | 44.1 | | 6.3 | | 12.8 | | (3.3) | | — | |
APMEA | | | 2.0 | | | (4.9) | | | — | | | — | | | (2.9) | | 3.4 | | (59.6) | | — | | — | | | | 8.7 | | | 2.9 | | | — | | | (0.2) | | | 11.4 | | 11.0 | | 52.7 | | — | | (66.7) | |
Total | | $ | 29.5 | | $ | (6.3) | | $ | (9.4) | | $ | (6.8) | | $ | 7.0 | | | | | | | | | | | $ | 128.9 | | $ | 33.9 | | $ | 5.5 | | $ | 67.3 | | $ | 235.6 | | | | | | | | | |
The organic sales increase of $7.0 million was partially muted by the $15.1 million impact of our ongoing product rationalization efforts across our regions, as we continue to focus on our core product lines. The product rationalization mainly affected our DIY and OEM channels.
Organic net sales in the Americas increased $7.4 million mainly from growth in the wholesale channel, driven by valve, HVAC,primarily due to incremental price across all of our channels, as well as higher volume within our heating and drainagehot water solution products. ThisThe increase was partially offset by declinesmuted due to 2021 being positively impacted from the severe freezing weather in the specialty channels, where we experienced weaknessSouth-Central United States, which drove an estimated 2% of incremental sales in our tankless water heaterwholesale and condensing boiler products. There was also a decrease in the DIY channel due to the product rationalization discussed above.channels.
Organic net sales in Europe increased $2.5 million primarily due to incremental price, with growth in all platforms as well as all major regions. A significant portion of this growth related to HVAC products within the wholesale channel from increased sales of our drains products. This increaseOEM markets in Italy and Germany driven by government energy incentives. Sales growth was alsonegatively impacted by approximately $9 million due to higher demand for our electronics productsdecision to exit all direct sales into Russia as a result of the war in Germany. These increases were partially offset by product rationalization and reduced demand for our HVAC products in Italy.Ukraine effective April 1, 2022.
Organic net sales in APMEA decreased $2.9 millionincreased primarily due to higher volumes and price, with sales growth in China, Australia, New Zealand and the Middle East. China’s sales growth was primarily driven primarily by the impact of product rationalization. This decrease was offset partly by higher demand in China for our residential underfloor heating products and commercial valves products, as well as growth in South Korea from an expanded product offering.within data centers.
The net increasedecrease in sales due to foreign exchange was primarilymostly due to the appreciation of the euro and the CanadianU.S. dollar against the U.S. dollareuro and Chinese yuan in 2017.2022. 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 decreasechange in total net sales due to divested products of $3.5 millionacquisitions relates to the discontinuation of product lines we divested by the end of the first quarter of 2016an immaterial acquisition in the Americas segment as part of our Americas transformation program.
The increase in net sales from acquisitions in the Americas and APMEA segments are related to the fourth quarter 2016 acquisition of PVI and the first quarter 2016 acquisition of Watts Korea, respectively.2021.
Gross Profit. Gross profit and gross profit as a percent of net sales (gross margin) for 20172022 and 20162021 were as follows:
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| | | Year Ended | |
| | | December 31, 2022 | | December 31, 2021 | |
| | | | | | | | |
| | Year Ended | | |
| | December 31, | | |
| | 2017 | | 2016 | | |
| | (dollars in millions) | | |
| | | (dollars in millions) | |
Gross profit | | $ | 602.4 | | $ | 565.6 | | | $ | 874.3 | | $ | 767.1 | |
Gross margin | | | 41.4 | % | | 40.5 | % | | | 44.2 | % | | 42.4 | % |
The increase inGross profit and gross margin percentage is attributable to increased volume, manufacturingprimarily from incremental price, productivity changes to our product mix, and incremental savings from our transformation and restructuring programs primarily within the Americassavings, partially offset by inflation related to material and Europe.labor costs and higher logistic and energy costs.
Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses increased $8.2$42.3 million, or 1.9%8.3%, in 20172022 compared to 2016.2021. The increase in SG&A expenses was attributable to the following:
| | | | | | | |
| | (in millions) | | % Change | | |
| | | | | | | |
| | | (in millions) | | % Change | |
Organic | | $ | (7.3) | | (1.7) | % | | $ | 54.2 | | 10.6 | % |
Foreign exchange | | | 1.7 | | 0.4 | | | | (15.4) | | (3.0) | |
Acquisition | | | 13.8 | | 3.2 | | |
Acquired | | | | 3.5 | | 0.7 | |
Total | | $ | 8.2 | | 1.9 | % | | $ | 42.3 | | 8.3 | % |
SG&A expensesThe organic increase was primarily due to an increase in investments of $23.0 million, including in our smart and connected and commercial excellence initiatives, general inflation of $15.7 million, increased primarily asvariable costs due to the higher sales of $14.4 million and an increase in marketing, travel and other normalized spending of $11.2 million compared to 2021. These increases were partially offset by $11.5 million due to productivity initiatives and a resultdecrease in short-term and long-term compensation expense of our 2016 acquisitions of PVI and Watts Korea, as well as increases$6.9 million. The decrease in foreign exchange primarily fromwas mainly due to the appreciation of the euro and the CanadianU.S. dollar against the U.S. dollar compared to 2016. Organicallyeuro. The acquired SG&A expenses decreased $7.3 million compared to 2016, primarilycosts related to a declinean immaterial acquisition in product liability coststhe Americas segment in the fourth quarter of $9.4 million, lower transformation costs of $8.1 million as we completed our transformation program in 2017, and lower property tax and other tax charges of $1.1 million. The decline in product liability costs was primarily due to the resolution of the class action lawsuits related to certain legacy claims for undifferentiated products which we have exited, and the associated reduction in reported claims. The organic decrease was partially offset by $8.2 million for investments in strategic initiatives, which includes $2.5 million in research and development costs, and$4.2 million of higher distribution and freight costs.2021. Total SG&A expenses, as a percentage of sales, were 29.7%27.8% in 20172022 compared to 30.3%28.1% in 2016.2021.
Restructuring.In 2017,2022, we recorded a net restructuring charge of $6.8$10.6 million, which related to a 2021 French restructuring program as well as other actions related to the decommissioning of machinery at one of our facilities in the Americas and cost reduction actions in Europe and the Americas. In 2021, we recorded a net restructuring charge of $19.3 million, primarily for costs related to the transformation2021 French restructuring program that was approved in the second quarter of our Americas business, involuntary terminations and other costs incurred as part of our restructuring initiatives, as compared to a net charge of $4.7 million in 2016. 2021. For a more detailed description of our current restructuring plans, see Note 3 of Notes to Consolidated Financial Statements in this Annual Report Form 10-K.
Goodwill and Other Long‑Lived Asset Impairment Charges. In 2017, we recorded an impairment of $1.0 million, primarily related to a technology asset in the Americas operating segment. In 2016, we recorded impairment charges of $0.5 million, primarily related to an indefinite lived tradename in the Europe operating segment. See Note 6 of Notes to Consolidated Financial Statements in this Annual Report on Form 10‑K for additional information regarding these impairments.
Gain on disposition.In the second quarter of 2016, we recorded a pre-tax gain of $8.7 million related to the sale of a China subsidiary that was dedicated to the production of non-core products and part of the transformation of our Americas and APMEA businesses. The pre-tax gain included a non-cash accumulated currency translation adjustment of $7.3 million.
Operating Income (Loss). Operating income (loss) by geographic segment for 20172022 and 20162021 was as follows:
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| | | | | | | | | | | | % Change to | |
| | | Year Ended | | | | | Consolidated | |
| | | December 31, | | December 31, | | | | | Operating | |
| | | 2022 | | 2021 | | Change | | Income | |
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| | | | | | | | | | | % Change to | | |
| | | | | | | | | | | Consolidated | | |
| | Year Ended | | | | | Operating | | |
| | December 31, 2017 | | December 31, 2016 | | Change | | Income | | |
| | (dollars in millions) | | | | |
| | | (dollars in millions) | | | |
Americas | | $ | 146.8 | | $ | 127.1 | | $ | 19.7 | | 13.6 | % | | $ | 283.9 | | $ | 211.0 | | $ | 72.9 | | 30.4 | % |
Europe | | | 47.6 | | | 40.0 | | | 7.6 | | 5.2 | | | | 66.7 | | | 63.6 | | | 3.1 | | 1.3 | |
APMEA | | | 4.7 | | | 15.1 | | | (10.4) | | (7.2) | | | | 14.0 | | | 14.4 | | | (0.4) | | (0.1) | |
Corporate | | | (36.8) | | | (37.2) | | | 0.4 | | 0.3 | | | | (49.6) | | | (49.4) | | | (0.2) | | (0.1) | |
Total | | $ | 162.3 | | $ | 145.0 | | $ | 17.3 | | 11.9 | % | | $ | 315.0 | | $ | 239.6 | | $ | 75.4 | | 31.5 | % |
The increase (decrease) in operating income (loss) is attributable to the following:
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| | | | | | | | | | | | | | | | | | Change As a % of | | Change As a % of | |
| | | | | | | | | | | | | | | | | | Consolidated Operating Income | | Segment Operating Income | |
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| | | Americas | | Europe | | APMEA | | Corporate | | Total | | Americas | | Europe | | APMEA | | Corporate | | Total | | Americas | | Europe | | APMEA | | Corporate | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | 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) | | |
| | | (dollars in millions) | |
Organic | | $ | 19.1 | | $ | 6.5 | | $ | (1.4) | | $ | 1.0 | | $ | 25.2 | | 13.2 | % | 4.5 | % | (1.0) | % | 0.7 | % | 17.4 | % | 15.0 | % | 16.3 | % | (9.3) | % | 2.7 | % | | $ | 75.2 | | $ | 1.0 | | $ | 1.1 | | $ | (0.2) | | $ | 77.1 | | 31.4 | % | 0.4 | % | 0.5 | % | (0.1) | % | 32.2 | % | 35.6 | % | 1.6 | % | 7.6 | % | 0.4 | % |
Foreign exchange | | | 0.2 | | | 0.4 | | | — | | | — | | | 0.6 | | 0.1 | | 0.3 | | — | | — | | 0.4 | | 0.2 | | 1.0 | | — | | — | | | | (0.5) | | | (8.8) | | | (1.8) | | | — | | | (11.1) | | (0.3) | | (3.6) | | (0.7) | | — | | (4.6) | | (0.2) | | (13.8) | | (12.5) | | — | |
Acquisition | | | 2.9 | | | — | | | — | | | — | | | 2.9 | | 2.0 | | — | | — | | — | | 2.0 | | 2.3 | | — | | — | | — | | |
Gain on disposition | | | — | | | — | | | (8.7) | | | — | | | (8.7) | | — | | — | | (6.0) | | — | | (6.0) | | — | | — | | (57.6) | | — | | |
Acquired | | | | 0.7 | | | — | | | — | | | — | | | 0.7 | | 0.3 | | — | | — | | — | | 0.3 | | 0.3 | | — | | — | | — | |
Restructuring, impairment charges | | | (2.5) | | | 0.7 | | | (0.3) | | | (0.6) | | | (2.7) | | (1.7) | | 0.4 | | (0.2) | | (0.4) | | (1.9) | | (2.0) | | 1.7 | | (2.0) | | (1.6) | | | | (2.5) | | | 10.9 | | | 0.3 | | | — | | | 8.7 | | (1.0) | | 4.5 | | 0.1 | | — | | 3.6 | | (1.2) | | 17.1 | | 2.1 | | — | |
Total | | $ | 19.7 | | $ | 7.6 | | $ | (10.4) | | $ | 0.4 | | $ | 17.3 | | 13.6 | % | 5.2 | % | (7.2) | % | 0.3 | % | 11.9 | % | 15.5 | % | 19.0 | % | (68.9) | % | 1.1 | % | | $ | 72.9 | | $ | 3.1 | | $ | (0.4) | | $ | (0.2) | | $ | 75.4 | | 30.4 | % | 1.3 | % | (0.1) | % | (0.1) | % | 31.5 | % | 34.5 | % | 4.9 | % | (2.8) | % | 0.4 | % |
The increase in consolidatedorganic operating income was primarily driven by increased volumedue to incremental price and gross margin improvements in the Americas, as well as savings from ourproductivity and restructuring initiativesactions. These increases were partially offset by inflation related to material and labor costs, higher logistic and energy costs, incremental investments and the return of expenses related to business normalization.
Interest Expense.Interest expense increased $0.7 million, or 11.1%, in Europe. The2022 as compared to 2021 primarily due to an increase in operating income was also driveninterest rates, partially offset by reduced transformation costs compared to 2016 in the Americas and APMEA as our transformation program was completed in 2017. Contributing to the increase in consolidated operating income was $2.9 million from the acquisitiona lower principal balance of PVI. Included in operating income in 2016 was an $8.7 million gain on a disposition of a China subsidiary.
Interest Expense. Interest expense decreased $3.5 million, or 15.5%, in 2017 from 2016 as we repaid over $150 million in outstanding debt during 2017. Further, our weighted average interest rate decreased marginally year to year as we retired higher cost private placement debt in the middle of 2016 and replaced with lower cost revolver debt and we replaced certain U.S. based revolver debt with lower cost euro denominated debt in late 2016. outstanding. Refer to Note 11 of the Notes to
Consolidated Financial Statements in this Annual Report on Form 10-K Form10-K for further details.
Other expense (income), net.Other expense (income), net, decreased $5.5 increased $1.8 million to a netan expense balance of $1.1 million in 2017 as compared to a net other income balance of ($4.4) million in 2016. Included in other income in 2016 was a $1.7 million non-cash gain recognized on the acquisition of Watts Korea. The remaining decrease is primarily due to net foreign currency transaction losses in 2017.
Income Taxes. Our effective income tax rate changed to 48.9% in 2017, from 34.1% in 2016. The tax rate increased primarily due to the impact of the 2017 Tax Act, which was enacted on December 22, 2017, and has resulted in significant changes to the U.S. corporate income tax system. These changes include lowering the corporate tax rate from
35% to 21% in 2018, implementing a territorial tax system, and imposing a one-time deemed repatriation toll tax on cumulative undistributed foreign earnings.
Changes in tax rates and tax laws are accounted for in the period of enactment and deferred tax assets and liabilities are measured at the enacted tax rate. Therefore, during the year ended December 31, 2017, we recorded a provisional charge of $25.1 million related to our current estimate of the provisions of the 2017 Tax Act, including an estimated $23.3 million expense under the Toll Tax. The Toll Tax will be paid over an eight-year period, starting in 2018, and will not accrue interest.
Net Income (Loss).Net income for 2017 was $73.1 million, or $2.12 per common share, compared to $84.2 million, or $2.44 per common share, for 2016. Results for 2017 include a charge of $25.1 million within income tax expense, or $0.73 per common share, related to the impact of the 2017 Tax Act, $1.9 million, or $0.06 per common share, for the Europe and Americas transformation costs; $4.7 million, or $0.14 per common share, for restructuring charges; $0.6 million, or $0.02 per common share for long-lived asset impairment charges, partially offset by $1.6 million or $0.05 per common share in tax benefits.
Results for 2016 include after-tax benefits of $8.3 million, or $0.24 per common share, for a gain on disposition and $1.0 million, or $0.03 per common share, for a gain on acquisition of Watts Korea, offset by an after-tax charge of $8.8 million, or $0.26 per common share, for the Europe and Americas transformation deployment costs; $3.2 million, or $0.09 per common share, for restructuring charges; $1.3 million, or $0.04 per common share for purchase accounting adjustments related to our acquisitions in 2016; $1.2 million, or $0.03 per common share for acquisition costs in 2016; and $2.6 million, or $0.08 per common share for other items, primarily related to tax charges related to the transformation.
Results of Operations
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Net Sales. Our business is reported in three geographic segments: Americas, Europe and APMEA. Our net sales in each of these segments for the years ended December 31, 2016 and 2015 were as follows:
| | | | | | | | | | | | | | | | |
| | Year Ended | | Year Ended | | | | | % Change to | |
| | December 31, 2016 | | December 31, 2015 | | | | | Consolidated | |
| | Net Sales | | % Sales | | Net Sales | | % Sales | | Change | | Net Sales | |
| | (dollars in millions) | |
Americas | | $ | 900.9 | | 64.5 | % | $ | 978.5 | | 66.7 | % | $ | (77.6) | | (5.3) | % |
Europe | | | 431.3 | | 30.8 | | | 436.0 | | 29.7 | | | (4.7) | | (0.3) | |
APMEA | | | 66.2 | | 4.7 | | | 53.2 | | 3.6 | | | 13.0 | | 0.9 | |
Total | | $ | 1,398.4 | | 100.0 | % | $ | 1,467.7 | | 100.0 | % | $ | (69.3) | | (4.7) | % |
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 | | $ | 7.7 | | $ | 0.5 | | $ | 6.1 | | $ | 14.3 | | 0.6 | % | 0.1 | % | 0.4 | % | 1.1 | % | 0.8 | % | 0.1 | % | 11.7 | % |
Foreign exchange | | | (2.4) | | | (5.2) | | | (2.0) | | | (9.6) | | (0.2) | | (0.4) | | (0.1) | | (0.7) | | (0.2) | | (1.2) | | (3.7) | |
Divested | | | (91.8) | | | — | | | (6.2) | | | (98.0) | | (6.3) | | — | | (0.4) | | (6.7) | | (9.4) | | — | | (11.7) | |
Acquisitions | | | 8.9 | | | — | | | 15.1 | | | 24.0 | | 0.6 | | — | | 1.0 | | 1.6 | | 0.9 | | — | | 28.2 | |
Total | | $ | (77.6) | | $ | (4.7) | | $ | 13.0 | | $ | (69.3) | | (5.3) | % | (0.3) | % | 0.9 | % | (4.7) | % | (7.9) | % | (1.1) | % | 24.5 | % |
The change in organic net sales as a percentage of consolidated net sales and of segment net sales in the Americas and APMEA excluded divested sales for both periods presented.
Our products are sold to wholesalers, OEMs, various specialty channels and DIY chains. The change in organic net sales by channel was attributable to the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Change As a % |
| | | | | | | | | | | | | | | | | of Prior Year Sales |
| | Wholesale | | OEMs | | Specialty | | DIY | | Total | | Wholesale | | OEMs | | Specialty | | DIY | |
| | (dollars in millions) | |
Americas | | $ | 3.7 | | $ | 4.3 | | $ | (1.3) | | $ | 1.0 | | $ | 7.7 | | 0.7 | % | 6.3 | % | (0.5) | % | 1.7 | % |
Europe | | | 1.3 | | | 2.2 | | | — | | | (3.0) | | | 0.5 | | 0.6 | | 1.0 | | — | | (35.6) | |
APMEA | | | 9.9 | | | (3.8) | | | — | | | — | | | 6.1 | | 39.1 | | (36.2) | | — | | — | |
Total | | $ | 14.9 | | $ | 2.7 | | $ | (1.3) | | $ | (2.0) | | $ | 14.3 | | | | | | | | | |
The change in organic net sales by channel in the Americas and APMEA excluded divested sales for both periods presented.
Organic net sales in the Americas increased $7.7 million compared to 2015 primarily due to growth in our wholesale markets and OEM channels, particularly relating to backflow, valve, and drainage products.
Organic net sales in Europe increased slightly compared to 2015 mainly due to improved demand in certain key markets such as Italy, and new product introductions in our electronics platform. These increases were partially offset by declines in the OEM boiler market in Germany, sales declines in France, and by project delays in our drains business partly driven by the impact of economic and political uncertainty in the UK.
Organic net sales in the APMEA wholesale market increased as compared to 2015 primarily due to strong demand for our underfloor heating products for residential applications as well as for our water and plumbing products outside of China.
2021. The net decrease in sales due to foreign exchangeincrease was primarily due to the depreciation$1.0 million of the euro, Chinese yuan and the Canadian dollar against the U.S. dollar in 2016. 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 decrease in total net sales due to divested products of $98.0 million was a result of the exit of our low margin, non-core products beginning after the first quarter 2015 in our Americas and APMEA segments. Divested sales included the exit of our non-core products through sale and through the discontinuation of product lines.
The increase in net sales from acquisitions in APMEA wasadditional expense related to the fourth quarter 2015 acquisition of Apex and the first quarter 2016 acquisition of Watts Korea. The increase in net sales from acquisitions in the Americas was related to the acquisition of PVI in the fourth quarter of 2016.
Gross Profit. Gross profit and gross profit as a percent of net sales (gross margin) for 2016 and 2015 were as follows:
| | | | | | | |
| | Year Ended | |
| | December 31, | |
| | 2016 | | 2015 | |
| | (dollars in millions) | |
Gross profit | | $ | 565.6 | | $ | 553.1 | |
Gross margin | | | 40.5 | % | | 37.7 | % |
Americas’ gross margin percentage increased compared to 2015 due primarily to a favorable product mix, including the 2015 exit of our low-margin, non-core product lines, as well as manufacturing efficiencies and commodity cost savings. Europe’s gross margin percentage increased marginally due to manufacturing productivity, restructuring savings and commodity cost savings, compared to 2015. APMEA’s gross margin percentage increased compared to 2015 primarily due to increased trade sales and product mix, offset by the decreased intercompany activity.
Selling, General and Administrative Expenses.Selling, general and administrative, or SG&A, expenses decreased $67.2 million, or 13.7%, in 2016 compared to 2015. The decrease in SG&A expenses was attributable to the following:
| | | | | | |
| | (in millions) | | % Change | |
Organic | | $ | (72.2) | | (14.8) | % |
Foreign exchange | | | (2.2) | | (0.4) | |
Acquisitions | | | 7.2 | | 1.5 | |
Total | | $ | (67.2) | | (13.7) | % |
The organic decrease in SG&A expenses was primarily due to the 2015 settlement of certain long-term obligations, including our pension plan and supplemental employee retirement plan obligations of $64.7 million and a $6.0 million charge incurred in 2015 to settle legacy product liability claims. Product liability expense decreased $2.8 million in 2016 compared to 2015 due to a reduction in the frequency of reported claims. These decreases were partially offset by an increase in stockdeferred compensation expense of $2.5 million in 2016 comparedplan assets. Refer to 2015 mainly due to a change in timing of our 2016 grants, which were granted earlier in 2016 than in 2015. SG&A expenses from acquisitions related to the Apex, Watts Korea, and PVI acquisitions. Total SG&A expenses, as a percentage of sales, were 30.3% in 2016 compared to 33.5% in 2015.
Restructuring.In 2016, we recorded a net charge of $4.7 million primarily for the transformation of our Americas and APMEA businesses and involuntary terminations and other costs incurred as part of our Europe restructuring plans, as compared to $21.4 million in 2015. For a more detailed description of our current restructuring plans, see Note 316 Financial Instruments of Notes to Consolidated Financial Statements in this Annual Report on Form 10‑K.Form10-K for further details.
Goodwill and Other Long‑Lived Asset Impairment Charges.In 2016, we recorded impairment charges of $0.5 million,Income Taxes.Our effective income tax rate decreased to 18.2% in 2022, from 29.2% in 2021. The decrease is primarily related to an indefinite lived tradename in the Europe reporting unit. In 2015, we recorded impairment charges of $130.5 million, primarily relatingdue to a $129.7$16.1 million goodwill impairment charge in the Europe reporting unit. See Note 2 of Notes to Consolidated Financial Statements in this Annual Report on Form 10‑K for additional information regarding these impairments.
Gain on disposition. In the second quarter of 2016, we recorded a pre-tax gain of $8.7 milliontax benefit related to the sale of a China subsidiary that was dedicated to the production of non-core products and partmodification of the transformationstructure of our Americas and APMEA businesses. The pre-tax gain includedMexican supply chain operations in 2022, while the initial restructuring of our Mexican supply chain operations in 2021 resulted in a non-cash accumulated currency translation adjustmentnet $7.2 million tax charge. In 2022, we also benefited from the release of $7.3 million.tax reserves of $2.5 million due to statute of limitation expirations.
Operating Income (loss). OperatingNet Income.Net income (loss) by geographic segment for 2016 and 20152022 was as follows:
| | | | | | | | | | | | |
| | | | | | | | | | | % Change to | |
| | Year Ended | | | | | Consolidated | |
| | December 31, | | December 31, | | | | | Operating | |
| | 2016 | | 2015 | | Change | | Income | |
| | (Dollars in millions) | |
Americas | | $ | 127.1 | | $ | 109.9 | | $ | 17.2 | | 19.1 | % |
Europe | | | 40.0 | | | (99.6) | | | 139.6 | | 154.9 | |
APMEA | | | 15.1 | | | 0.5 | | | 14.6 | | 16.2 | |
Corporate | | | (37.2) | | | (100.9) | | | 63.7 | | 70.7 | |
Total | | $ | 145.0 | | $ | (90.1) | | $ | 235.1 | | 260.9 | % |
The change in operating income was attributable to the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Change as a % of | | Change as a % of | |
| | | | | | | | | | | | | | | | | Consolidated Operating Income | | Segment Operating Income | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Americas | | Europe | | APMEA | | Corp. | | Total | | Americas | | Europe | | APMEA | | Corp. | | Total | | Americas | | Europe | | APMEA | | Corp. | |
| | (Dollars in millions) | |
Organic | | $ | 10.5 | | $ | 7.2 | | $ | 0.6 | | $ | 62.1 | | $ | 80.4 | | 11.7 | % | 7.9 | % | 0.7 | % | 68.9 | % | 89.2 | % | 9.5 | % | 7.2 | % | 120.0 | % | 61.5 | % |
Foreign exchange | | | (0.3) | | | (0.3) | | | (0.5) | | | — | | | (1.1) | | (0.3) | | (0.3) | | (0.6) | | — | | (1.2) | | (0.3) | | (0.3) | | (100.0) | | — | |
Acquisitions | | | (1.4) | | | — | | | 1.8 | | | — | | | 0.4 | | (1.6) | | — | | 2.0 | | — | | 0.4 | | (1.3) | | — | | NMF | | — | |
Restructuring, impairment charges | | | 8.4 | | | 132.7 | | | 4.0 | | | 1.6 | | | 146.7 | | — | | — | | 9.7 | | — | | 9.7 | | — | | — | | NMF | | 1.6 | |
Gain on disposition | | | — | | | — | | | 8.7 | | | — | | | 8.7 | | 9.3 | | 147.3 | | 4.4 | | 1.8 | | 162.8 | | 7.7 | | 133.2 | | NMF | | — | |
Total | | $ | 17.2 | | $ | 139.6 | | $ | 14.6 | | $ | 63.7 | | $ | 235.1 | | 19.1 | % | 154.9 | % | 16.2 | % | 70.7 | % | 260.9 | % | 15.6 | % | 140.1 | % | NMF | % | 63.1 | % |
Operating income in 2016 of $145.0$251.5 million, increased by $235.1 millionor $7.48 per common share on a diluted basis, compared to 2015. This increase is$165.7 million, or $4.88 per common share on a diluted basis, for 2021. Results for 2022 include an after-tax benefit of $18.2 million, or $0.54 per common share, primarily for an income tax benefit related to the $129.7modification of the structure of our Mexican supply chain operations and $1.4 million, goodwill impairment charge in the Europe reporting unit, the 2015 settlementor $0.04 per common share, for an after-tax gain on sale of asset; partially offset by an after-tax charge of $64.7 million for certain long-term obligations, including our pension plan and supplemental employee retirement plan, $16.7 million less in restructuring costs recognized in 2016 compared to 2015, as well as the $6.0 million charge to settle legacy product liability claims in 2015. We also recognized a gain of $8.7 million in the second quarter of 2016 on the disposition of a subsidiary in China. The remaining $9.3 million increase was due to favorable sales mix, favorable sourcing, and productivity.
Interest Expense.Interest expense decreased $1.7$7.9 million, or 7%,$0.23 per common share, for restructuring.
Results for 2021 include an after-tax charge of $14.1 million, or $0.42 per common share, for restructuring and $7.2 million, or $0.22 per common share, for an income tax adjustment related to the restructuring of our Mexican manufacturing supply chain operations.
Liquidity and Capital Resources
2022 and 2021 Cash Flows
We generated $224.0 million of net cash from operating activities in 20162022 as compared to 2015$180.8 million in 2021. The increase in cash generated was primarily due to higher net income and lower investment in inventory, partially offset by lower accounts payable balances associated with the retirementreduction in April 2016inventory purchases and increased payments related to income taxes, restructuring and employee and customer incentives.
We used $22.9 million of a $225net cash for investing activities in 2022 compared to $30.7 million higher interest bearing private placement note that was replacedused in 2021. We spent $1.3 million more on net capital expenditures and $9.1 million less for acquisitions in 2022 compared to 2021.
We used $121.7 million of net cash from financing activities in 2022 primarily due to long-term debt repayments of $80.0 million, dividend payments of $39.5 million, tax withholding payments on vested stock awards of $13.3 million and payments of $69.4 million to repurchase 493,733 shares of Class A common stock. These payments were partially offset by $230 million drawnproceeds from drawdowns on our line of credit. Refercredit totaling $85.0 million. In 2021, we used $118.6 million of net cash from financing activities primarily due to long-term debt repayments of $95.0 million, dividend payments of $34.3 million, tax withholding payments on vested stock awards of $9.6 million and payments of $16.0 million to repurchase approximately 110,000 shares of Class A common stock. These payments were partially offset by proceeds from drawdowns on our line of credit totaling $40.0 million.
On March 30, 2021, we and certain of our subsidiaries entered into the Second Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement amended the Company’s borrowings under the Amended and Restated Credit Agreement entered into on April 24, 2020 (the “Prior Credit Agreement”), to extend the maturity date of the $800 million senior unsecured revolving credit facility from February 12, 2022 to March 30, 2026 (the “Revolving Credit Facility”). Among other changes from the Prior Credit Agreement, the 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 London interbank offered rate (LIBOR) to 0.00%. On August 2, 2022, we and certain of our subsidiaries entered into Amendment No. 1 to the Credit Agreement (as so amended, the “Amended Credit Agreement”) to replace LIBOR as a reference rate for borrowings with the term secured overnight financing rate (“Term SOFR”), and to provide for a fixed adjustment of 10 basis points added to Term SOFR (“Term Benchmark”) for all Term SOFR borrowings, subject to a 0.00% floor. The Company elected the optional expedient under Accounting Standards Update (“ASC”) No. 2020-04, Reference Rate Reform (Topic 848), in connection with amending its credit agreement to replace the reference rate from LIBOR to Term Benchmark to consider the amendment as a continuation of the existing contract without having to perform an assessment that would otherwise be required under U.S. GAAP.
The Revolving Credit Facility also includes sub-limits of $100 million for letters of credit and $15 million for swing line loans. As of December 31, 2022, we had drawn down $150.0 million on this line of credit and had $12.1 million in letters of credit outstanding, which resulted in $637.9 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 Term Benchmark loans, the Term Benchmark 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 Rate in effect on such day, (b) the FRBNY Rate in effect on such day plus 0.50% and (c) the Term Benchmark rate plus 1.00% for a one month interest period. The weighted average interest rate on debt outstanding under the Revolving Credit Facility as of December 31, 2022 was 5.35%. The weighted average interest rate on debt outstanding inclusive of the interest rate swap discussed in Note 11 of the Notes to Consolidated Financial Statements and interest rates under the Revolving Credit Facility as of December 31, 2022 was 3.23%. In addition to paying interest under the Amended Credit Agreement, we are also required to pay certain fees in this Annual Report on Form 10-K for further details.
Other income, net.Other income, net, increased $2.0 millionconnection with the Revolving Credit Facility, including, but not limited to, an income balance of $4.4 million in 2016 as compared to 2015, primarily due to the $1.7 million non-cash gain recognized on the acquisition of Watts Korea in the first quarter of 2016. Refer to Note 5 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for further details on the acquisition. The remaining increase is due to net foreign currency transaction gains in 2016 as a result of the depreciation of the eurounused facility fee and the Canadian dollar against the U.S. dollar in 2016 compared to 2015.
Income Taxes.Our effective income tax rate changed to 34.1% in 2016, from (1.7%) in 2015. The significant change in the tax rate was due to the impact that the non-deductible and other income tax reserve items had on a loss before income taxes reported in 2015, primarily related to the goodwill impairment charge and the settlement of our pension plan and supplemental employee retirement plan obligations.
Net Income (loss). Net income was $84.2 million, or $2.45 per common share, compared to a net loss of ($112.9) million, or ($3.24) per common share, for 2015. Results for 2016 include after-tax benefits for a gain on disposition of $8.3 million, or $0.24 per common share, and $1.0 million, or $0.03 per common share, for a gain on acquisition of Watts Korea, offset by an after-tax charge of $8.8 million, or $0.26 per common share, for the Europe and Americas transformation deployment costs; $3.2 million, or $0.09 per common share, for restructuring charges; $1.3 million, or $0.04 per common share for purchase accounting adjustments related to our acquisitions in 2016; $1.2 million, or $0.03 per common share for acquisition costs in 2016; and $2.6 million, or $0.08 per common share for other items, primarily related to tax charges related to the transformation.
Results for 2015 include an after‑tax charge of $126.8 million, or $3.63 per common share, for goodwill and other long‑lived asset impairment charges; $44.6 million, or $1.28 per common share, for long‑term obligation settlements including pension obligations; $13.9 million, or $0.40 per common share, for restructuring; $9.0 million, or $0.26 per common share, for the Europe and Americas transformation deployment costs; $3.7 million, or $0.11 per common share, for legal and other settlements; and $0.9 million, or $0.03 per common share, for acquisition related costs.
Liquidity and Capital Resources
2017 Cash Flows
We generated $155.9 million of net cash from operating activities in 2017 as compared to $138.1 million of net cash generated from operating activities in 2016. The increase was primarily related to higher net income after excluding the non-cash effect of the 2017 Tax Act and the impact of non-cash adjustments, partially offset by the timing of working capital fluctuations compared to 2016. We generated $126.9 million of free cash flow (a non‑GAAP financial measure, which we reconcile below, defined as net cash provided by operating activities minus capital expenditures plus proceeds from sale of assets), compared to free cash flow of $102.2 million in 2016.
We used $27.3 million of net cash for investing activities in 2017 compared to $114.0 million in 2016. We used $88.1 million less cash in 2017 for acquisitions as 2016 included the acquisition of PVI and Watts Korea. We used $6.6 million less cash for purchases of capital equipment compared to 2016. The decrease in cash used for investing activities was partially offset by a $1.5 million purchase of additional intangible assets, and $6.8 million less cash generated from the sale of assets in 2017. We anticipate investing between $36 million to $40 million in capital equipment in 2018 to improve our manufacturing capabilities.
We used $205.3 million of net cash from financing activities in 2017 primarily due to payments of long-term debt of $178.0 million, dividend payments of $25.9 million, and payments to repurchase approximately 278,000 shares of Class A common stock at a cost of $18.2 million. This was partially offset by proceeds from an additional draw on our lineletter of credit of $20.0 million during 2017.
On February 12, 2016, we terminated our prior Credit Agreement and entered into a new Credit Agreement (the “Credit Agreement”) among the Company, certain subsidiaries of the Company who became borrowers under the Credit Agreement, JPMorgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender and Letter of Credit Issuer, and the other lenders referred to therein.fees. The Credit Agreement provides for a $500 million, five‑year, senior unsecured revolving credit facility (the “Revolving Credit Facility”) with a sublimit of up to $100 million in letters of credit. The Credit Agreement also provided for a $300 million, five‑year, term loan facility (the “Term Loan Facility”) available to us in a single draw. TheAmended Credit Agreement matures on February 12, 2021,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 December 31, 2017, we had $277.5 million of borrowings outstanding on the term loan and $147.0 million drawn on the Revolving Credit Facility; had $25.7 million of stand-by letters of credit outstanding and had $327.3 million of unused and available credit under the Revolving Credit Facility. As of December 31, 2017,2022, we were in compliance with all covenants related to the Amended Credit Agreement.
On December 16, 2016, Watts International Holdings Limited (“Watts International”), a wholly owned subsidiary of the Company, entered into a Facility Agreement (the “Facility Agreement”) among Watts International, as original borrower and original guarantor, Watts Water Technologies EMEA B.V., a wholly owned subsidiary of the Company (“Watts EMEA”), as original guarantor, JPMorgan Chase Bank, N.A., as sole bookrunner and sole lead arranger (“JP Morgan Chase Bank”), J.P. Morgan Europe Limited, as agent to the financial parties, and the other lenders referred to therein. The Facility Agreement provides for a €110 million, 364 day, term loan facility available to the Company in a single draw. On December 20, 2016, Watts International borrowed the full amount available for borrowing under the Facility Agreement. The loan made on December 20, 2016 bears interest at a rate per annum equal to (i) the Euro InterBank Offered Rate (EURIBOR), provided that if such rate is less than zero, then EURIBOR shall be deemed to be zero, plus (ii) a margin of 1.875%, provided that if no event of default is continuing and Watts International’s consolidated leverage ratio is at a specified level, the margin shall decrease to 1.50%. Accrued interest on the loan is payable on the last day of each interest period. The first interest period is set at one month and may be changed subsequently to a period of one, two, or three months (or such other period agreed with all the lenders). Substantially all of the proceeds of the borrowings made on December 20, 2016 under the Facility Agreement were used to pay down $113 million outstanding under the Revolving Credit Facility. As of the third quarter of 2017, the Company had repaid in full the Facility Agreement.
We have historically financed our operating and capital needs primarily through cash flows generated by our operations. We expect to continue funding future operating requirements principally through our cash flows from operations, in addition to existing cash resources. We believe that our existing funds, when combined with cash generated from operations and our ability to access additional financing resources, if needed, are sufficient to satisfy our operating, working capital, strategic initiatives, capital expenditure and debt service requirements for the foreseeable future. In
addition, we may choose to opportunistically return cash to shareholders and pursue other business initiatives, including acquisition activities. We may, from time to time, also seek additional funding through a combination of equity and debt financings should we identify a significant new opportunity.
As of December 31, 2017,2022, we held $280.2$310.8 million in cash and cash equivalents. Of this amount, $259.3$221.2 million was held by foreign subsidiaries. As of December 31, 2017,Our U.S. operations typically generate sufficient cash flows to meet our domestic obligations. However, if we considered nonedid have to borrow to fund some or all of our earningsexpected cash outlays, we can do so at reasonable interest rates by utilizing the undrawn borrowings under our Revolving Credit Facility. Subsequent to be permanently reinvested outsiderecording the Toll Tax as part of the U.S. Previously,Tax Cuts and Jobs Act of 2017, our intent is to permanently reinvest undistributed earnings of foreign subsidiaries, were only subjectand we do not have any current plans to U.S. income tax upon repatriation to the U.S. However, the 2017repatriate post-Toll Tax Act, requires us to pay a one-time deemed repatriation toll charge on cumulative undistributed foreign earnings for which we have not previously provided U.S. taxes. Cumulative earningsto fund operations in the form of cash and cash equivalents, as definedUnited States. However, if amounts held by foreign subsidiaries were needed to fund operations in the 2017 Tax Act, willUnited States, we could be taxed at a rate of 15.5%required to accrue and all other earnings will be taxed at a rate of 8.0%. We estimate that our obligation associated with this one-time deemed repatriation toll charge to be $23.3 million, which will be paid in installments over eight years. We can repatriate cumulative undistributed foreign earnings back to the U.S. when needed and have recorded provisional charges of $14.6 million for the year ended December 31, 2017 related to future repatriation of earnings. Over the next twelve months we expectpay taxes to repatriate approximately $125 million of cash back to the U.S. We are currently evaluating allthese funds. Such charges may include potential uses for the cash in the U.S., with debt reduction expected to be a priority. state income taxes and other tax charges.
Covenant complianceCompliance
Under the Amended Credit Agreement, we are required to satisfy and maintain specified financial ratios and other financial condition tests as of December 31, 2017.2022. The financial ratios includedinclude a consolidated interest coverage ratio based on consolidated earnings before income taxes, interest expense, depreciation, and amortization (Consolidated EBITDA) to consolidated interest expense, as defined in the Amended Credit Agreement. OurThe Amended Credit Agreement defineddefines Consolidated EBITDA to exclude unusual or non‑recurringnon-recurring charges and gains. We wereare also required to maintain a consolidated leverage ratio of consolidated funded debt to Consolidated EBITDA. Consolidated funded debt, as defined in the Amended Credit Agreement, includedincludes all long and short‑termshort-term debt, capitalfinance lease obligations and any trade letters of credit that are outstanding, less cash and cash equivalents on the balance sheet that exceeded $50 million.sheet.
As of December 31, 2017,2022, our actual financial ratios calculated in accordance with ourthe Amended Credit Agreement compared to the required levels under the Amended Credit Agreement were as follows:
| | | | |
|
| ActualRatio |
| | Required Level |
| | ActualRatio
| | Required Level
| |
| | | | Minimum level | |
Interest Charge Coverage Ratio | | 12.4954.1 to 1.00
| | 3.50 to 1.00 | |
| | | | Maximum level | |
Leverage Ratio | | 1.120.00 to 1.00
| | 3.253.50 to 1.00
| |
As of December 31, 2017,2022, we were in compliance with all covenants related to the Amended Credit Agreement.
We have one senior note agreement as further detailed in Note 11 of Notes to Consolidated Financial Statements in this Annual Report Form 10-K. This senior note agreement requires us to maintain a fixed charge coverage ratio of consolidated EBITDA plus consolidated rent expense during the period to consolidated fixed charges. Consolidated fixed charges are the sum of consolidated interest expense for the period and consolidated rent expense.
As of December 31, 2017, our actual fixed charge coverage ratio calculated in accordance with our senior note agreements compared to the required ratio therein was as follows:
| | | | | |
| | Actual Ratio
| | Required Level
| |
| | | | Minimum level
| |
Fixed Charge Coverage Ratio
| | 7.03 to 1.00
| | 2.00 to 1.00
| |
In addition to financial ratios, the Amended Credit Agreement and senior note agreement containcontains affirmative and negative covenants that include limitations on disposition or sale of assets, prohibitions on assuming or incurring any liens on assets with limited exceptions and limitations on making investments other than those permitted by the agreements.agreement.
Working capital (defined as current assets less current liabilities) as of December 31, 20172022 was $456.2$571.9 million compared to $393.9$453.0 million as of December 31, 2016.2021. The ratio of current assets to current liabilities was 2.42.5 to 1 as of December 31, 20172022 compared to 1.92.1 to 1 as of December 31, 2016.2021. The increase in working capital is primarily related to morethe increase in cash generated from operations,and cash equivalents as well as less cash used for purchasesa result of capital equipment and repurchases of common stock in 2017.
2016 Cash Flows
In 2016, we generated $138.1 million ofincreased cash from operating activities.
Material Cash Requirements
We expect existing cash and cash equivalents and cash flows from operations and financing activities as compared to $109.4be sufficient to meet our cash needs during 2023 and thereafter for the foreseeable future.
We anticipate investing between $40 million to $45 million in 2015. Cash flows from operating activities in 2015 included a $49.2 million settlement of certain long‑term obligations, including pension obligations. We generated approximately $102.2 million of free cash flow (a non‑GAAP financial measure, which we reconcile below, defined as net cash provided by operating activities minus capital expenditures plus proceeds from saleduring 2023 to improve our manufacturing capabilities and invest in technology and other commercial and operational excellence initiatives.
We anticipate spending approximately $6.0 million during 2023 related to various restructuring programs. For a more detailed description of assets), comparedour current restructuring plans, see Note 3 of Notes to free cash flowConsolidated Financial Statements in this Annual Report Form 10-K.
In 2016, we used $114.0 million of net cash for investing activities comparedWe intend to $17.3 million in 2015. We used $67.6 million more cash in 2016 than 2015 relatingcontinue to the acquisitions of PVI and Watts Korea. We also increased our purchases of capital equipment during 2016 by $8.3 million. In 2015, we received approximately $20.8 million more in cash proceeds from the sale of assets, primarily relating to the sale of non-core product lines in the Americas.
In 2016, we generated $27.7 million of net cash from financing activities as compared to $70.9 million of net cash used in 2015. The increase in cash generated is primarily due to net proceeds from long-term borrowings of $74.4 million and $17.8 million less in stock repurchases in 2016. We also received an additional $5.7 million in cash proceeds from share transactions under employee stock plans in 2016 compared to 2015.
2015 Cash Flows
In 2015, we generated $109.4 million of cash from operating activities as compared to $135.2 million in 2014. The decrease was primarily due to the $49.2 million settlement of certain long‑term obligations, including the pension plan, offset by inventory reduction efforts and stronger accounts receivable collections. We generated approximately $81.8 million of free cash flow (a non‑GAAP financial measure, which we reconcile below, defined as net cash provided by continuing operating activities minus capital expenditures plus proceeds from sale of assets).
In 2015, we used $17.3 million of net cash for investing activities, including $20.4 million for the purchase of Apex and $27.7 million of cash for capital equipment, offset by cash proceeds of approximately $33.1 million for the sale of certain assets relating to divested product lines in the Americas.
In 2015, we used $70.9 million of net cash from financing activities including $44.6 million used to repurchase approximately 813,000 shares of Class A common stock consistent with prior years. The repurchases are executed from time to time on the open market or in privately negotiated transactions. The timing and $23.1 million usednumber of shares repurchased will be determined based on our evaluation of market conditions and other factors, see Note 12 of Notes to Consolidated Financial Statements in this Annual Report Form 10-K.
While we presently intend to continue to pay dividends.comparable quarterly cash dividends on both Class A and B common stock, the payment of future cash dividends depends upon the Board of Directors’ assessment of our earnings, financial condition, capital requirements and other factors.
Non‑GAAPWe maintain letters of credit that guarantee our performance or payment to third parties in accordance with specified terms and conditions. Amounts outstanding were approximately $12.1 million as of December 31, 2022 and $14.0 million as of December 31, 2021. Our letters of credit are primarily associated with insurance coverage and, to a lesser extent, foreign purchases and generally expire within one year of issuance. These instruments may exist or expire without being drawn down; therefore, they do not necessarily represent future cash flow obligations.
Our contractual obligations as of December 31, 2022 are presented in the following table:
| | | | | | | | | |
| | | | | Next | | Beyond |
Contractual Obligations | | Total | | 12 Months | | 12 Months |
|
| | (in millions) |
Long-term debt obligations, including current maturities(a) | | $ | 150.0 | | $ | — | | $ | 150.0 |
Operating lease obligations(b) | | | 54.8 | | | 10.4 | | | 44.4 |
Finance lease obligations(c) | | | 4.7 | | | 3.0 | | | 1.7 |
Pension contributions(d) | | | 9.2 | | | 0.5 | | | 8.7 |
Interest(e) | | | 13.2 | | | 5.2 | | | 8.0 |
2017 Tax Act Toll Tax payable(f) | | | 18.7 | | | 3.4 | | | 15.3 |
Capital expenditures(g) | | | 6.3 | | | 6.3 | | | — |
Other(h) | | | 54.6 | | | 54.1 | | | 0.5 |
Total | | $ | 311.5 | | $ | 82.9 | | $ | 228.6 |
| (a) | Relates to the drawdown on the line of credit under the Amended Credit Agreement as recognized in the consolidated balance sheet. See Note 11 of Notes to the Consolidated Financial Statements in this Annual Report for further disclosures. |
| (b) | Relates to the lease liabilities recognized for right-of-use assets of operating leases with a lease term longer than twelve months. See Note 5 of Notes to the Consolidated Financial Statements in this Annual Report for further disclosures. |
| (c) | Relates to the lease liabilities recognized for right-of-use assets of financing leases with a lease term longer than twelve months. See Note 5 of Notes to the Consolidated Financial Statements in this Annual Report for further disclosures. |
| (d) | Relates to estimated future obligations for the Europe pension plans. See Note 14 of Notes to the Consolidated Financial Statements in this Annual Report for further disclosures. |
| (e) | Represents the current estimate of future interest payments due on the current drawdown on the line of credit under the Amended Credit Agreement referenced above at (a). |
| (f) | Relates to the 2017 Tax Act one time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax which was payable over a number of years. |
| (g) | Relates to capital expenditure obligations included in investment totals of $40 million to $45 million discussed above. |
| (h) | The majority relates to commodity commitments, as well as the contingent consideration related to an immaterial acquisition. |
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 are material to investors.
Non-GAAP Financial Measures
In accordance with the SEC's Regulation G and itemItem 10(e) of Regulation S-K, the following provides definitions of the non-GAAP measures used by management. We believe that these measures provide for a more complete perspectiveenhance the overall understanding of underlying business results and trends. These non-GAAP measures are not intended to be considered by the user in place of the related GAAP measure, but rather as supplemental information to more fully understand our business results. These non-GAAP 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 net sales growth is a non-GAAP measure of net 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.GAAPU.S. GAAP 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.
Adjusted operating income, adjusted operating margins, adjusted net income, and adjusted earnings per share are non-GAAP measures that exclude certain expenses incurred and benefits recognized in the periods presented that relate primarily to our global restructuring programs, deployment
costs, acquisition related costs, purchase accounting adjustments, gains on acquisition and disposition, goodwill and other long-lived asset, impairments, certain other costs and the related income tax impacts on these items and other tax adjustments, including the impact of the 2017 Tax Act.adjustments. Management believes reporting these financial measures provides useful information to investors, potential investors and others, by facilitating easier comparisons of our performance with prior and future periods.
A reconciliation of U.S. GAAP results to these adjusted non-GAAP measures is provided below:below (dollars in millions, except per share amounts):
| | | | | | |
| | | | | | |
| | Year Ended |
| | December 31, | | December 31, |
| | 2022 | | 2021 |
| | | | | | |
Net sales | | $ | 1,979.5 | | $ | 1,809.2 |
| | | | | | |
Operating income - as reported | | | 315.0 | | | 239.6 |
Operating margin % | | | 15.9% | | | 13.2% |
| | | | | | |
Adjustments for special items: | | | | | | |
Restructuring | | | 10.6 | | | 19.3 |
Gain on sale of asset | | | (1.8) | | | — |
| | | | | | |
Total adjustments for special items | | $ | 8.8 | | $ | 19.3 |
| | | | | | |
Operating income - as adjusted | | $ | 323.8 | | $ | 258.9 |
Adjusted operating margin % | | | 16.4% | | | 14.3% |
| | | | | | |
Net income - as reported | | $ | 251.5 | | $ | 165.7 |
| | | | | | |
Adjustments for special items - tax effected: | | | | | | |
Restructuring | | | 7.9 | | | 14.1 |
Tax adjustments | | | (18.2) | | | 7.2 |
Gain on sale of asset | | | (1.4) | | | — |
| | | | | | |
Total adjustments for special items - tax effected: | | $ | (11.7) | | $ | 21.3 |
| | | | | | |
Net income as adjusted | | $ | 239.8 | | $ | 187.0 |
| | | | | | |
Diluted earnings per share - as reported | | $ | 7.48 | | $ | 4.88 |
Adjustments for special items | | | (0.35) | | | 0.64 |
Diluted earnings per share - as adjusted | | $ | 7.13 | | $ | 5.52 |
| | | | | | |
| | | | | | |
| | Year Ended |
| | December 31, | | December 31, |
| | 2017 | | 2016 |
| | | | | | |
Net sales | | $ | 1,456.7 | | $ | 1,398.4 |
| | | | | | |
Operating income - as reported | | | 162.3 | | | 145.0 |
Operating margin % | | | 11.1% | | | 10.4% |
| | | | | | |
Adjustments for special items: | | | | | | |
Goodwill and other long-lived asset impairment charges | | | 1.0 | | | 0.5 |
Acquisitions costs/purchase accounting adjustments | | | 0.2 | | | 4.0 |
Restructuring | | | 6.8 | | | 4.7 |
Transformation and deployment costs | | | 2.9 | | | 14.2 |
Gain on disposition | | | — | | | (8.7) |
Debt issuance costs and other items | | | — | | | 0.3 |
Total adjustments for special items | | $ | 10.9 | | $ | 15.0 |
| | | | | | |
Operating income - as adjusted | | $ | 173.2 | | $ | 160.0 |
Adjusted operating margin % | | | 11.9% | | | 11.4% |
| | | | | | |
Net income - as reported | | $ | 73.1 | | $ | 84.2 |
| | | | | | |
Adjustments for special items - tax affected: | | | | | | |
Goodwill and other long-lived asset impairment charges | | | 0.6 | | | 0.4 |
Acquisitions costs/purchase accounting adjustments | | | 0.1 | | | 1.5 |
Restructuring | | | 4.7 | | | 3.2 |
Transformation and deployment costs | | | 1.9 | | | 8.8 |
Gain on disposition | | | — | | | (8.3) |
Tax adjustments | | | (1.6) | | | 2.6 |
2017 Tax Act | | | 25.1 | | | — |
Total Adjustments for special items - tax affected: | | $ | 30.8 | | $ | 8.2 |
| | | | | | |
Net income as adjusted | | $ | 103.9 | | $ | 92.4 |
| | | | | | |
Diluted earnings per share - as reported | | | 2.12 | | | 2.44 |
Adjustments for special items | | | 0.90 | | | 0.23 |
Diluted earnings per share - as adjusted | | $ | 3.02 | | $ | 2.67 |
Free cash flow is a non-GAAP measure that does not represent cash generated from operating activities in accordance with U.S. GAAP. Therefore, it should not be considered an alternative to net cash provided by 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.
A reconciliation of net cash provided by operating activities to free cash flow and calculation of our cash conversion rate is provided below:
| | | | | | | |
| | Year Ended |
| | December 31, | | December 31, | |
| | 2022 | | 2021 | |
|
| | (in millions) |
Net cash provided by operating activities | | $ | 224.0 | | $ | 180.8 | |
Less: additions to property, plant, and equipment | | | (28.1) | | | (26.7) | |
Plus: proceeds from the sale of property, plant, and equipment | | | 5.2 | | | 5.1 | |
Free cash flow | | $ | 201.1 | | $ | 159.2 | |
Net income —as reported | | $ | 251.5 | | $ | 165.7 | |
Cash conversion rate of free cash flow to net income | | | 80.0 | % | | 96.1 | % |
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| | (in millions) | |
Net cash provided by operating activities | | $ | 155.9 | | $ | 138.1 | | $ | 109.4 | |
Less: additions to property, plant, and equipment | | | (29.4) | | | (36.0) | | | (27.7) | |
Plus: proceeds from the sale of property, plant, and equipment | | | 0.4 | | | 0.1 | | | 0.1 | |
Free cash flow | | $ | 126.9 | | $ | 102.2 | | $ | 81.8 | |
Net income (loss)—as reported | | $ | 73.1 | | $ | 84.2 | | $ | (112.9) | |
Cash conversion rate of free cash flow to net income (loss) | | | 173.6 | % | | 121.4 | % | | NM | % |
Free cash flow | | $ | 126.9 | | $ | 102.2 | | $ | 81.8 | |
Plus: payments made on long‑term obligations | | | — | | | — | | | 49.2 | |
Free cash flow—as adjusted | | $ | 126.9 | | $ | 102.2 | | $ | 131.0 | |
Our free cash flow increased in 20172022 when compared to the free cash flow for 20162021 primarily due to an increase in cash flows provideddriven by operations higher net income and lower capital investment spending in 2017, inventory, partially offset by lower accounts payable balances associated with the timing of working capital fluctuations comparedreduction in inventory purchases and increased payments related to 2016income taxes, restructuring and employee and customer incentives.
Our net debt to capitalization ratio, a non‑GAAPnon-GAAP financial measure used by management, decreasedat December 31, 2022 was (14.3)% for 2022 compared to 20.7% for 2017 from 29.8%(9.3)% in 2016.2021. The decreasechange was driven by a decreasean increase in net cash of $68.8 million, partially offset by an increase in debt outstanding of $5.7 million at December 31, 2017, primarily due2022 compared to the full repayment of the Facility Agreement during the third quarter of 2017.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‑termlong-term debt (including current portion) to net debt and our net debt to capitalization ratio is provided below:
| | | | | | | |
| | | December 31, | | December 31, |
| | | 2022 | | 2021 |
| | | | | | | | |
| | December 31, | | |
| | 2017 | | 2016 | | |
| | (in millions) | | |
Current portion of long‑term debt | | $ | 22.5 | | $ | 139.1 | | |
| | | (in millions) |
Current portion of long‑term debt | | | $ | — | | $ | — |
Plus: long-term debt, net of current portion | | | 474.6 | | | 511.3 | | | | 147.6 | | | 141.9 |
Less: cash and cash equivalents | | | (280.2) | | | (338.4) | | | | (310.8) | | | (242.0) |
Net debt | | $ | 216.9 | | $ | 312.0 | | | $ | (163.2) | | $ | (100.1) |
A reconciliation of capitalization is provided below:
| | | | | | | | |
| | | December 31, | | December 31, | |
| | | 2022 | | 2021 | |
| | | | | | | | |
| | December 31, | | |
| | 2017 | | 2016 | | |
| | (in millions) | | |
| | | (in millions) | |
Net debt | | $ | 216.9 | | $ | 312.0 | | | $ | (163.2) | | $ | (100.1) | |
Total stockholders’ equity | | | 829.0 | | | 736.3 | | | | 1,300.6 | | | 1,173.2 | |
Capitalization | | $ | 1,045.9 | | $ | 1,048.3 | | | $ | 1,137.4 | | $ | 1,073.1 | |
Net debt to capitalization ratio | | | 20.7 | % | | 29.8 | % | | | (14.3) | % | | (9.3) | % |
Contractual Obligations
Our contractual obligations as of December 31, 2017 are presented in the following table:
| | | | | | | | | | | | | | | | |
| | Payments Due by Period | |
| | | | | Less than | | | | | | | | More than | |
Contractual Obligations | | Total | | 1 year | | 1‑3 years | | 4‑5 years | | 5 years | |
| | (in millions) | |
Long-term debt obligations, including current maturities(a)(c) | | $ | 499.5 | | $ | 22.5 | | $ | 135.0 | | $ | 342.0 | | $ | — | |
Operating lease obligations | | | 36.9 | | | 11.4 | | | 17.0 | | | 5.3 | | | 3.2 | |
Capital lease obligations(a) | | | 3.8 | | | 1.3 | | | 2.3 | | | 0.2 | | | — | |
Pension contributions | | | 8.8 | | | 0.8 | | | 1.1 | | | 1.3 | | | 5.6 | |
Interest | | | 21.0 | | | 9.3 | | | 11.7 | | | — | | | — | |
Redeemable financial instrument(a) | | | 2.9 | | | 2.9 | | | — | | | — | | | — | |
2017 Tax Act Toll Tax payable | | | 23.3 | | | 3.8 | | | 3.8 | | | 5.3 | | | 10.4 | |
Other(b) | | | 43.7 | | | 42.0 | | | 1.6 | | | 0.1 | | | — | |
Total | | $ | 639.9 | | $ | 94.0 | | $ | 172.5 | | $ | 354.2 | | $ | 19.2 | |
| (a)
| | as recognized in the consolidated balance sheet.
|
| (b)
| | the majority relates to commodity and capital commitments at December 31, 2017.
|
| (c)
| | the payment in less than one year represents the second year of amortization of the term loan under the Credit Agreement. See Note 11 of Notes to Consolidated Financial Statements in this Annual Report on Form 10‑K for further details of our financing arrangements.
|
We maintain letters of credit that guarantee our performance or payment to third parties in accordance with specified terms and conditions. Amounts outstanding were approximately $25.7 million as of December 31, 2017 and $25.6 million as of December 31, 2016. Our letters of credit are primarily associated with insurance coverage and, to a lesser extent, foreign purchases and generally expire within one year of issuance. These instruments may exist or expire without being drawn down; therefore they do not necessarily represent future cash flow obligations and are not included in the table above.
Off‑Balance Sheet Arrangements
Except for operating lease commitments, 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.
Application of Critical Accounting Policies and Key Estimates
The preparation of our consolidated financial statements in accordance with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported. A critical accounting estimate is an assumption about highly uncertain matters and could have a material effect on the consolidated financial statements if another, also reasonable, amount were used, or, a change in the estimate is reasonably likely from period to period. We base our assumptions on historical experience and on other estimates that we believe are reasonable under the circumstances. Actual results could differ significantly from these estimates. There were no significant changes in our accounting policies or significant changes in our accounting estimates during 2017.2022.
We periodically discuss the development, selection and disclosure of the estimates with our Audit Committee. Management believes the following critical accounting policies reflect our more significant estimates and assumptions.
Revenue recognition
We recognize revenue when allunder the core principle to depict the transfer of control to our customers in an amount reflecting the consideration to which we expect to be entitled. In order to achieve that core principle, we apply the following criteria are met:five-step approach: (1) we have entered intoidentify the contract with a binding agreement,customer, (2) identify the product has shipped and title has passed,performance obligations in the contract, (3) determine the salestransaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. When determining the transaction price of each contract, we consider contractual consideration payable by the customer is fixed or is determinable and assess variable consideration that may affect the total transaction price. Variable consideration, consisting of early payment discounts, rebates and other sources of price variability, are included in the estimated transaction price based on both customer-specific information as well as historical experience. We regularly review our estimates of variable consideration on the transaction price and recognize changes in
(4) collectability is reasonably assured. We recognize revenue based uponestimates on a determination that all criteria for revenue recognition have been met, which, based oncumulative catch-up basis as if the majority of our shipping terms, is considered to have occurred upon shipmentmost current estimate of the finished product. Some shipping terms requiretransaction price adjusted for variable consideration had been known as of the goodsinception of the contract.
Our revenue for product sales is recognized on a point in time model, at the point control transfers to be received by the customer, before title passes. In those instances, revenueswhich is generally when products are not recognized untilshipped from the customer has receivedCompany’s manufacturing or distribution facilities or when delivered to the goods. We record estimated reductionscustomer’s named location. Sales tax, value-added tax, or other taxes collected concurrent with revenue producing activities are excluded from revenue. Freight costs billed to customers for shipping and handling activities are included in revenue with the related cost included in selling, general and a corresponding assetadministrative expenses. See Note 4 of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for customer returnsfurther disclosures and allowances and for customer programs. Provisions for returns and allowances are made at the time of sale, derived from historical trends and form a portion of the allowance for doubtful accounts. Customer programs, which are primarily annual volume incentive plans, allow customers to earn credit for attaining agreed upon purchase targets from us. We record estimated reductions todetail regarding revenue made at the time of sale, for customer programs based on estimated purchase targets.recognition.
Inventory valuation
Inventories are stated at the lower of cost or net realizable value with costs determined primarily on a first‑in first‑outfirst-in first-out basis. We evaluate the need to record adjustments for excess or obsolete inventory at least quarterly.We utilize both specific product identification and historical product demand as the basis for determiningestimating our excess or obsolete inventory reserve. We identify all inventories that exceed a range of one to three years in sales.sales to calculate inventory on hand that exceeds estimated demand. This is determined by comparing the current inventory balance against unit sales for the trailing twelve months. New products added to inventory within the past twelve months are excluded from this analysis. A portion of our products contain recoverable materials, therefore the excess and obsolete reserve is established net of any estimated recoverable amounts.amounts based on historical experience. Changes in market conditions, lower‑than‑lower-than- expected customer demand or changes in technology or features could result in additional excess or obsolete inventory that is not saleable and could require additional inventory reserve provisions.
In certain countries, additional inventory reserves are maintained for potential shrinkage experienced in the manufacturing process. The reserve is established based on the prior year’s inventory losses adjusted for any change in the gross inventory balance.
Goodwill and other intangibles
We have made numerous acquisitions over the years and have recognized a significant amount of goodwill. Goodwill is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, and determination of the fair value of each reporting unit.unit when a quantitative analysis is performed. We estimate the fair value of our reporting units using an income approach based on the present value of estimated future cash flows, and when appropriate, guideline public company and guideline transaction market approaches.
Accounting guidance allows us to reviewassess goodwill for impairment utilizing either qualitative or quantitative analyses. We have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the quantitative impairment test is unnecessary.
We first identify those reporting units that we believe could pass a qualitative assessment to determine whether further impairment testing is necessary. For each reporting unit identified, our qualitative analysis includes:
| 1) | | A review of the most recent fair value calculation to identify the extent of the cushion between fair value and carrying amount, to determine if a substantial cushion existed. |
| 2) | | A review of events and circumstances that have occurred since the most recent fair value calculation to determine if those events or circumstances would have affected our previous fair value assessment. Items identified and reviewed include macroeconomic conditions, industry and market changes, cost factor changes, events that affect the reporting unit, and financial performance against expectations and the reporting unit’s performance relative to peers. expectations. |
We then compile this information and make our assessment of whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we determine it is not more likely than not, then no further quantitative analysis is required.
In 2017,2022, we had eightseven reporting units. One of these reporting units, Water Quality, had no goodwill. We performed a qualitative analysis for sixeach of the six remaining seven reporting units, which include Blücher, Dormont, US Drains, Europe, Residential and Commercial, and APMEA. For one reporting unit,Fluid Solutions-Europe, Fluid Solutions-Americas, Heating and Hot Water Solutions (“HHWS”), we performed a quantitative analysis. and APMEA.
As of our October 29, 201723, 2022 testing date, we had $547.5$581.2 million of goodwill on our balance sheet. As a result of our qualitative analyses, we determined that the fair values of the six reporting units noted above were more likely than not greater than the carrying amounts. We performed a quantitative impairmentIn 2022, we did not need to proceed beyond the qualitative analysis, forand no goodwill impairments were recorded. Changes in macroeconomic, industry or market conditions, or our inability to achieve projected results that were used to complete the HHWS reporting unitqualitative analyses could result in connection with the annual strategic plan and due to underperformance to budget, primarily caused by continuing softness in the condensing boiler market, weakness in our tankless water heater products and competitive pricing pressure. We estimated the fair value of the reporting unit using a weighted calculation of the income approach and the market approach. Inherent in our development of the fair value of the reporting unit are the assumptions and estimates used in the income, and where appropriate, market approaches. The income approach calculates the present value of future cash flow projections based on assumptions and estimates derived from a review of our operating results, business plans, expected growth rates, the appropriate revenue and EBITDA multiples, and discount rates. We also made certain assumptions about future economic conditions and market data. We developed our assumptions based on our historical results, including sales growth, operating profits, working capital levels and income tax rates. The market approach calculates the estimated fair value based on valuation multiples derived from stock prices and enterprise values of publicly traded companies that are comparable to the reporting unit and based on valuation multiples are derived from actual transactions for comparable public companies when appropriate.
We believe that the income approach is sensitive to the selected discount rate and the market approach is sensitive to valuation multiples used. We use third-party valuation specialists to help develop the appropriate discount rate and valuation multiples. We use standard valuation practices to arrive at a weighted average cost of capital (“WACC”) based on the market and guideline public companies. The higher the discount rate, the lower the discounted cash flows. While we believe that our estimate of future cash flows and market approach valuations are reasonable, different assumptions could significantly affect our valuation and result in impairments in the future.
The expected cash flows are discounted to present value using a WACC. The key assumptions used to determine the appropriate WACC rates utilized in the income approach for the HHWS reporting unit were as follows:
| ·
| | A risk free rate based on the 20-year U.S. Treasury Bonds as of the assessment date.
|
| ·
| | A market risk premium that is determined, in part, through published historical studies adjusted for the business risk index for the reporting unit. The business risk index is derived from comparable companies and measures the estimated stock price volatility.
|
| ·
| | Comparable company and market interest rate information used to the determine the cost of debt and the appropriate long-term capital structure in order to weight the cost of debt and the cost of equity into an overall WACC.
|
| ·
| | A small stock premium based on the size of the reporting unit.
|
For the HHWS reporting unit, the underlying analyses supporting our fair value assessment are related to our comparable companies' historical and projected results, current transaction values and our outlook of our business' long-term performance, which included key assumptions as to the appropriate revenue and EBITDA multiples, discount rate and long-term growth rate. In connection with the HHWS impairment assessment, we utilized a discount rate of 9% and growth rates beyond our planning periods ranging from 5% to 7% and a long-term terminal growth rate of 3%. Future increases in discount rates due to changing interest rates or a declining economic environment and different market multiples could impact our assumptions and the value of our reporting units. However, taking into consideration the various elements of the 2017 Tax Act would result in a net increase to the discounted cash flows generated by the reporting unit in our strategic plan, which would increase the fair value of the reporting unit.
The estimated fair value of the reporting unit of $397.0 million exceedednot exceeding the carrying value of $373.8 million by approximately $23.2 million, or 6%, in 2017amounts and therefore, no impairment was recorded.could lead to impairment.
In 2015, we recognized a pre‑tax impairment charge of $129.7 million in the Europe reporting unit. The remaining goodwill balance as of December 31, 2015 in this reporting unit was $46.4 million.
Intangible assets such as trademarks and trade names are generally recorded in connection with a business acquisition.acquisition and we have recorded certain trademarks and trade names as indefinite-lived intangible assets. Values assigned to intangible assets are typically determined by an independent valuation firm based on our estimates and judgments regarding expectations of the success and life cycle of products and technology acquired. Accounting guidance allows us to perform a qualitative impairment assessment of indefinite‑livedindefinite-lived intangible assets consistent with the goodwill guidance noted previously. For our 20172022 impairment assessment, which occurred as of October 29, 2017,23, 2022, we performed quantitative assessmentsa qualitative assessment for all indefinite‑livedtrademarks and tradenames as each intangible assets.asset’s fair value significantly exceeded the carrying value in the previous quantitative assessment performed and each had sales growth in 2022, and no other indicators of impairment were present. The majority of the trademarks and tradenames are expected to have sales growth in 2023, with a few expected to potentially have minimal sales decline in 2023 but sales growth in 2024. As a result of our qualitative analyses, we determined that the fair values of the indefinite-lived intangibles assets were more likely than not greater than the carrying amounts. If we were to perform a quantitative assessment, the methodology we employed wasemploy is the relief from royalty method, a subset of the income approach. During 2017,2022, 2021, and 2020, no impairment was recognized on our indefinite-lived intangible assets. In 2016, we recognized a non‑cash pre‑tax charge of approximately $0.4 million relatedChanges in macroeconomic, industry or market conditions, or our inability to an indefinite lived tradenameachieve projected results that were used to complete the qualitative analyses could result in our Europe reporting unit. In 2015, we recognized a non-cash pre-tax impairment charge of $0.6 million of certain of our indefinite‑lived intangible assets.the trademark’s or trade name’s fair value not exceeding its carrying amount and could lead to impairment.
Product liability
Because of retention requirements associated with our insurance policies, we are generally self‑insuredself-insured for potential product liability claims. We are subject to a variety of potential liabilities in connection with product liability cases, and for our most significant volume of liability matters, we maintain a high self‑insuredself-insured retention limit within our product liability and general liability coverage, which we believe to be generally in accordance with industry practices. We maintain excess liability insurance to minimize our risks related to claims in excess of our primary insurance policies. The product liability accrual is established after considering any applicable insurance coverage.
For our product liability cases in the U.S., management establishes itswe establish a product liability accrual, which includes estimated legal costs associated with accrued claims, by utilizing third‑partyclaims. For our most significant volume of liability matters, we utilize third-party actuarial valuations which incorporate historical trend factors including, but not limited to, claim frequency and loss severity, and our specific claims experience derived from loss reports provided by third‑party administrators.third-party claims administrators to establish our product liability accrual. The product liability accrual is established after considering any applicablerepresents the estimated ultimate losses for all reported and incurred but not reported claims. For the remainder of our product liability accrual, where we do not utilize third-party actuarial valuations, we maintain insurance coverage.and calculate potential product liability accruals which includes legal costs associated with the accrued claims on a case by case basis. Changes in the nature and volume of product liability claims, legal costs, or the actual settlement amounts could affect the adequacy of the estimates and require changes to the accrual. Because the liability is an estimate, the ultimate liability may be more or less than reported.
We determine the trend factors for product liability based on consultation with outside actuaries. We maintain excess liability insurance to minimize our risks related to claims in excess of our primary insurance policies. Any material change in the aforementioned factors could have an adverse impact on our operating results.results for any particular period depending, in part, upon the operating results for such period.
Legal contingencies
We are a defendant in numerous legal matters including those involving environmental issues and product liability as discussed in more detail in Part I, Item 1. “Business—Product Liability, Environmental and Other Litigation Matters.”Matters” and Note 15 of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K. As required by GAAP, we determine whether an estimated loss from a loss contingency should be accrued by assessing whether a loss is deemed probable and the loss amount can be reasonably estimated. When it is possible to estimate reasonably possible
loss or range of loss above the amount accrued, that estimate is aggregated and disclosed. Estimates of potential outcomes of these contingencies are often developed in consultation with outside counsel. While this assessment is based upon all available information, litigation is inherently uncertain and the actual liability to fully resolve litigation cannot be predicted with any assurance of accuracy. In the event of an unfavorable outcome in one or more legal matters, the ultimate liability may be in excess of amounts currently accrued, if any, and may be material to our operating results or cash flows for a particular quarterly or annual period. However, based on information currently known to us, management believes that the ultimate outcome of all legal contingencies, as they are resolved over time, is not likely to have a material adverse effect on our financial condition, though the outcome could be material to our operating results for any particular period depending, in part, upon the operating results for such period.condition.
Income taxes
We are subject to income taxes in the U.S. (federal and state) and foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes, and evaluating the impact of the 2017 Tax Act.taxes.
We estimate and use our expected annual effective income tax rates to accrue income taxes. Effective tax rates are determined based on budgeted earnings before taxes, including our best estimate of permanent items that will affect the effective rate for the year. Management periodically reviews these rates with outside tax advisors and changes are made if material variances from expectations are identified.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
A valuation allowance is provided to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We consider estimated future taxable income, and future reversals of the deferred tax liabilities, and tax planning strategies, in assessing the need for a valuation allowance.
The 2017 Tax Act was enacted on December 22, 2017 and introduces significant changes to U.S. Changes in the relevant facts, including the accuracy of our estimated future taxable income, tax law. Effective in 2018,can significantly impact the 2017 Tax Act reducesjudgment or need for valuation allowances. In the U.S. statutory tax rate from 35% to 21% and creates new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred toevent we change our determination as the global intangible low-taxed income tax and the base erosion tax, respectively. In addition, in 2017 we are subject to the Toll Tax, a one-time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax. Accounting for the income tax effectsamount of the 2017 Tax Act requires significant judgments and estimates in the interpretation and calculations of the provisions of the 2017 Tax Act.
We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the Toll Tax, remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability ofthat can be realized, we will adjust our deferred tax assets and liabilities. Duevaluation allowance with a corresponding impact to the timing of the enactment and the complexity involved in applying the provisions of the 2017 Tax Act, we have made reasonable estimates of the effects and recorded provisional amounts in our financial statements for the year ended December 31, 2017. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As we collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, the IRS or other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact the provision for income taxes and the effective tax rate in the period or periods in which such determination is made.
As of December 31, 2021, we released $22.1 million of our valuation allowance on foreign tax credits related to the additional foreign source income resulting from our restructured Mexican manufacturing supply chain operations. As of December 31, 2022, there were no material adjustments are made. The accounting for the tax effectsto our valuation allowances. See Note 9 of the enactment of the 2017 Tax Act will be completed in 2018.
New Accounting Standards
A discussion of recent accounting pronouncements is included in Note 2 of the Notes to the Consolidated Financial Statements in this Annual Report on Form 10‑K.for further disclosures.
Item 7A. 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 16 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. In the third quarter of 2017, we did not renew the twoWe have entered into forward exchange contracts which werehedge 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 manage60% 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 rate exposure betweenhedge contracts in other comprehensive income until inventory turns and is sold to a third-party. Once the Hong Kong dollar andthird-party transaction associated with the euro regarding two intercompany loans, ashedged forecasted transaction occurs, the loans have been settled. These forward contracts were marked-to-market with changes ineffective 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 recorded to earnings throughout 2017.
Prior to 2016, we generally had a low exposure on the cost of our debt to changes in interest rates. On February 12, 2016, the Company entered into a new Credit Agreement pursuant to which it received a funding commitment under a Term Loan of $300 million, of which $277.5 million isdesignated foreign hedge contracts outstanding and a Revolving Commitment of $500 million, of which $147.0 million has been drawn as of December 31, 2017. Both facilities mature on February 12, 2021. For each facility, we can choose either2022 was an Adjusted LIBOR or Alternative Base Rate (“ABR”). Accordingly,asset of $0.2 million.
Under the Amended Credit Agreement, our earnings and cash flows are exposed to interest rate risk from changes in Adjusted LIBOR. In order to manage our exposure to changes in cash flows attributable to fluctuations in LIBOR-indexed interest payments related to our floating rate debt,debt. In order to manage our exposure, we entered into twoan interest rate swaps. For eachswap on March 30, 2021. Under the interest rate swap agreement, we received the one-month USD-LIBOR subject to a 0.00% floor and paid a fixed rate of 1.02975% on a notional amount of $100.0 million. On August 2, 2022, the Company amended the interest rate swap to replace LIBOR as a reference rate for borrowings with Term SOFR. Under the amended interest rate swap agreement, the Company receives the three-month USD-LIBORone-month Term SOFR subject to a 0%-0.1% floor and pays a fixed rate of 1.31375%0.942% on a notional amount of $225.0$100.0 million. The swap matures on March 30, 2026. Information about our long‑termlong-term debt including principal amountsfacility and related interest rates appears in Note 1116 of Notes to 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements listed in section (a) (1) of “Part IV, Item 15. Exhibits, and Financial Statement Schedules” of this Annual Report are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Item 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a‑15(b)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 provideprovided 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 rules and forms and in that such controls are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act areis 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 quarter ended December 31, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In connection with these rules, we will continue to review and document our disclosure controls and procedures, including our internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a‑15(f)13a-15(f) and 15d‑15(f)15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
| (i) | | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| (ii) | | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| (iii) | | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013).
Based on ourthis assessment, and those criteria, management believeshas concluded that the Company maintained effectiveour internal control over financial reporting was effective as of December 31, 2017.2022.
The independent registered public accounting firm that audited the Company’s consolidated financial statements included elsewhere in this Annual Report on Form 10‑K10-K has also audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017,2022, as stated in this Annual Report on Form 10-K under the heading, “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 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 may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
Item 9B. OTHER INFORMATION.
None.
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information with respect to the executive officers of the Company is set forth in Part I, Item 1 of this Report under the caption “Executive“Information about Our Executive Officers and Directors” and is incorporated herein by reference. The information provided under the captions “Information as to Nominees for Director,” “Corporate Governance,”Governance” and “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” in our definitive Proxy Statement for our 20182023 Annual Meeting of Stockholders to be held on May 16, 201817, 2023 is incorporated herein by reference.
We have adopted a Code of Business Conduct applicable to all officers, employees and Board members. The Code of Business Conduct is posted in the Investors section of our website, www.wattswater.com. We will provide you with a print copy of our Code of Business Conduct free of charge on written request to Kenneth R. Lepage,our Corporate Secretary, Watts Water Technologies, Inc., 815 Chestnut Street, North Andover, MA 01845. Any amendments to, or waivers of, the Code of Business Conduct which apply to our Chief Executive Officer, Chief Financial Officer, Corporate Controller or any person performing similar functions will be disclosed on our website promptly following the date of such amendment or waiver.
Item 11. EXECUTIVE COMPENSATION.
The information provided under the captions “Director Compensation,” “Corporate Governance,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in our definitive Proxy Statement for our 20182023 Annual Meeting of Stockholders to be held on May 16, 201817, 2023 is incorporated herein by reference.
The “Compensation Committee Report” contained in our Proxy Statement shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed under the Securities Act or Exchange Act.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information appearing under the caption “Principal Stockholders” in our definitive Proxy Statement for our 20182023 Annual Meeting of Stockholders to be held on May 16, 201817, 2023 is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2017,2022, about the shares of Class A common stock that may be issued upon the exercise of stock options, settlement of performance stock awards and vesting of deferred stock awards issued under the Company’s SecondThird Amended and Restated 2004 Stock Incentive Plan, and the settlement of restricted stock units granted under our Management Stock Purchase Plan as well as the number of shares remaining for future issuance under our SecondThird Amended and Restated 2004 Stock Incentive Plan and Management Stock Purchase Plan.
| | | | | | | | |
| | Equity Compensation Plan Information | |
| | | | | | | Number of securities remaining | |
| | Number of securities to be | | | | | available for future issuance | |
| | issued upon exercise of | | Weighted‑average exercise | | under equity compensation | |
| | outstanding options, | | price of outstanding options, | | plan (excluding securities | |
| | warrants and rights | | warrants and rights | | reflected in column (a)) | |
Plan Category | | (a) | | (b) | | (c) | |
Equity compensation plans approved by security holders | | 337,565 | (1) | $ | 57.47 | (2) | 1,660,874 | (3) |
Equity compensation plans not approved by security holders | | None | | | None | | None | |
Total | | 337,565 | (1) | $ | 57.47 | (2) | 1,660,874 | (3) |
| | | | | | | | |
| | Equity Compensation Plan Information | |
| | | | | | | Number of securities remaining | |
| | Number of securities to be | | | | | available for future issuance | |
| | issued upon exercise of | | Weighted‑average exercise | | under equity compensation | |
| | outstanding options, | | price of outstanding options, | | plan (excluding securities | |
| | warrants and rights | | warrants and rights | | reflected in column (a)) | |
Plan Category | | (a) | | (b) | | (c) | |
Equity compensation plans approved by security holders | | 566,943 | (1) | $ | — | | 2,106,091 | (2) |
Equity compensation plans not approved by security holders | | None | | | None | | None | |
Total | | 566,943 | (1) | $ | — | | 2,106,091 | (2) |
| (1) | (1)
| | Represents 94,544962 outstanding options, 272,670145,888 performance sharestock awards and 25,959113,944 deferred sharesstock awards under the SecondThird Amended and Restated 2004 Stock Incentive Plan, and 173,77076,771 outstanding restricted stock units under the Management Stock Purchase Plan. |
| (2) | (2)Represents the weighted-average exercise price of the 962 outstanding options.
|
| (3) | | Includes 1,342,858955,686 shares available for future issuance under the SecondThird Amended and Restated 2004 Stock Incentive Plan, and 763,233705,188 shares available for future issuance under the Management Stock Purchase Plan. |
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information provided under the captions “Corporate Governance” and “Certain Relationships and Related Transactions” in our definitive Proxy Statement for our 20182023 Annual Meeting of Stockholders to be held on May 16, 201817, 2023 is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information provided under the caption “Ratification of Independent Registered Public Accounting Firm” in our definitive Proxy Statement for our 20182023 Annual Meeting of Stockholders to be held on May 17, 20172023 is incorporated herein by reference.
PART IV
Item 15. EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements
The following financial statements are included in a separate section of this Report commencing on the page numbers specified below:
| |
Report of Independent Registered Public Accounting Firm (KPMG LLP, Boston, MA, PCAOB ID: 185) | 4847 |
Consolidated Statements of Operations for the years ended December 31, 2017, 20162022, 2021 and 20152020 | 5049 |
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 20162022, 2021 and 20152020 | 5150 |
Consolidated Balance Sheets as of December 31, 20172022 and 20162021 | 5251 |
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 20162022, 2021 and 20152020 | 5352 |
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 20162022, 2021 and 20152020 | 5453 |
Notes to Consolidated Financial Statements | 5554 |
(a)(2) Schedules
All other required schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are included in the Notes to the Consolidated Financial Statements.
(a)(3) Exhibits
The exhibits listed in the Exhibit Index immediately preceding the signature page hereto are filed as part of this Annual Report on Form 10‑K.10-K.
Item 16. FORM 10-K SUMMARY.
None.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Watts Water Technologies, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Watts Water Technologies, Inc,Inc. and subsidiaries (the “Company”)Company) as of December 31, 20172022 and 2016,2021, the related consolidated statements of operations, comprehensive income, (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017,2022, and the related notes and financial statement Schedule II-ValuationII - Valuation and Qualifying Accounts (collectively, the “consolidatedconsolidated financial statements”)statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control – Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172022 and 2016,2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017,2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement's Annual Report on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Product liability accrual
As discussed in Notes 10 and 15 to the consolidated financial statements, the Company’s product liability accrual as of December 31, 2022 was $22.4 million. The Company is generally self-insured for potential product liability claims. For its most significant volume of liability matters, the Company uses third-party actuarial valuations, which incorporate historical trend factors and its specific claims experience derived from loss reports provided by third-party claims administrators, to establish its product liability accrual.
We identified the evaluation of the product liability accrual as a critical audit matter. A high degree of auditor judgment and actuarial professionals with specialized skills and knowledge were required to (1) assess the actuarial methods used, and (2) evaluate the estimated ultimate losses on claims that are based on application of loss development factors to historical claims experience.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of internal controls related to the product liability accrual, which included controls over the review of the actuarial valuations and selection of estimated ultimate losses, as well as completeness and accuracy of claims data used in the actuarial valuations. We tested current year claims data used to estimate the product liability accrual by selecting certain claims and comparing them to relevant underlying claim information, including documentation of claim payments. We involved an actuarial professional with specialized skills and knowledge, who assisted in:
| ● | assessing the actuarial methods used to calculate the product liability accrual for consistency with generally accepted actuarial standards; |
| ● | assessing the loss development factors by comparing them to historical loss development factors and industry loss development trends; and |
| ● | evaluating the weighting of actuarial methods used to derive ultimate losses. |
/s/ KPMG LLP
We have served as the Company’s auditor since 1997.
Boston, Massachusetts
February 23, 201821, 2023
Watts Water Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in millions, except per share information)
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
Net sales | | $ | 1,456.7 | | $ | 1,398.4 | | $ | 1,467.7 | |
Cost of goods sold | | | 854.3 | | | 832.8 | | | 914.6 | |
GROSS PROFIT | | | 602.4 | | | 565.6 | | | 553.1 | |
Selling, general and administrative expenses | | | 432.3 | | | 424.1 | | | 491.3 | |
Restructuring | | | 6.8 | | | 4.7 | | | 21.4 | |
Goodwill and other long-lived asset impairment charges | | | 1.0 | | | 0.5 | | | 130.5 | |
Gain on disposition | | | — | | | (8.7) | | | — | |
OPERATING INCOME (LOSS) | | | 162.3 | | | 145.0 | | | (90.1) | |
Other (income) expense: | | | | | | | | | | |
Interest income | | | (1.0) | | | (1.0) | | | (1.0) | |
Interest expense | | | 19.1 | | | 22.6 | | | 24.3 | |
Other expense (income), net | | | 1.1 | | | (4.4) | | | (2.4) | |
Total other expense | | | 19.2 | | | 17.2 | | | 20.9 | |
INCOME (LOSS) BEFORE INCOME TAXES | | | 143.1 | | | 127.8 | | | (111.0) | |
Provision for income taxes | | | 70.0 | | | 43.6 | | | 1.9 | |
NET INCOME (LOSS) | | $ | 73.1 | | $ | 84.2 | | $ | (112.9) | |
Basic EPS | | | | | | | | | | |
NET INCOME (LOSS) PER SHARE | | $ | 2.12 | | $ | 2.45 | | $ | (3.24) | |
Weighted average number of shares | | | 34.4 | | | 34.4 | | | 34.9 | |
Diluted EPS | | | | | | | | | | |
NET INCOME (LOSS) PER SHARE | | $ | 2.12 | | $ | 2.44 | | $ | (3.24) | |
Weighted average number of shares | | | 34.4 | | | 34.5 | | | 34.9 | |
Dividends declared per share | | $ | 0.75 | | $ | 0.71 | | $ | 0.66 | |
| | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
Net sales | | | $ | 1,979.5 | | $ | 1,809.2 | | $ | 1,508.6 |
Cost of goods sold | | | | 1,105.2 | | | 1,042.1 | | | 883.2 |
GROSS PROFIT | | | | 874.3 | | | 767.1 | | | 625.4 |
Selling, general and administrative expenses | | | | 550.5 | | | 508.2 | | | 434.4 |
Restructuring | | | | 10.6 | | | 19.3 | | | 9.9 |
Gain on sale of asset | | | | (1.8) | | | — | | | — |
OPERATING INCOME | | | | 315.0 | | | 239.6 | | | 181.1 |
Other (income) expense: | | | | | | | | | | |
Interest income | | | | (0.6) | | | — | | | (0.2) |
Interest expense | | | | 7.0 | | | 6.3 | | | 13.3 |
Other expense (income), net | | | | 1.0 | | | (0.8) | | | 1.0 |
Total other expense | | | | 7.4 | | | 5.5 | | | 14.1 |
INCOME BEFORE INCOME TAXES | | | | 307.6 | | | 234.1 | | | 167.0 |
Provision for income taxes | | | | 56.1 | | | 68.4 | | | 52.7 |
NET INCOME | | | $ | 251.5 | | $ | 165.7 | | $ | 114.3 |
Basic EPS | | | | | | | | | | |
NET INCOME PER SHARE | | | $ | 7.51 | | $ | 4.90 | | $ | 3.37 |
Weighted average number of shares | | | | 33.5 | | | 33.8 | | | 33.9 |
Diluted EPS | | | | | | | | | | |
NET INCOME PER SHARE | | | $ | 7.48 | | $ | 4.88 | | $ | 3.36 |
Weighted average number of shares | | | | 33.6 | | | 33.9 | | | 34.0 |
Dividends declared per share | | | $ | 1.16 | | $ | 1.01 | | $ | 0.92 |
The accompanying notes are an integral part of these consolidated financial statements.
Watts Water Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Amounts in millions)
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
Net income (loss) | | $ | 73.1 | | $ | 84.2 | | $ | (112.9) | |
Other comprehensive income (loss): | | | | | | | | | | |
Foreign currency translation adjustments | | | 51.1 | | | (32.4) | | | (75.2) | |
Reversal of foreign currency translation for sale of foreign entity, net of tax | | | — | | | 6.9 | | | — | |
Cash flow hedges, net of tax | | | 0.6 | | | 2.9 | | | — | |
Defined benefit pension plans, net of tax: | | | | | | — | | | 36.1 | |
Other comprehensive income (loss) | | | 51.7 | | | (22.6) | | | (39.1) | |
Comprehensive income (loss) | | $ | 124.8 | | $ | 61.6 | | $ | (152.0) | |
| | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
Net income | | | $ | 251.5 | | $ | 165.7 | | $ | 114.3 |
Other comprehensive (loss) income net of tax: | | | | | | | | | | |
Foreign currency translation adjustments | | | | (29.1) | | | (28.0) | | | 31.4 |
Cash flow hedges | | | | 6.5 | | | 0.7 | | | (0.6) |
Other comprehensive (loss) income | | | | (22.6) | | | (27.3) | | | 30.8 |
Comprehensive income | | | $ | 228.9 | | $ | 138.4 | | $ | 145.1 |
The accompanying notes are an integral part of these consolidated financial statements.
Watts Water Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in millions, except share information)
| | | | | | | |
| | December 31, | |
| | 2017 | | 2016 | |
ASSETS | | | | | | | |
CURRENT ASSETS: | | | | | | | |
Cash and cash equivalents | | $ | 280.2 | | $ | 338.4 | |
Trade accounts receivable, less allowance for doubtful accounts of $14.3 million at December 31, 2017 and $14.2 million at December 31, 2016 | | | 216.1 | | | 198.0 | |
Inventories, net | | | 259.1 | | | 239.4 | |
Prepaid expenses and other current assets | | | 26.7 | | | 40.5 | |
Assets held for sale | | | 1.5 | | | 3.1 | |
Total Current Assets | | | 783.6 | | | 819.4 | |
PROPERTY, PLANT AND EQUIPMENT | | | | | | | |
Property, plant and equipment, at cost | | | 525.8 | | | 498.1 | |
Accumulated depreciation | | | (327.3) | | | (308.4) | |
Property, plant and equipment, net | | | 198.5 | | | 189.7 | |
OTHER ASSETS: | | | | | | | |
Goodwill | | | 550.5 | | | 532.7 | |
Intangible assets, net | | | 185.2 | | | 202.5 | |
Deferred income taxes | | | 1.6 | | | 3.0 | |
Other, net | | | 17.1 | | | 15.9 | |
TOTAL ASSETS | | $ | 1,736.5 | | $ | 1,763.2 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
CURRENT LIABILITIES: | | | | | | | |
Accounts payable | | $ | 123.8 | | $ | 101.1 | |
Accrued expenses and other liabilities | | | 125.8 | | | 136.8 | |
Accrued compensation and benefits | | | 55.3 | | | 48.5 | |
Current portion of long-term debt | | | 22.5 | | | 139.1 | |
Total Current Liabilities | | | 327.4 | | | 425.5 | |
LONG-TERM DEBT, NET OF CURRENT PORTION | | | 474.6 | | | 511.3 | |
DEFERRED INCOME TAXES | | | 55.2 | | | 48.6 | |
OTHER NONCURRENT LIABILITIES | | | 50.3 | | | 41.5 | |
STOCKHOLDERS’ EQUITY: | | | | | | | |
Preferred Stock, $0.10 par value; 5,000,000 shares authorized; no shares issued or outstanding | | | — | | | — | |
Class A common stock, $0.10 par value; 80,000,000 shares authorized; 1 vote per share; issued and outstanding, 27,724,192 shares at December 31, 2017 and 27,831,013 shares at December 31, 2016 | | | 2.8 | | | 2.8 | |
Class B common stock, $0.10 par value; 25,000,000 shares authorized; 10 votes per share; issued and outstanding, 6,379,290 shares at December 31, 2017 and December 31, 2016 | | | 0.6 | | | 0.6 | |
Additional paid-in capital | | | 551.8 | | | 535.2 | |
Retained earnings | | | 372.9 | | | 348.5 | |
Accumulated other comprehensive loss | | | (99.1) | | | (150.8) | |
Total Stockholders’ Equity | | | 829.0 | | | 736.3 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 1,736.5 | | $ | 1,763.2 | |
| | | | | | |
| | December 31, |
| | 2022 | | 2021 |
ASSETS | | | | | | |
CURRENT ASSETS: | | | | | | |
Cash and cash equivalents | | $ | 310.8 | | $ | 242.0 |
Trade accounts receivable, less reserve allowances of $10.7 million at December 31, 2022 and $10.3 million at December 31, 2021 | | | 233.8 | | | 220.9 |
Raw materials | | | 138.0 | | | 119.4 |
Work in process | | | 21.0 | | | 20.4 |
Finished goods | | | 216.6 | | | 230.9 |
Total Inventories | | | 375.6 | | | 370.7 |
Prepaid expenses and other current assets | | | 30.4 | | | 27.9 |
Total Current Assets | | | 950.6 | | | 861.5 |
PROPERTY, PLANT AND EQUIPMENT | | | | | | |
Property, plant and equipment, at cost | | | 595.6 | | | 608.8 |
Accumulated depreciation | | | (398.8) | | | (408.1) |
Property, plant and equipment, net | | | 196.8 | | | 200.7 |
OTHER ASSETS: | | | | | | |
Goodwill | | | 592.4 | | | 600.7 |
Intangible assets, net | | | 113.7 | | | 128.6 |
Deferred income taxes | | | 17.8 | | | 3.5 |
Other, net | | | 59.6 | | | 60.6 |
TOTAL ASSETS | | $ | 1,930.9 | | $ | 1,855.6 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
CURRENT LIABILITIES: | | | | | | |
Accounts payable | | $ | 134.3 | | $ | 143.4 |
Accrued expenses and other liabilities | | | 174.6 | | | 186.9 |
Accrued compensation and benefits | | | 69.8 | | | 78.2 |
Total Current Liabilities | | | 378.7 | | | 408.5 |
LONG-TERM DEBT | | | 147.6 | | | 141.9 |
DEFERRED INCOME TAXES | | | 26.2 | | | 40.5 |
OTHER NONCURRENT LIABILITIES | | | 77.8 | | | 91.5 |
STOCKHOLDERS’ EQUITY: | | | | | | |
Preferred Stock, $0.10 par value; 5,000,000 shares authorized; no shares issued or outstanding | | | — | | | — |
Class A common stock, $0.10 par value; 120,000,000 shares authorized; 1 vote per share; issued and outstanding, 27,314,679 shares at December 31, 2022 and 27,584,525 shares at December 31, 2021 | | | 2.7 | | | 2.8 |
Class B common stock, $0.10 par value; 25,000,000 shares authorized; 10 votes per share; issued and outstanding, 5,958,290 shares at December 31, 2022 and 6,024,290 shares at December 31, 2021 | | | 0.6 | | | 0.6 |
Additional paid-in capital | | | 651.9 | | | 631.2 |
Retained earnings | | | 795.3 | | | 665.9 |
Accumulated other comprehensive loss | | | (149.9) | | | (127.3) |
Total Stockholders’ Equity | | | 1,300.6 | | | 1,173.2 |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 1,930.9 | | $ | 1,855.6 |
The accompanying notes are an integral part of these consolidated financial statements.
Watts Water Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(Amounts in millions, except share information)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | Class A | | Class B | | Additional | | | | | Other | | Total | |
| | Common Stock | | Common Stock | | Paid-In | | Retained | | Comprehensive | | Stockholders’ | |
| | Shares | | Amount | | Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Equity | |
Balance at December 31, 2014 | | 28,552,065 | | $ | 2.9 | | 6,479,290 | | $ | 0.6 | | $ | 497.4 | | $ | 500.6 | | $ | (89.1) | | $ | 912.4 | |
Net loss | | — | | | — | | — | | | — | | | — | | | (112.9) | | | — | | | (112.9) | |
Other comprehensive loss | | — | | | — | | — | | | — | | | — | | | — | | | (39.1) | | | (39.1) | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | (152.0) | |
Shares of Class B common stock converted to Class A common stock | | 100,000 | | | — | | (100,000) | | | — | | | — | | | — | | | — | | | — | |
Shares of Class A common stock issued upon the exercise of stock options | | 66,749 | | | — | | — | | | — | | | 2.5 | | | — | | | — | | | 2.5 | |
Stock-based compensation | | — | | | — | | — | | | — | | | 10.9 | | | — | | | — | | | 10.9 | |
Stock repurchase | | (812,540) | | | (0.1) | | — | | | — | | | — | | | (44.6) | | | — | | | (44.7) | |
Issuance of shares of restricted Class A common stock | | 123,000 | | | — | | — | | | — | | | — | | | (1.6) | | | — | | | (1.6) | |
Net change in restricted stock units | | 20,634 | | | — | | — | | | — | | | 1.2 | | | (0.7) | | | — | | | 0.5 | |
Common stock dividends | | — | | | — | | — | | | — | | | — | | | (23.1) | | | — | | | (23.1) | |
Balance at December 31, 2015 | | 28,049,908 | | $ | 2.8 | | 6,379,290 | | $ | 0.6 | | $ | 512.0 | | $ | 317.7 | | $ | (128.2) | | $ | 704.9 | |
Net income | | — | | | — | | — | | | — | | | — | | | 84.2 | | | — | | | 84.2 | |
Other comprehensive loss | | — | | | — | | — | | | — | | | — | | | — | | | (22.6) | | | (22.6) | |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | 61.6 | |
Shares of Class A common stock issued upon the exercise of stock options | | 217,030 | | | — | | — | | | — | | | 8.2 | | | — | | | — | | | 8.2 | |
Stock-based compensation | | — | | | — | | — | | | — | | | 13.4 | | | — | | | — | | | 13.4 | |
Stock repurchase | | (501,229) | | | — | | — | | | — | | | — | | | (26.8) | | | — | | | (26.8) | |
Issuance of net shares of restricted Class A common stock | | 53,714 | | | — | | — | | | — | | | — | | | (1.6) | | | — | | | (1.6) | |
Net change in restricted stock units | | 11,590 | | | — | | — | | | — | | | 1.6 | | | (0.5) | | | — | | | 1.1 | |
Common stock dividends | | — | | | — | | — | | | — | | | — | | | (24.5) | | | — | | | (24.5) | |
Balance at December 31, 2016 | | 27,831,013 | | $ | 2.8 | | 6,379,290 | | $ | 0.6 | | $ | 535.2 | | $ | 348.5 | | $ | (150.8) | | $ | 736.3 | |
Share based payment change in accounting principle | | — | | | — | | — | | | — | | | — | | | (0.5) | | | — | | | (0.5) | |
Net income | | — | | | — | | — | | | — | | | — | | | 73.1 | | | — | | | 73.1 | |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | 51.7 | | | 51.7 | |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | 124.8 | |
Shares of Class A common stock issued upon the exercise of stock options | | 31,377 | | | — | | — | | | — | | | 1.7 | | | — | | | — | | | 1.7 | |
Stock-based compensation | | — | | | — | | — | | | — | | | 13.9 | | | — | | | — | | | 13.9 | |
Stock repurchase | | (277,886) | | | — | | — | | | — | | | — | | | (18.2) | | | — | | | (18.2) | |
Issuance of net shares of restricted Class A common stock | | 87,443 | | | — | | — | | | — | | | — | | | (2.4) | | | — | | | (2.4) | |
Net change in restricted stock units | | 52,245 | | | — | | — | | | — | | | 1.0 | | | (1.7) | | | — | | | (0.7) | |
Common stock dividends | | — | | | — | | — | | | — | | | — | | | (25.9) | | | — | | | (25.9) | |
Balance at December 31, 2017 | | 27,724,192 | | $ | 2.8 | | 6,379,290 | | $ | 0.6 | | $ | 551.8 | | $ | 372.9 | | $ | (99.1) | | | 829.0 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | |
| | Class A | | Class B | | Additional | | | | | Other | | Total |
| | Common Stock | | Common Stock | | Paid-In | | Retained | | Comprehensive | | Stockholders’ |
| | Shares | | Amount | | Shares | | Amount | | Capital | | Earnings | | Loss | | Equity |
Balance at December 31, 2019 | | 27,586,416 | | $ | 2.8 | | 6,279,290 | | $ | 0.6 | | $ | 591.5 | | $ | 513.9 | | $ | (130.8) | | $ | 978.0 |
Net income | | — | | | — | | — | | | — | | | — | | | 114.3 | | | — | | | 114.3 |
Other comprehensive loss | | — | | | — | | — | | | — | | | — | | | — | | | 30.8 | | | 30.8 |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | 145.1 |
Shares of Class B common stock converted to Class A common stock | | 135,000 | | | — | | (135,000) | | | — | | | — | | | — | | | — | | | — |
Shares of Class A common stock issued upon the exercise of stock options | | 4,666 | | | — | | — | | | — | | | 0.4 | | | — | | | — | | | 0.4 |
Stock-based compensation | | — | | | — | | — | | | — | | | 12.7 | | | — | | | — | | | 12.7 |
Stock repurchase | | (331,531) | | | — | | — | | | — | | | — | | | (28.9) | | | — | | | (28.9) |
Net change in restricted stock units | | 83,961 | | | — | | — | | | — | | | 1.7 | | | (7.8) | | | — | | | (6.1) |
Common stock dividends | | — | | | — | | — | | | — | | | — | | | (31.4) | | | — | | | (31.4) |
Balance at December 31, 2020 | | 27,478,512 | | $ | 2.8 | | 6,144,290 | | $ | 0.6 | | $ | 606.3 | | $ | 560.1 | | $ | (100.0) | | $ | 1,069.8 |
Net income | | — | | | — | | — | | | — | | | — | | | 165.7 | | | — | | | 165.7 |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | (27.3) | | | (27.3) |
Comprehensive income | | | | | | | | | | | | | | | | | | | — | | | 138.4 |
Shares of Class B common stock converted to Class A common stock | | 120,000 | | | — | | (120,000) | | | — | | | — | | | — | | | — | | | — |
Shares of Class A common stock issued upon the exercise of stock options | | 1,440 | | | — | | — | | | — | | | 0.1 | | | — | | | — | | | 0.1 |
Stock-based compensation | | — | | | — | | — | | | — | | | 22.9 | | | — | | | — | | | 22.9 |
Stock repurchase | | (109,998) | | | — | | — | | | — | | | — | | | (16.0) | | | — | | | (16.0) |
Net change in restricted stock units | | 94,571 | | | — | | — | | | — | | | 1.9 | | | (9.6) | | | — | | | (7.7) |
Common stock dividends | | — | | | — | | — | | | — | | | — | | | (34.3) | | | — | | | (34.3) |
Balance at December 31, 2021 | | 27,584,525 | | $ | 2.8 | | 6,024,290 | | $ | 0.6 | | $ | 631.2 | | $ | 665.9 | | $ | (127.3) | | | 1,173.2 |
Net income | | — | | | — | | — | | | — | | | — | | | 251.5 | | | — | | | 251.5 |
Other comprehensive loss | | — | | | — | | — | | | — | | | — | | | — | | | (22.6) | | | (22.6) |
Comprehensive income | | | | | | | | | | | | | | | | | | | — | | | 228.9 |
Shares of Class B common stock converted to Class A common stock | | 66,000 | | | — | | (66,000) | | | — | | | — | | | — | | | — | | | — |
Shares of Class A common stock issued upon the exercise of stock options | | 2,325 | | | — | | — | | | — | | | 0.2 | | | — | | | — | | | 0.2 |
Stock-based compensation | | — | | | — | | — | | | — | | | 18.4 | | | — | | | — | | | 18.4 |
Stock repurchase | | (493,733) | | | (0.1) | | — | | | — | | | — | | | (69.3) | | | — | | | (69.4) |
Net change in restricted stock units | | 155,562 | | | — | | — | | | — | | | 2.1 | | | (13.3) | | | — | | | (11.2) |
Common stock dividends | | — | | | — | | — | | | — | | | — | | | (39.5) | | | — | | | (39.5) |
Balance at December 31, 2022 | | 27,314,679 | | $ | 2.7 | | 5,958,290 | | $ | 0.6 | | $ | 651.9 | | $ | 795.3 | | $ | (149.9) | | | 1,300.6 |
The accompanying notes are an integral part of these consolidated financial statements.
Watts Water Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in millions)
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
OPERATING ACTIVITIES | | | | | | | | | | |
Net income (loss) | | $ | 73.1 | | $ | 84.2 | | $ | (112.9) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | |
Depreciation | | | 29.7 | | | 30.4 | | | 31.6 | |
Amortization of intangibles | | | 22.5 | | | 20.8 | | | 20.9 | |
Loss on disposal and impairment of intangibles, property, plant and equipment and other | | | 2.1 | | | 3.7 | | | 132.4 | |
Gain on disposition | | | — | | | (8.6) | | | — | |
Gain on acquisition | | | — | | | (1.7) | | | — | |
Stock-based compensation | | | 13.9 | | | 13.4 | | | 10.9 | |
Deferred income tax | | | 6.4 | | | 3.5 | | | (20.5) | |
Defined benefit plans settlement | | | — | | | — | | | 59.7 | |
Changes in operating assets and liabilities, net of effects from business acquisitions and divestures: | | | | | | | | | | |
Accounts receivable | | | (7.5) | | | (7.1) | | | 13.0 | |
Inventories | | | (8.4) | | | 9.8 | | | 21.2 | |
Prepaid expenses and other assets | | | 14.7 | | | 4.9 | | | (17.8) | |
Accounts payable, accrued expenses and other liabilities | | | 9.4 | | | (15.2) | | | (29.1) | |
Net cash provided by operating activities | | | 155.9 | | | 138.1 | | | 109.4 | |
INVESTING ACTIVITIES | | | | | | | | | | |
Additions to property, plant and equipment | | | (29.4) | | | (36.0) | | | (27.7) | |
Proceeds from the sale of property, plant and equipment | | | 0.4 | | | 0.1 | | | 0.1 | |
Net proceeds from the sale of assets, and other | | | 3.1 | | �� | 9.9 | | | 30.7 | |
Purchase of intangible assets | | | (1.5) | | | — | | | — | |
Business acquisitions, net of cash acquired | | | 0.1 | | | (88.0) | | | (20.4) | |
Net cash used in investing activities | | | (27.3) | | | (114.0) | | | (17.3) | |
FINANCING ACTIVITIES | | | | | | | | | | |
Proceeds from long-term borrowings | | | 20.0 | | | 688.8 | | | — | |
Payments of long-term debt | | | (178.0) | | | (614.4) | | | (2.0) | |
Payment of capital leases and other | | | (4.9) | | | (1.9) | | | (4.0) | |
Proceeds from share transactions under employee stock plans | | | 1.7 | | | 8.2 | | | 2.5 | |
Tax benefit of stock awards exercised | | | — | | | 0.4 | | | 0.3 | |
Payments to repurchase common stock | | | (18.2) | | | (26.8) | | | (44.6) | |
Debt issuance costs | | | — | | | (2.1) | | | — | |
Dividends | | | (25.9) | | | (24.5) | | | (23.1) | |
Net cash (used in) provided by financing activities | | | (205.3) | | | 27.7 | | | (70.9) | |
Effect of exchange rate changes on cash and cash equivalents | | | 18.5 | | | (9.6) | | | (26.1) | |
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | (58.2) | | | 42.2 | | | (4.9) | |
Cash and cash equivalents at beginning of year | | | 338.4 | | | 296.2 | | | 301.1 | |
CASH AND CASH EQUIVALENTS AT END OF YEAR | | $ | 280.2 | | $ | 338.4 | | $ | 296.2 | |
NON CASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | | | |
Acquisition of businesses: | | | | | | | | | | |
Fair value of assets acquired | | $ | — | | $ | 112.6 | | $ | 29.8 | |
Cash paid, net of cash acquired | | | — | | | 88.0 | | | 20.4 | |
Gain on acquisition | | | (0.1) | | | 1.7 | | | — | |
Liabilities assumed | | $ | — | | $ | 22.9 | | $ | 9.4 | |
Acquisitions of fixed assets under financing agreement | | $ | — | | $ | — | | $ | 0.2 | |
Issuance of stock under management stock purchase plan | | $ | 0.9 | | $ | 0.7 | | $ | 0.3 | |
CASH PAID FOR: | | | | | | | | | | |
Interest | | $ | 18.8 | | $ | 20.2 | | $ | 23.1 | |
Income taxes | | $ | 39.4 | | $ | 33.5 | | $ | 24.5 | |
| | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
OPERATING ACTIVITIES | | | | | | | | | | |
Net income | | | $ | 251.5 | | $ | 165.7 | | $ | 114.3 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
Depreciation | | | | 27.6 | | | 31.4 | | | 31.3 |
Amortization of intangibles | | | | 12.1 | | | 13.7 | | | 15.2 |
(Gain) on sale of asset, loss on disposal and impairment of long-lived asset | | | | (0.2) | | | 1.4 | | | 4.0 |
Stock-based compensation | | | | 18.4 | | | 22.9 | | | 12.7 |
Deferred income tax | | | | (29.6) | | | (8.2) | | | 7.0 |
Changes in operating assets and liabilities: | | | | | | | | | | |
Accounts receivable | | | | (20.0) | | | (30.2) | | | 32.2 |
Inventories | | | | (16.4) | | | (113.7) | | | 18.7 |
Prepaid expenses and other assets | | | | 1.9 | | | (0.8) | | | 0.7 |
Accounts payable, accrued expenses and other liabilities | | | | (21.3) | | | 98.6 | | | (7.3) |
Net cash provided by operating activities | | | | 224.0 | | | 180.8 | | | 228.8 |
INVESTING ACTIVITIES | | | | | | | | | | |
Additions to property, plant and equipment | | | | (28.1) | | | (26.7) | | | (43.8) |
Proceeds from the sale of property, plant and equipment | | | | 5.2 | | | 5.1 | | | 2.2 |
Proceeds from the sale of business, and other | | | | — | | | — | | | 2.0 |
Business acquisitions, net of cash acquired | | | | — | | | (9.1) | | | (15.2) |
Net cash used in investing activities | | | | (22.9) | | | (30.7) | | | (54.8) |
FINANCING ACTIVITIES | | | | | | | | | | |
Proceeds from long-term borrowings | | | | 85.0 | | | 40.0 | | | 407.5 |
Payments of long-term debt | | | | (80.0) | | | (95.0) | | | (517.5) |
Payments for withholding taxes on vested awards | | | | (13.3) | | | (9.6) | | | (7.8) |
Payments for finance leases and other | | | | (4.7) | | | (1.4) | | | (2.1) |
Proceeds from share transactions under employee stock plans | | | | 0.2 | | | 0.1 | | | 0.5 |
Debt issuance costs | | | | — | | | (2.4) | | | (2.2) |
Payments to repurchase common stock | | | | (69.4) | | | (16.0) | | | (28.9) |
Dividends | | | | (39.5) | | | (34.3) | | | (31.4) |
Net cash used in financing activities | | | | (121.7) | | | (118.6) | | | (181.9) |
Effect of exchange rate changes on cash and cash equivalents | | | | (10.6) | | | (8.4) | | | 7.1 |
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | | 68.8 | | | 23.1 | | | (0.8) |
Cash and cash equivalents at beginning of year | | | | 242.0 | | | 218.9 | | | 219.7 |
CASH AND CASH EQUIVALENTS AT END OF YEAR | | | $ | 310.8 | | $ | 242.0 | | $ | 218.9 |
| | | | | | | | | | |
SUPPLEMENTAL CASH FLOW DISCLOSURE: | | | | | | | | | | |
Acquisition of businesses: | | | | | | | | | | |
Fair value of assets acquired | | | $ | — | | $ | 12.1 | | $ | 20.4 |
Cash paid, net of cash acquired | | | | — | | | 9.1 | | | 15.2 |
Liabilities assumed | | | $ | — | | $ | 3.1 | | $ | 5.2 |
Issuance of stock under management stock purchase plan | | | $ | 0.4 | | $ | 0.6 | | $ | 0.6 |
CASH PAID FOR: | | | | | | | | | | |
Interest | | | $ | 5.7 | | $ | 6.9 | | $ | 12.2 |
Income taxes | | | $ | 85.8 | | $ | 73.0 | | $ | 45.6 |
The accompanying notes are an integral part of these consolidated financial statements.
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) Description of Business
Watts Water Technologies, Inc. (the Company) is a leading supplier of products and solutions that manage and conserve the flow of fluids and energy into, through and out of buildings in the commercial, industrial and residential and commercial markets ofin the Americas, Europe, and Asia‑Pacific,Asia-Pacific, Middle East, and Africa (APMEA). For over 140nearly 150 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.
(2) Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority and wholly ownedwholly-owned subsidiaries. Upon consolidation, all intercompany accounts and transactions are eliminated.
Cash Equivalents
Cash equivalents consist of instruments with remainingoriginal 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.
Allowance for Doubtful AccountsCredit Losses
The allowance for doubtful accountscredit losses is established to represent the Company’s best estimate of the net realizable value of the outstanding accounts receivable.amount of receivables that it will be unable to collect. The Company developed financial asset pools that consist of business or legal entities with similar risk and economic characteristics, including types of products and customers, trade receivable characteristics, and history of credit losses on trade receivables. The development of the Company’s allowance for doubtful accountscredit losses varies by regionasset pool but in general is based on a review of past due amounts, historical write‑offwrite-off experience, as well as aging trends affecting specific accounts, andchanges in customer payment terms, general operational factors affecting all accounts.accounts and as applicable current economic conditions and reasonable and supportable forecasted economic conditions that affect collectability. In addition, factors are developed in certain regions utilizing historical trends of sales and returns and allowances and cash discount activities to derive a reserve for returns and allowances and cash discounts.
The Company uniformly considers current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. The Company also aggressively monitors the creditworthiness of the Company’s largest customers and periodically reviews customer credit limits to reduce risk. If circumstances relating to specific customers change or unanticipated changes occur in the general business environment, the Company’s estimates of the recoverability of receivables could be further adjusted.
Concentration of Credit
The Company sells products to a diversified customer base and, therefore, has no significant concentrations of credit risk. In 2017, 2016,2022, 2021 and 2015,2020, no customer accounted for 10% or more of the Company’s total sales or accounts receivable.
Inventories
Inventories
Inventories are stated at the lower of cost or market, using primarily the first‑in, first‑out method. Market value is determined by replacement cost or net realizable value. Historical usage is usedvalue with costs determined primarily on the first-in, first-out method. The Company utilizes both specific product identification and historical product demand as the basis for determining the reserve forestimating its excess or obsolete inventories.inventory reserve, which is evaluated at least quarterly. The Company identifies all inventories that exceed a range of one to three years in sales to calculate inventory on hand that exceeds estimated demand. This is determined by comparing the current inventory balance against unit sales for the trailing twelve months. New products added to inventory within the past twelve months are excluded from this analysis. A portion of the Company’s products contain recoverable materials, therefore the excess and obsolete reserve is established net of any estimated recoverable amounts based on historical experience. Changes in market conditions, lower-than-expected customer demand or changes in technology or features could result in additional excess or obsolete inventory that is not saleable and could require additional inventory reserve provisions.
Goodwill and Other Intangible Assets
Goodwill is recorded when the consideration paid for acquisitions exceeds the fair value of net tangible and intangible assets acquired. Goodwill and other intangible assets with indefinite useful lives are not amortized, but rather 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.
Long-Lived Assets
Intangible assets with estimable lives and other long‑livedlong-lived assets are reviewed for indicators of impairment wheneverat least quarterly or more frequently if events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of intangible assets with estimable lives and other long‑ lived assets is measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted pretax cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the impairment loss recognized is the amount by which the carrying amount of the asset or asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future pretax operating cash flows or appraised values, depending on the nature of the asset. The Company determines the discount rate for this analysis based on the weighted average cost of capital using the market and guideline public companies for the related businesses and does not allocate interest charges to the asset or asset group being measured. Judgment is required to estimate future operating cash flows.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided on a straight‑linestraight-line basis over the estimated useful lives of the assets, which range from 10 to 40 years for buildings and improvements and 32 to 15 years for machinery and equipment. Leasehold improvements are depreciated over the lesser of the economic useful life of the asset or the remaining lease term.
Taxes, OtherLeases
The Company has leases for the following classes of underlying assets: real estate, automobiles, manufacturing equipment, facility equipment, office equipment and certain service arrangements that are dependent on an identified asset. The Company determines if an arrangement qualifies as a lease at its inception. The Company, as the lessee, recognizes in the consolidated balance sheets a liability to make lease payments and a right-of-use asset (“ROU”) representing the right to use the underlying asset for both finance and operating leases with a lease term longer than Income Taxes
Taxes assessed by governmental authorities on sale transactions are recordedtwelve months. The Company elected the short-term lease recognition exemption for all leases that qualify and does not recognize ROU assets or lease liabilities for short-term leases. The Company recognizes short-term lease payments on a netstraight-line basis and excluded from salesover the lease term in the consolidated statements of operations. The Company determines the initial classification and measurement of its ROU assets and lease liabilities at the lease commencement date and thereafter if modified.
For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. For finance leases, the lease liability is initially measured in the same manner and date as operating leases and is subsequently measured at amortized cost using the effective interest method.
Measuring the lease liability requires certain estimates and judgments. These estimates and judgments include how the Company determines 1) the discount rate it uses to discount the unpaid lease payments to present value; 2) lease term; and 3) lease payments.
| ● | The present value of lease payments is determined using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, the Company uses its incremental borrowing rate. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, the Company uses the incremental borrowing rate as the discount rate for the lease. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under a similar term. The Company’s incremental borrowing rate is determined by using a portfolio approach by geographic region, considering many factors, such as the Company’s specific credit risk, the amount of the lease payments, collateralized nature of the lease, both borrowing term and the lease term, and geographical economic considerations. |
| ● | The lease term for all of the Company’s leases includes the fixed, noncancelable term of the lease plus (a) all periods, if any, covered by options to extend the lease if the Company is reasonably certain to exercise that option, (b) all periods, if any, covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option, and (c) all periods, if any, covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor. When determining if a renewal option is reasonably certain of being exercised, the Company considers several economic factors, including but not limited to, the significance of leasehold improvements incurred on the property, whether the asset is difficult to replace, underlying contractual obligations, or specific characteristics unique to that particular lease that would make it reasonably certain to exercise such option. |
| ● | Lease payments included in the measurement of the lease liability include the following: |
| o | Fixed payments, including in-substance fixed payments, owed over the lease term (which includes termination penalties the Company would owe if the lease term assumes Company exercise of a termination option), less any lease incentives paid or payable to the Company; |
| o | Variable lease payments that depend on an index or rate initially measured using the index or rate at the commencement date; |
| o | Amounts expected to be payable under a Company-provided residual value guarantee; and |
| o | The exercise price of a Company option to purchase the underlying asset if the Company is reasonably certain to exercise that option. |
The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for the lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received.
For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for operating leases is recognized on a straight-line basis over the reasonably assured lease term based on the total lease payments and is included in cost of goods sold or within selling, general and administrative expenses in the consolidated statements of operations, based on the primary use of the ROU asset.
For finance leases, the Company recognizes the amortization of the ROU asset on a straight-line basis from the lease commencement date to the earlier of the end of the useful life or the end of the lease term unless the lease transfers ownership of the underlying asset to the Company or the Company is reasonably certain to exercise an option to purchase the underlying asset. In those cases, the ROU asset is amortized over the useful life of the underlying asset. Amortization of the ROU asset is recognized in depreciation in the consolidated statements of operations. The interest expense related to finance leases is recognized using the effective interest method and is included within interest expense.
Variable lease payments associated with the Company’s leases are recognized in the period when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs and are included in cost of goods sold or within selling, general and administrative expenses in the consolidated statements of operations, based on the primary use of the ROU asset.
ROU assets for operating and finance leases are assessed for impairment at least quarterly or more frequently if events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The Company uses the long-lived assets impairment guidance in ASC Subtopic 360-10, Property, Plant, and Equipment- Overall, to determine whether an ROU asset is impaired, and if so, the amount of the impairment loss to recognize.
The Company monitors for events or changes in circumstances that require a reassessment of one of its leases. When a reassessment results in a remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in the consolidated statements of operations.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company recognizes tax benefits when the item in question meets the more–likely–than‑notthan-not (greater than 50% likelihood of being sustained upon examination by the taxing authorities) threshold. During 2017, unrecognized tax benefits of the Company increased by a net amount of $2.6 million. Unrecognized tax benefits increased by approximately $3.1 million, consisting of $1.7 million related to European tax positions, $0.5 million related to China tax positions, $0.2 million related to U.S. tax positions and $0.7 million related to currency movements. Unrecognized tax benefits decreased by $0.5 million, which was primarily related to the settlement of a Belgium audit and various statute expirations.
As of December 31, 2017, the Company had gross unrecognized tax benefits of approximately $7.7 million, approximately $3.6 million of which, if recognized, would affect the effective tax rate. The difference between the amount of unrecognized tax benefits and the amount that would affect the effective tax rate consists of the federal tax benefit of state income tax items and allowable correlative adjustments that are available for certain jurisdictions.
A reconciliation of the beginning and ending amount of unrecognized tax is as follows:
| | | | |
| | (in millions) | |
Balance at January 1, 2017 | | $ | 5.1 | |
Increases related to prior year tax positions | | | 2.4 | |
Decreases related to statute expirations | | | (0.3) | |
Settlements | | | (0.2) | |
Currency movement | | | 0.7 | |
Balance at December 31, 2017 | | $ | 7.7 | |
The Company estimates that it is reasonably possible that the balance of unrecognized tax benefits as of December 31, 2017 may decrease by approximately $0.5 million in the next twelve months, as a result of lapses in statutes of limitations and settlements of open audits.
In January of 2017, the United States Internal Revenue Service commenced an audit of the Company’s 2015 tax year. The Company does not anticipate any material adjustments to arise as a result of the audit. The Company conducts business in a variety of locations throughout the world resulting in tax filings in numerous domestic and foreign jurisdictions. The Company is subject to tax examinations regularly as part of the normal course of business. The Company’s major jurisdictions are the U.S., France, Germany, Canada, and the Netherlands. The statute of limitations in the U.S. is subject to tax examination for 2014 and later; France, Germany, Canada and the Netherlands are subject to tax examination for 2012-2014 and later. All other jurisdictions, with few exceptions, are no longer subject to tax examinations in state and local, or international jurisdictions for tax years before 2012.
The Company accounts for interest and penalties related to uncertain tax positions as a component of income tax expense.
Foreign Currency Translation
The functional currency for most of ourthe Company’s foreign subsidiaries is their local currency. For our non-U.S. subsidiaries that transact in a functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average foreign currency exchange rates for the period. Adjustments resulting from the translation of the financial statements of our foreign operations into U.S. dollars are excluded from the determination of net income and are recorded in accumulated other comprehensive income, a separate component of equity. Transaction gains and losses are included in other (income) expense, net in the consolidated statements of operations. For subsidiaries where the functional currency of the assets and liabilities differs from the local currency, non-monetary assets and liabilities are translated at the rate of exchange in effect on the date assets were acquired while monetary assets and liabilities are translated at current rates of exchange as of the balance sheet date. Income and expense items are translated at the average foreign currency rates for the period. Translation adjustments offor these subsidiaries are included in other (income) expense, (income), net in ourthe consolidated statements of operations.
Stock‑BasedStock-Based Compensation
The Company records compensation expense in the financial statements for share‑basedshare-based awards based on the grant date fair value of those awards for restricted stock awards and deferred shares. Stock‑basedstock awards. Stock-based compensation expense for restricted stock awards and deferred sharesstock awards is recognized over the requisite service periods of the awards on a straight‑linestraight-line basis, which is generally commensurate with the vesting term. The performance stock units offered by the Company to employees 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. In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” and theThe Company adopted this standard in the first quarter of 2017 with an immaterial change to retained earnings. As part of the adoption of this standard, the Company elected to accountaccounts for forfeitures as they occur, rather than estimate expected forfeitures over the vesting period of the respective grant. The Company also no longer reclassifiesdoes not reclassify the benefits associated with tax deductions in excess of recognized compensation cost from operating activities to financing activities in the Consolidated Statementconsolidated statements of Cash Flows. cash flows.
At December 31, 2017, the Company had one stock‑based compensation plan with total unrecognized compensation costs related to unvested stock‑based compensation arrangements of approximately $14.8 million and a total weighted
average remaining term of 1.57 years. For 2017, 2016 and 2015, the Company recognized compensation costs related to stock‑based programs of approximately $13.9 million, $13.4 million and $10.9 million, respectively. For 2017, 2016, and 2015 stock compensation expense, $0.8 million, $0.9 million and $0.4 million, respectively, was recorded in cost of goods sold and $13.1 million, $12.5 million and $10.5 million, respectively, was recorded in selling, general and administrative expenses. For 2017, 2016 and 2015, the Company recorded approximately $0.1 million, $0.8 million and $0.3 million, respectively, of tax benefits for the compensation expense relating to its stock options. For 2017, 2016 and 2015, the Company recorded approximately $3.9 million, $2.8 million and $2.0 million, respectively, of tax benefit for its other stock‑based plans. For 2017, 2016 and 2015, the recognition of total stock‑based compensation expense impacted both basic and diluted net income per common share by $0.28, $0.29 and $0.25, respectively.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding. The calculation of diluted net income (loss) per share assumes the conversion of all dilutive securities (see Note 13).
Net income (loss) and number of shares used to compute net income (loss) per share, basic and assuming full dilution, are reconciled below:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| | | | | | | Per | | | | | | | Per | | | | | | | Per | |
| | Net | | | | Share | | Net | | | | Share | | Net | | | | Share | |
| | Income | | Shares | | Amount | | Income | | Shares | | Amount | | Loss | | Shares | | Amount | |
| | (Amounts in millions, except per share information) | |
Basic EPS | | $ | 73.1 | | 34.4 | | $ | 2.12 | | $ | 84.2 | | 34.4 | | $ | 2.45 | | $ | (112.9) | | 34.9 | | $ | (3.24) | |
Dilutive securities, principally common stock options | | | — | | — | | | — | | | — | | 0.1 | | | (0.01) | | | — | | — | | | — | |
Diluted EPS | | $ | 73.1 | | 34.4 | | $ | 2.12 | | $ | 84.2 | | 34.5 | | $ | 2.44 | | $ | (112.9) | | 34.9 | | $ | (3.24) | |
The computation of diluted net income (loss) per share for the years ended December 31, 2016 and 2015 excludes the effect of the potential exercise of options to purchase approximately 0.1 million and 0.3 million shares, respectively, because the exercise price of the option was greater than the average market price of the Class A common stock and the effect would have been anti‑dilutive.
Financial Instruments
In the normal course of business, the Company manages risks associated with commodity prices, foreign exchange rates and interest rates through a variety of strategies, including the use of hedging transactions, executed in accordance with the Company’s policies. The Company’s hedging transactions include, but are not limited to, the use of various derivative financial and commodity instruments. As a matter of policy, the Company does not use derivative instruments unless there is an underlying exposure. Any change in value of the derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items. The Company does not use derivative instruments for trading or speculative purposes.
Derivative instruments may be designated and accounted for as either a hedge of a recognized asset or liability (fair value hedge) or a hedge of a forecasted transaction (cash flow hedge). For a fair value hedge, both the effective and ineffective portions of the change in fair value of the derivative instrument, along with an adjustment to the carrying amount of the hedged item for fair value changes attributable to the hedged risk, are recognized in earnings. For a cash flow hedge, changes in the fair value of the derivative instrument that are highly effective are deferred in accumulated other comprehensive income or loss until the underlying hedged item is recognized in earnings. The Company has twohad an interest rate swapsswap and foreign exchange hedges designated as cash flow hedges as of December 31, 2017 and 2016. The Company had one foreign currency swap which was a non-designated cash flow hedge as of December 31, 2016.2022. Refer to Note 16 for further details.
If a fair value or cash flow hedge were to cease to qualify for hedge accounting or be terminated, it would continue to be carried on the balance sheet at fair value until settled, but hedge accounting would be discontinued prospectively. If a forecasted transaction were no longer probable of occurring, amounts previously deferred in accumulated other comprehensive income would be recognized immediately in earnings. On occasion, the Company may enter into a derivative instrument that does not qualify for hedge accounting because it is entered into to offset changes in the fair
value of an underlying transaction which is required to be recognized in earnings (natural hedge). These instruments are reflected in the Consolidated Balance Sheetsconsolidated balance sheets at fair value with changes in fair value recognized in earnings.
Portions of the Company’s outstanding debt are exposed to interest rate risks. The Company monitors its interest rate exposures on an ongoing basis to maximize the overall effectiveness of its interest rates.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.
The Company has certain financial assets and liabilities that are measured at fair value on a recurring basis and certain nonfinancial assets and liabilities that may be measured at fair value on a nonrecurring basis. The fair value disclosures of these assets and liabilities are based on a three‑levelthree-level hierarchy, which is defined as follows:
Level 1 | Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. |
| |
Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| |
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Assets and liabilities subject to this hierarchy are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Refer to Note 16 for further details.
Shipping and Handling
Shipping and handling costs included in selling, general and administrative expense amounted to $52.1$73.4 million, $47.9$69.4 million and $53.5$55.0 million for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively.
Research and Development
Research and development costs included in selling, general, and administrative expense amounted to $29.0$59.4 million, $26.5$45.6 million and $23.5$42.2 million for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively.
Revenue Recognition
The Company recognizes revenue when allunder the core principle to depict the transfer of control to the Company’s customers in an amount reflecting the consideration to which the Company expects to be entitled. In order to achieve that core principle, the Company applies the following criteria have been met:five-step approach: (1) identify the Company has entered intocontract with a binding agreement,customer, (2) identify the product has been shipped and title passes,performance obligations in the salescontract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. When determining the transaction price of each contract, we consider contractual consideration payable by the customer is fixed or is determinable, and collectability is reasonably assured. Provisions for estimated returnsassess variable consideration that may affect the total transaction price. Variable consideration, consisting of early payment discounts, rebates and allowancesother sources of price variability, are made at the time of sale, and are recorded as a reduction of sales and included in the allowance for doubtful accounts in the Consolidated Balance Sheets.estimated transaction price based on both customer-specific information as well as historical experience. The Company also records a rightregularly reviews its estimates of return asset for estimated returns of product that is included within other assetsvariable consideration on the Consolidated Balance Sheets. transaction price and recognizes changes in estimates on a cumulative catch-up basis as if the most current estimate of the transaction price adjusted for variable consideration had been known as of the inception of the contract.
The Company records provisionsCompany’s revenue for product sales incentives (primarily volume rebates), as an adjustment to net sales,is recognized on a point in time model, at the time of sale based on estimated purchase targets.
Basis of Presentation
Certain amountspoint control transfers to the customer, which is generally when products are shipped from the Company’s manufacturing or distribution facilities or when delivered to the customer’s named location. Sales tax, value-added tax, or other taxes collected concurrent with revenue producing activities are excluded from revenue. Freight costs billed to customers for shipping and handling activities are included in the 2016 and 2015 consolidated financial statements have been reclassified to permit comparisonrevenue with the 2017 presentation, including from adoption of recent accounting standards. These reclassifications had no effect on reported results of operations or stockholders' equity.related cost included in selling, general and administrative expenses. See Note 4 for further disclosures and detail regarding revenue recognition.
Estimates
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The use of estimates in specific accounting policies is described further below as appropriate. Actual results could differ from those estimates.
Recently Adopted Accounting Standards
In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the need to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value. The revised guidance will be applied prospectively and is effective for calendar year-end SEC filers in 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company’s adoption of the new guidance effective January 1, 2017 did not have a material impact on the Company's financial statements.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” ASU 2016‑09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as equity or liabilities, forfeitures, and classification on the statement of cash flows. The Company adopted this standard in the first quarter of 2017. The impact of the adoption of this standard resulted in the following:
The Company elected to account for forfeitures as they occur, rather than estimate expected forfeitures over the vesting period of the respective grant. This was adopted using a modified retrospective approach with a cumulative effect adjustment of $0.5 million to retained earnings as of January 1, 2017.
The Company no longer reclassifies the excess tax benefit from operating activities to financing activities in the Consolidated Statement of Cash Flows. This change has been applied prospectively in the Statement of Cash Flows. The Company had an excess tax benefit of $0.4 million for the year ended December 31, 2016.
The Company no longer records windfall or shortfall tax benefits to additional paid-in capital and records these tax benefits directly to operations. This change has been applied prospectively as is required by the standard and therefore the comparative period has not been adjusted. This change may create volatility in the Company’s effective tax rate on a prospective basis.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes: Balance Sheet Classification of Deferred Taxes.” ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016 and all interim periods thereafter. The Company adopted the provision of this ASU during the first quarter of 2017 and applied it retrospectively. As of December 31, 2016, the Company had $38.6 million of current deferred tax assets, $1.5 million of noncurrent deferred tax assets, and $85.7 million of noncurrent deferred tax liabilities. The adoption of this standard resulted in a reclassification of $38.6 million of current deferred tax assets to noncurrent deferred tax liabilities and a reclassification of $1.5 million of noncurrent deferred tax liabilities to noncurrent deferred tax assets. Therefore, the restated noncurrent deferred tax asset balance and noncurrent deferred tax liability balance as of December 31, 2016 was $3.0 million and $48.6 million, respectively. Adoption of this standard did not affect results of operations, retained earnings, or cash flows in the current or previous interim and annual reporting periods.
In July 2015, the FASB issued ASU 2015-11, “Inventory: Simplifying the Measurement of Inventory.” This new standard changes inventory measurement from lower of cost or market to lower of cost and net realizable value. The standard eliminates the requirement to consider replacement cost or net realizable value less a normal profit margin when measuring inventory. ASU 2015-11 was effective in the first quarter of 2017 for public companies with calendar year ends, and should be applied prospectively with early adoption permitted. The adoption of this guidance did not have a material impact on the Company’s financial statements.
Accounting Standards Updates
In August 2017, the FASB issued ASU 2017-12 “Derivatives and Hedging (Topic 815)-Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 amends the hedge accounting guidance to improve the financial
reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in the financial statements. This guidance permits hedge accounting for risk components in hedging relationships that involve nonfinancial risk, reduces complexity in hedging for fair value hedges of interest rate risk, eliminates the requirement to separately measure and report hedging ineffectiveness, and simplifies certain hedge effectiveness assessment requirements. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. The Company is currently evaluating the impact of this guidance, including transition elections and required disclosures, on our financial statements.
In January 2017, the FASB issued ASU 2017-01 “Business Combinations (Topic 805)-Clarifying the Definition of a Business”, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016‑02 requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term for both finance and operating leases. ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018 and all interim periods thereafter. Early adoption is permitted for all entities. The Company plans to adopt this standard effective January 1, 2019, using the modified retrospective approach. The Company is currently reviewing its leasing arrangements in order to evaluate the impact of this standard on the Company’s financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 converges revenue recognition under U.S. GAAP and International Financial Reporting Standards ("IFRS"). For U.S. GAAP, the standard generally eliminates transaction and industry-specific revenue recognition guidance. This includes current guidance on long-term construction-type contracts, software arrangements, real estate sales, telecommunication arrangements, and franchise sales. Under the new standard, revenue is recognized based on a five-step model. The FASB issued ASU 2015-14 in August 2015 which deferred the effective date of ASU 2014-09 for public companies to periods beginning after December 15, 2017, with early adoption permitted. The Company assessed the impact of the guidance on its revenues by reviewing its contract portfolio to identify potential differences that would result from applying the new standard to its current revenue arrangements, including evaluation of potential performance obligations and variable consideration. The Company completed this analysis and concluded the adoption of this guidance will not have a material impact on the Company’s financial results in the year of adoption. The Company adopted this new standard effective January 1, 2018 using the modified retrospective approach. Under the new standard entities are required to disaggregate and disclose revenue into categories to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The Company expects to disaggregate revenue by geographic segment, and further disaggregate revenue to distribution channel and product line. The Company is evaluating the impact of this standard on the internal controls over financial reporting and enhanced disclosure requirements, beyond the impact of disaggregating revenue.
(3) 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 that the liability is incurred. These costs are included in restructuring charges in the Company’s consolidated statements of operations.
A summary of the pre‑taxpre-tax cost by restructuring program is as follows:
| | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2017 | | 2016 | �� | 2015 | | |
| | (in millions) | | |
| | | | (in millions) |
Restructuring costs: | | | | | | | | | | | | | | | | | | | | |
2015 Actions | | $ | 2.4 | | $ | 2.1 | | $ | 13.6 | | |
2021 France Actions | | | | $ | 5.1 | | $ | 19.7 | | $ | — |
Other Actions | | | 4.4 | | | 2.6 | | | 7.8 | | | | | 5.5 | | | (0.4) | | | 9.9 |
Total restructuring charges | | $ | 6.8 | | $ | 4.7 | | $ | 21.4 | | | | $ | 10.6 | | $ | 19.3 | | $ | 9.9 |
The Company recorded pre‑taxpre-tax restructuring in its business segments as follows:
| | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
|
| | | (in millions) |
Americas | | | $ | 2.2 | | $ | (0.3) | | $ | 6.1 |
Europe | | | | 8.5 | | | 19.5 | | | 1.3 |
APMEA | | | | (0.1) | | | 0.1 | | | 2.4 |
Corporate | | | | — | | | — | | | 0.1 |
Total | | | $ | 10.6 | | $ | 19.3 | | $ | 9.9 |
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| | (in millions) | |
Americas | | $ | 3.1 | | $ | 1.6 | | $ | 9.4 | |
Europe | | | 3.3 | | | 3.4 | | | 6.7 | |
APMEA | | | 0.4 | | | 0.2 | | | 4.2 | |
Corporate | | | — | | | (0.5) | | | 1.1 | |
Total | | $ | 6.8 | | $ | 4.7 | | $ | 21.4 | |
2021 France Restructuring Actions
2015 Actions
In 2015,On June 25, 2021, the Board of Directors of the Company approved a transformationrestructuring program relatingwith respect to the Company’s Americasoperating facilities in France, within its Europe operating segment. The restructuring program included the shutdown of the Company’s manufacturing facility in Méry, France and APMEA businesses, whichthe consolidation of that facility’s operations primarily involvedinto the exitCompany’s facilities in Virey-le-Grand and Hautvillers, France. As of low-margin, non-core product lines,December 31, 2022, the Company had incurred all pre-tax restructuring charges related to the program, resulting in total program charges of $24.8 million. The total charges include costs for employee severance, relocation of equipment, clean-up of the facility and enhancing global sourcing capabilities (“phase one”)certain asset write-downs, and resulted in the elimination of approximately 80 positions at the Méry, France facility. As a result of the facility consolidation, the net headcount reduction in France was approximately 40 positions. Total net after-tax charges for this restructuring program were approximately $18.4 million (including approximately $1.5 million in non-cash charges). The Company eliminatedspent approximately $165$0.6 million in capital expenditures to consolidate operations. In the fourth quarter of the combined Americas and APMEA net sales primarily within the Company’s do-it-yourself (DIY) distribution channel. As part of the exit of non-core product lines,2022, the Company entered into an agreement to sell an operating subsidiary in China that was dedicated exclusively to the manufacturing of products being discontinued. The sale was finalized in the second quarter of 2016, and the Company recognized a pre-tax gain of $8.7 million and received cash proceeds from the sale of $8.4 million.
The second phasethe manufacturing facility of the program involved the consolidation of manufacturing facilities and distribution center network optimization, including reducing the square footage of the Company’s Americas facilities, which together with phase one, reduced the Americas net operating footprint by approximately 30%. This phase of the program was designed to improve the utilization of our remaining facilities, better leverage our cost structure, reduce working capital, and improve execution of customer delivery requirements. As of December 31, 2017, the second phase was complete.
On a combined basis, the total pre-tax cost for the Company’s transformation program related to its Americas and APMEA businesses was approximately $59.8 million, including restructuring costs of $18.1 million, goodwill and intangible asset impairments of $13.5$4.3 million and other transformation and deployment costsrecognized a pre-tax gain on sale of approximately $28.2$1.8 million. The other transformation and deployment costs included consulting and project management fees, inventory write-offs, and other associated costs. The program originally includedAnnual cash savings, net of tax, are estimated pre-tax charges totalingto be approximately $65 million. In$3.0 million, which the third quarter of 2017, the total expected costs of the planned actions were reducedCompany expects to approximately $60 million, primarily related to reduced expected facility exit costs and reduced other transformation and deployment costs. All costs associated with the Americas and APMEA transformation program were incurred as of December 31, 2017.fully realize by 2023.
The following table summarizes by type, the total incurred pre-tax restructuring costs for the Company’s transformationrestructuring program related to its Americas and APMEA businesses (phase one and phase two combined):the 2021 France Actions:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | Facility | | | | |
| | | | | Legal and | | Asset | | exit | | | | |
| | Severance | | consultancy | | write-downs | | and other | | Total | |
| | (in millions) | |
Costs incurred—2015 | | $ | 8.5 | | $ | 0.7 | | $ | 1.6 | | $ | 2.8 | | $ | 13.6 | |
Costs incurred—2016 | | | (1.5) | | | 0.2 | | | 2.9 | | | 0.5 | | | 2.1 | |
Costs incurred—2017 | | | — | | | — | | | 2.2 | | | 0.2 | | | 2.4 | |
Total restructuring costs | | $ | 7.0 | | $ | 0.9 | | $ | 6.7 | | $ | 3.5 | | $ | 18.1 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | Facility | | | |
| | | | | Legal and | | Asset | | exit | | | |
| | Severance | | consultancy | | write-downs | | and other | | Total |
|
| | (in millions) |
Costs incurred — 2021 | | $ | 16.9 | | $ | 0.9 | | $ | 0.9 | | $ | 1.0 | | $ | 19.7 |
Costs incurred — 2022 | | | 3.5 | | | 0.2 | | | 0.8 | | | 0.6 | | | 5.1 |
Total restructuring costs | | $ | 20.4 | | $ | 1.1 | | $ | 1.7 | | $ | 1.6 | | $ | 24.8 |
The following table summarizes pre-tax restructuring costs incurred for the year ended December 31, 2017 and total pre-tax restructuring costs incurred for the program, by business segment for the Company’s Americas and APMEA 2015 transformation program. There are no remaining costs to be incurred:
| | | | | | | | |
| | Year Ended | | | | | |
| | December 31, | | Total program | | |
| | 2017 | | costs | | |
| | (in millions) | |
APMEA | | $ | 0.2 | | $ | 4.6 | | |
Americas | | | 2.2 | | | 13.5 | | |
Total restructuring costs | | $ | 2.4 | | $ | 18.1 | | |
Details of the restructuring reserve activity for the Company’s Americas and APMEA 2015 transformation program2021 France Actions for the year ended December 31, 20172022 are as follows:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | Facility | | |
| | | | | | Legal and | | Asset | | exit | | | |
| | | Severance | | consultancy | | write-downs | | and other | | Total |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | Facility | | | | |
| | | | | Legal and | | Asset | | exit | | | | | |
| | Severance | | consultancy | | write-downs | | and other | | Total | | |
| | (in millions) | | |
Balance at December 31,2015 | | $ | 5.0 | | $ | 0.4 | | $ | — | | $ | 1.0 | | $ | 6.4 | | |
| | | (in millions) |
Balance at December 31, 2020 | | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Net pre-tax restructuring charges | | | (1.5) | | | 0.2 | | | 2.9 | | | 0.5 | | | 2.1 | | | | 16.9 | | | 0.9 | | | 0.9 | | | 1.0 | | | 19.7 |
Utilization and foreign currency impact | | | (2.3) | | | (0.6) | | | (2.9) | | | (1.5) | | | (7.3) | | | | (7.0) | | | (0.7) | | | (0.9) | | | (0.5) | | | (9.1) |
Balance at December 31, 2016 | | $ | 1.2 | | $ | — | | $ | — | | $ | — | | $ | 1.2 | | |
Balance at December 31, 2021 | | | $ | 9.9 | | $ | 0.2 | | $ | — | | $ | 0.5 | | $ | 10.6 |
Net pre-tax restructuring charges | | | — | | | — | | | 2.2 | | | 0.2 | | | 2.4 | | | | 3.5 | | | 0.2 | | | 0.8 | | | 0.6 | | | 5.1 |
Utilization and foreign currency impact | | | (1.0) | | | — | | | (2.2) | | | (0.2) | | | (3.4) | | | | (11.5) | | | (0.4) | | | (0.8) | | | (1.1) | | | (13.8) |
Balance at December 31, 2017 | | $ | 0.2 | | $ | — | | $ | — | | $ | — | | $ | 0.2 | | |
Balance at December 31, 2022 | | | $ | 1.9 | | $ | — | | $ | — | | $ | — | | $ | 1.9 |
Other Actions
The Company periodically initiates other actions which are not part of a major program. Total “Other Actions” pre-tax restructuring charges was expense was $4.4of $5.5 million, a credit of $0.4 million and expense of $9.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Included in “Other Actions” for the year ended December 31, 2017. 2022, was $3.2 million and $0.9 million of restructuring charges associated with cost saving actions in the Europe and Americas segments, respectively, and related to severance and other costs; and $1.4 million of facility exit charges were recognized associated with the decommissioning of machinery at one of the Company’s facilities in the Americas.
Included in “Other Actions” are European restructuring activities initiated in 2017, the 2015 Europe restructuring actions, as well as certain other minor initiatives for which the Company incurred restructuring expenses for the year ended December 31, 2017.
In2020, were actions taken in the fourth quarter of 2017, management initiated certain restructuring actions related to reductions in force within the Company’sAmericas, Europe segment. The restructuring activitiesand APMEA segments and Corporate primarily included severance benefits. The total pre-tax charges associated with the Europe restructuring activities were approximately $4.1 million with costs being fully incurred in 2017. The restructuring reserve associated with these actions is approximately $3.1 million as of December 31, 2017, and relates to severance benefits.
In the fourth quarter of 2015 management initiated certain restructuring actions and strategic initiatives with respect to the Company’s Europe segment in response to the ongoing economic challenges in Europe and additional product rationalization. The restructuring actions included severance benefits and limited costs relating to asset write offs, professional fees and relocation.
The total pre-tax charge for the Europe 2015 restructuring initiatives was expected to be approximately $10.0 million. As of December 31, 2017, the company revised its forecast to approximately $9.3 million. The reduction in estimated costs is primarily due to reduced expected severance costs. Through December 31, 2017, the Company has incurred approximately $7.7 million for the program to date. The remaining expected costs relate to potential additional severance and legal costs resulting from foreign statutes of limitations associated with the 2015 program; these statutes expire in 2018.
The following table summarizes total expected, incurred and remaining pre-tax restructuring costs for the Europe 2015 restructuring actions:
| | | | | | | | | | | | | |
| | | | | | | �� | Facility | | | | |
| | | | | Legal and | | Exit | | | | |
| | Severance | | consultancy | | and other | | Total | |
| | (in millions) | |
Costs incurred—2015 | | $ | 6.6 | | $ | — | | $ | 0.3 | | $ | 6.9 | |
Costs incurred—2016 | | | 1.3 | | | 0.5 | | | — | | | 1.8 | |
Adjustments to restructuring costs—2017 | | | (1.0) | | | — | | | — | | | (1.0) | |
Remaining costs to be incurred | | | 1.4 | | | 0.2 | | | — | | | 1.6 | |
Total expected restructuring costs | | $ | 8.3 | | $ | 0.7 | | $ | 0.3 | | $ | 9.3 | |
Details of the Company’s Europe 2015 restructuring reserve activity forCOVID-19 pandemic. For the year ended December 31, 2017 are as follows:2021 total pre-tax charges for the 2020 “Other Actions” were reduced by approximately $0.8 million due to revised estimates for severance costs, health benefits and outplacement support. This resulted in total program restructuring charges of approximately $9.7 million.
| | | | | | | | | | | | | |
| | | | | Legal and | | Facility exit | | | | |
| | Severance | | Consultancy | | and other | | Total | |
| | (in millions) | |
Balance at December 31, 2015 | | $ | 6.4 | | $ | — | | $ | — | | $ | 6.4 | |
Net pre-tax restructuring charges | | | 1.3 | | | 0.5 | | | — | | | 1.8 | |
Utilization and foreign currency impact | | | (2.9) | | | (0.5) | | | — | | | (3.4) | |
Balance at December 31, 2016 | | $ | 4.8 | | $ | — | | $ | — | | $ | 4.8 | |
Net pre-tax restructuring adjustments | | | (1.0) | | | — | | | — | | | (1.0) | |
Utilization and foreign currency impact | | | (2.8) | | | — | | | — | | | (2.8) | |
Balance at December 31, 2017 | | $ | 1.0 | | $ | — | | $ | — | | $ | 1.0 | |
(4) Revenue Recognition
(4) SaleThe Company is a leading supplier of Business
Gain on Saleproducts and solutions that manage and conserve the flow of China Operating Subsidiary
On September 22, 2015,fluids and energy into, through and out of buildings in the commercial, industrial and residential markets. For nearly 150 years, the Company signedhas designed and produced valve systems that safeguard and regulate water systems, energy efficient heating and hydronic systems, drainage systems and water filtration technology that helps purify and conserve water.
The Company distributes products through four primary distribution channels: wholesale, original equipment manufacturers (OEMs), specialty, and do-it-yourself (DIY). The Company operates in three geographic segments: Americas, Europe, and APMEA. Each of these segments sells similar products, which are comprised of the following principal product categories:
| ● | Residential & commercial flow control and protection 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 and protection products. Many of our flow control and protection products are now smart and connected warning of leaks and floods with alerts to Business Management Systems (BMS) and/or personal devices giving our customers greater insight into their water management and the ability to shut off the water supply to avoid waste and mitigate damage. |
| ● | HVAC & gas products—includes commercial high-efficiency boilers, water heaters and custom heat and hot water solutions, hydronic and electric heating systems for under-floor radiant applications, 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. Most of our HVAC products feature advanced controls enabling customers to easily connect to the Building Automation System for better monitoring, control and operation. 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, including connected roof drain systems. |
| ● | Water quality products—includes point-of-use and point-of-entry water filtration, monitoring, 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 category:
| | | | | | | | | | | | |
| | For the year ended December 31, 2022 |
| | | | (in millions) | | |
Distribution Channel | | Americas | | Europe | | APMEA | | Consolidated |
Wholesale | | $ | 790.6 | | $ | 314.8 | | $ | 82.5 | | $ | 1,187.9 |
OEM | | | 104.3 | | | 181.7 | | | 7.9 | | | 293.9 |
Specialty | | | 411.1 | | | — | | | — | | | 411.1 |
DIY | | | 84.0 | | | 2.6 | | | — | | | 86.6 |
Total | | $ | 1,390.0 | | $ | 499.1 | | $ | 90.4 | | $ | 1,979.5 |
| | | | | | | | | | | | |
| | For the year ended December 31, 2022 |
| | | | (in millions) | | |
Principal Product Category | | Americas | | Europe | | APMEA | | Consolidated |
Residential & Commercial Flow Control | | $ | 792.3 | | $ | 171.1 | | $ | 71.4 | | $ | 1,034.8 |
HVAC and Gas Products | | | 366.2 | | | 234.2 | | | 14.8 | | | 615.2 |
Drainage and Water Re-use Products | | | 107.7 | | | 89.4 | | | 2.9 | | | 200.0 |
Water Quality Products | | | 123.8 | | | 4.4 | | | 1.3 | | | 129.5 |
Total | | $ | 1,390.0 | | $ | 499.1 | | $ | 90.4 | | $ | 1,979.5 |
| | | | | | | | | | | | |
| | For the year ended December 31, 2021 |
| | | | (in millions) | | |
Distribution Channel | | Americas | | Europe | | APMEA | | Consolidated |
Wholesale | | $ | 694.4 | | $ | 332.9 | | $ | 78.8 | | $ | 1,106.1 |
OEM | | | 96.5 | | | 181.5 | | | 5.5 | | | 283.5 |
Specialty | | | 337.7 | | | — | | | 0.3 | | | 338.0 |
DIY | | | 78.6 | | | 3.0 | | | — | | | 81.6 |
Total | | $ | 1,207.2 | | $ | 517.4 | | $ | 84.6 | | $ | 1,809.2 |
| | | | | | | | | | | | |
| | For the year ended December 31, 2021 |
| | | | (in millions) | | |
Principal Product Category | | Americas | | Europe | | APMEA | | Consolidated |
Residential & Commercial Flow Control | | $ | 697.4 | | $ | 188.0 | | $ | 67.6 | | $ | 953.0 |
HVAC and Gas Products | | | 308.6 | | | 237.0 | | | 12.9 | | | 558.5 |
Drainage and Water Re-use Products | | | 92.8 | | | 87.8 | | | 2.8 | | | 183.4 |
Water Quality Products | | | 108.4 | | | 4.6 | | | 1.3 | | | 114.3 |
Total | | $ | 1,207.2 | | $ | 517.4 | | $ | 84.6 | | $ | 1,809.2 |
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 obligation. 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 agreementobservable input which depicts the price as if sold to sell an operating subsidiarya similar customer in China that was dedicatedsimilar circumstances. Revenue is recognized when control of the product is transferred to the production of non-core products. The sale was finalized incustomer (i.e., when the second quarter of 2016, andCompany’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 determining whether control has transferred, the Company received proceedsconsiders if there is a present right to payment, physical possession and legal title, along with risks and rewards of $8.4 millionownership having transferred to the customer. In certain circumstances, the Company manufactures customized products 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 control transfers at the point in time and not over time.
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 revenue for each distinct product delivered, assuming transfer of control has occurred. As scheduled delivery dates are within one year, under the optional exemption as provided for under ASC 606 (Revenue from Contracts with Customers), 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 sale aspublished specification. The Company’s liability is limited to either a credit equal to the purchase price or replacement of the fourth quarter of 2016.defective part. Returns under warranty have historically been immaterial. The Company recognizeddoes not consider activities related to such warranty, if any, to be a pre-tax gainseparate performance obligation. For certain of $8.7 million, which includes a non-cash accumulated currency translation adjustment of $7.3 million. The net after-tax gain was approximately $8.3 million.
Sale of Certain Americas Product Lines
On September 15, 2015,its products, the Company completedwill separately sell extended warranty and service policies to its customers. The Company considers the sale of certain assets relatedthese as separate performance obligations. These policies typically are for periods ranging from one to three years. Payments received are deferred and recognized over the policy period. For all periods presented, the revenue recognized and the revenue deferred under these policies is not material to the consolidated financial statements.
The timing of revenue recognition, billings and cash collections from the Company’s fittings, brasscontracts with customers can vary based on the payment terms and tubularconditions 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 vinyl tubing product lines to a third party in an all-cash transaction.market development funds. The Company received net cash proceedsincludes these constraints in the estimated transaction price when there is a basis to reasonably estimate the amount of approximately $33.1 million, after inventory adjustmentsvariable consideration. These estimates are based on historical experience, anticipated future performance and transaction fees. Total net assets sold were $33.4 million, resultingthe Company’s best judgment at the time. The Company did not recognize any material revenue from obligations satisfied in an immaterial loss.
(5) Business Acquisitions
PVI Industries, LLC
On November 2, 2016,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 acquired 100%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 sharesrelated goods as a fulfillment cost and the related cost is accrued for in conjunction with the recording of PVI Riverside Holdings, Inc.revenue for the goods.
(5) Leases
The Company has a variety of categories of lease arrangements, including real estate, automobiles, manufacturing equipment, facility equipment, office equipment and certain service arrangements that are dependent on an identified asset. The Company’s real estate leases, which consist primarily of manufacturing facilities, office space and warehouses, represent approximately 92% of the Company’s operating lease liabilities and generally have a leaseterm between 2 and 15 years. The remaining leases primarily consist of automobiles, machinery and equipment used in the manufacturing processes (e.g., forklifts and pallets), general office equipment and certain service arrangements, each with various lease terms. The Company’s automobile leases typically have terms ranging from 3 to 5 years. The Company’s remaining population of leases have terms ranging from 2 to 15 years. Certain lease arrangements may contain renewal terms rangingfrom 1 to 5 years. The majority of the parent companyCompany’s real estate, automobile, and equipment leases consist of PVI Industries, LLC (“PVI”).fixed and variable lease payments. For the Company’s real estate leases, variable payments include those for common area maintenance, property taxes, and insurance. For automobile leases, variable payments primarily include maintenance, taxes, and insurance. For equipment leases, variable payments include maintenance and payments based on usage. The aggregate purchase price, includingCompany has elected to account for lease and non-lease components as a single component for all leases. Therefore, all fixed costs within a lease arrangement are included in the final working capital adjustment, was approximately $79.1 million.fixed lease payments for the single, combined lease component and used to measure the lease liability. Variable lease costs are recognized in the period when the event, activity, or circumstance in the lease agreement occurs.
PVI is a leading manufacturerthe Company’s lease agreements include Company options to either extend and/or early terminate the lease, the costs of commercial stainless steel water heating equipment, focused on the high capacity market in North America and is based in Fort Worth, Texas. PVI’s water heater product offering complements AERCO’s boiler products, allowing the Company to address customers’ heating and hot water requirements. The results for PVIwhich are included in the Company’s Americas segment.
lease liability to the extent that such options are reasonably certain of being exercised. Renewal options are generally not included in the lease term for the Company’s existing leases because the Company is not reasonably certain to exercise these renewal options. The Company accounted fordoes not generally enter into leases involving the transaction as a purchased business combination and the acquisition was funded partially with available cash and partially from borrowings under the Company’s Credit Agreement. During the second quarter of 2017, the Company finalized the purchase price allocation for the PVI purchase. The acquisition resulted in the recognition of $41.1 million in goodwill and $31.0 million in intangible assets. The intangible assets acquired consist of customer relationships valued at $17.6 million with estimated lives of 15 years, developed technology valued at $10.2 million with estimated lives of 10 years, and the trade name valued at $3.2 million with an estimated life of 20 years. The goodwill is attributable to the workforce of PVI and the strategic platform adjacency that will allow Watts to extend its product offerings as a resultconstruction or design of the acquisition. Approximately $6.9 million of the goodwill is deductible for tax purposes. The following table summarizes the valueunderlying asset, and nearly all of the assets and liabilities acquired (in millions):
| | | | |
Accounts receivable | | $ | 5.7 | |
Inventory | | | 12.7 | |
Fixed assets | | | 8.1 | |
Other assets | | | 2.8 | |
Intangible assets | | | 31.0 | |
Goodwill | | | 41.1 | |
Accounts payable | | | (4.0) | |
Accrued expenses and other | | | (9.2) | |
Deferred tax liability | | | (9.1) | |
Purchase price | | $ | 79.1 | |
Watts Korea
On February 26, 2016, the Company acquired an additional 50% ofleases are not specialized in nature. The Company’s leases generally do not include termination options for either party to the outstanding shares of Watts Korea for an aggregate purchase price of approximately $4 million. Prior to February 26, 2016, the Company held a 40% interest in Watts Korea, which operated as a joint venture.lease or restrictive financial or other covenants. The Company acquired the remaining 10% ownership in the fourth quarter of 2016 for $0.7 million and now owns 100% of Watts Korea. Watts Korea strengthens Watts’ strategic vision to expand solutions sales into the Korean market. The Company accounted for the transaction as a step acquisition within a business combination. The Company recognized a $1.7 million pre-tax gain on the previously held 40% ownership interest in the first quarter of 2016.Company’s lease agreements generally do not include residual value guarantees.
The Company completed a valuation of the assets and liabilities acquired that resulted in the recognition of $3.3 million in goodwill, $1.6 million in intangible assets and $0.8 million as the estimate of the acquisition date fair value on commitment to purchase the remaining 10% ownership by December 31, 2017. The intangible assets acquired consisted entirely of customer relationships. The amortization period of these customer relationships is 10 years. The goodwill is not deductible for tax purposes. The balance sheet and results of operations for Watts Korea are included in the Company’s APMEA segment since acquisition date.
Right-of-use asset amounts reported in the consolidated balance sheet by asset category as of December 31, 2022 and 2021 were as follows:
| | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | (in millions) | | (in millions) |
Operating Leases (1) | | | | | | |
Real Estate | | $ | 40.0 | | $ | 43.4 |
Automobile | | | 2.4 | | | 2.2 |
Machinery and equipment | | | 0.9 | | | 1.3 |
Total operating lease ROU Asset | | $ | 43.3 | | $ | 46.9 |
| | | | | | |
Finance Leases (2) | | | | | | |
Real Estate | | $ | — | | $ | — |
Automobile | | | 0.1 | | | 0.1 |
Machinery and equipment | | | 10.6 | | | 7.3 |
Less: Accumulated depreciation | | | (6.1) | | | (4.2) |
Finance Leases, net | | $ | 4.6 | | $ | 3.2 |
(1) | Included on the Company’s consolidated balance sheet in other assets (other, net). |
(2) | Included on the Company’s consolidated balance sheet in property, plant and equipment. |
Apex Valves Limited
On November 30, 2015, the Company acquired 80%The maturity of the outstanding sharesCompany’s operating and finance lease liabilities as of Apex Valves Limited (“Apex”). Apex specializes inDecember 31, 2022 was as follows:
| | | | | | |
| | December 31, 2022 |
| | Operating Leases | | Finance Leases |
|
| | (in millions) |
2023 | | $ | 10.4 | | $ | 3.0 |
2024 | | | 8.4 | | | 1.2 |
2025 | | | 7.3 | | | 0.4 |
2026 | | | 4.7 | | | 0.1 |
2027 | | | 4.3 | | | — |
Thereafter | | | 19.7 | | | — |
Total undiscounted minimum lease payments | | $ | 54.8 | | $ | 4.7 |
Less imputed interest | | | 7.8 | | | 0.1 |
Total lease liabilities | | $ | 47.0 | | $ | 4.6 |
Included in the consolidated balance sheet | | | | | | |
Current lease liabilities (included in accrued expenses and other liabilities) | | | 8.9 | | | 3.2 |
Non-Current lease liabilities (included in other non-current liabilities) | | | 38.1 | | | 1.4 |
Total lease liabilities | | $ | 47.0 | | $ | 4.6 |
The total lease cost consisted of the design and manufacturingfollowing amounts:
| | | | | |
| | Year Ended | | | Year Ended |
| | December 31, 2022 | | | December 31, 2021 |
| | (in millions) | | | (in millions) |
Operating lease cost | $ | 11.1 | | $ | 11.7 |
Amortization of finance lease right-of-use assets | | 2.2 | | | 1.5 |
Interest on finance lease liabilities | | 0.1 | | | 0.1 |
Short-term lease cost | | 0.4 | | | 0.1 |
Sublease (income) | | (0.2) | | | (0.2) |
Variable lease cost | | 3.2 | | | 2.8 |
Total lease cost | $ | 16.8 | | $ | 16.0 |
The following information represents supplemental disclosure for the agricultural industry. The aggregate purchase price was approximately $20.4 millionstatement of cash flows related to operating and the Company recorded a long-term liability of $5.5 million as the estimate of the acquisition date fair value on the contractual call option to purchase the remaining 20% within three years of closing. The Company accounted for the transaction as a business combination. The Company completed a purchase price allocation that resulted in the recognition of $12.9 million in goodwill and $10.1 million in intangible assets. Intangible assets consist primarily of customer relationships with an estimated life of 10 years and a trade name with an estimated life of 15 years. The goodwill is not deductible for tax purposes. The results of operations for Apex are included in the Company’s APMEA segment since acquisition date.finance leases:
| | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | (in millions) | | (in millions) |
Operating cash flows from operating leases | | $ | 11.1 | | $ | 11.3 |
Operating cash flows from finance leases | | | 0.1 | | | 0.1 |
Financing cash flows from finance leases | | | 2.4 | | | 1.4 |
Total cash paid for amounts included in the measurement of lease liabilities | | | 13.6 | | | 12.8 |
Finance lease liabilities arising from obtaining right-of-use assets | | | 3.6 | | | 0.4 |
Operating lease liabilities arising from obtaining right-of-use assets | | | 6.8 | | | 4.9 |
The Company acquired anfollowing summarizes additional 10% ownership in the first quarter of 2017 for approximately $2.9 millioninformation related to operating and now owns 90% of the outstanding shares of Apex. The Company maintains a current liability of approximately $2.9 million for the estimated fair value on the remaining 10% contractual call option, which is expected to be exercised in 2018. finance leases:
| | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Weighted-average remaining lease term - finance leases | | | 1.9 | years | | | 3.0 | years |
Weighted-average remaining lease term - operating leases | | | 7.9 | years | | | 8.5 | years |
Weighted-average discount rate - finance leases | | | 1.9 | % | | | 3.2 | % |
Weighted-average discount rate - operating leases | | | 3.4 | % | | | 3.5 | % |
(6) Goodwill & Intangibles
Goodwill
The Company performs its annual goodwill impairment testing for each reporting unit as of fiscal October month endmonth-end or earlier if there is a triggering event or circumstance that indicates an impairment loss may have occurred. As of the October 29, 201723, 2022 testing date, the Company had $547.5$581.2 million of goodwill on its balance sheet. In 2017,2022, the Company had eightseven reporting units. One of these reporting units, Water Quality, had no goodwill. The Company performed a qualitative analysis for sixeach of the six remaining seven reporting units, which include Blücher, Dormont, US Drains, Europe, ResidentialFluid Solutions-Europe, Fluid Solutions-Americas, Heating and Commercial,Hot Water Solutions (HHWS) and APMEA. As of January 1, 2017, the Company began reporting the results of Watts Industries Middle East FZE (“Watts Middle East”), an indirect, wholly owned subsidiary, as part of the Company’s former Asia-Pacific segment, which is now referred to as APMEA. Watts Middle East had previously been reported within the former EMEA segment, which is now referred to as Europe. This change in segment composition aligns with the structure of the Company’s internal organization and did not result in a material change to previously reported segment information. There was no change in the determination of our eight reporting units for the purpose of goodwill testing. The Company followed the guidance in ASC 352-20-35-39 through ASC 350-20-35-40 to reassign assets and liabilities to the reporting units affected, including the allocation of an immaterial amount of goodwill.
As a result of the PVI acquisition in November 2016,qualitative analyses, the Company combined two components, AERCO and PVI, into the Heating and Hot Water Solutions (“HHWS”) reporting unit. The Company evaluated the aggregation criteria under ASC 350 in combining these components. AERCO was a standalone reporting unit for the 2016 annual impairment assessment. In the fourth quarter of 2017, the Company performed a quantitative impairment analysis for the HHWS reporting unit in connection with the annual strategic plan and due to underperformance to budget, primarily caused by continuing softness in the condensing boiler market, weakness in the Company’s tankless water heater products and competitive pricing pressure. The Company estimateddetermined that the fair valuevalues of the reporting unit using a weighted calculation of the income approach and the market approach. The income approach calculated the present value of expected future cash flows. The guideline public company method (market approach) calculated the estimated fair values based on valuation multiples derived from stock prices and enterprise values of publicly traded companies that are comparable to the reporting unit. The estimated fair value of the reporting unit exceededunits were more likely than not greater than the carrying value by approximately 6% in 2017amounts. In 2022 and therefore,2021, the Company did not need to proceed beyond the qualitative analysis, and no impairment wasgoodwill impairments were recorded.
In the fourth quarter of 2015,2021, the Company performed a quantitative impairment analysis forcompleted an acquisition within the Europe reporting unitAmericas segment resulting in connection with the annual strategic plan and due$8.4 million of goodwill. The acquisition is not considered material to the underperformance to budget, primarily caused by the continued challenging European macroeconomic environment. The Company estimated the fair value of the reporting unit using a weighted calculation of the income approach and the market approach. The income approach calculated the present value of expected future cash flows and included the impact of recent underperformance of the reporting unit due to the continued challenging macroeconomic environment in Europe and the Company’s lowered expectations for the reporting unit included in the strategic plan. The guideline public company method (market approach) calculated estimated fair
values based on valuation multiples derived from stock prices and enterprise values of publicly traded companies that are comparable to the Company. In the second step of the impairment test, the carrying value of the goodwill exceeded the implied fair value of goodwill, resulting in a pre-tax impairment charge of $129.7 million. There was a tax benefit associated with the impairment of $3.4 million, resulting in a net impairment charge of $126.3 million.
consolidated financial statements. The changes in the carrying amount of goodwill by geographic segment arewere as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Balance | | Accumulated Impairment Losses | | Foreign Currency Translation | | Net Goodwill |
| | | | Acquired | | | | | | | | | | | January 1, | | |
| | Balance | | During | | Balance | | Balance | | Impairment | | Balance | | 2022 - | | |
| | January 1, | | the | | December 31, | | January 1, | | Loss During | | December 31, | | December 31, | | December 31, |
| | 2022 | | Period | | 2022 | | 2022 | | the Period | | 2022 | | 2022 | | 2022 |
|
| | (in millions) |
Americas | | $ | 490.9 | | $ | — | | $ | 490.9 | | $ | (24.5) | | $ | — | | $ | (24.5) | | $ | (0.6) | | $ | 465.8 |
Europe | | | 242.9 | | | — | | | 242.9 | | | (129.7) | | | — | | | (129.7) | | | (6.2) | | | 107.0 |
APMEA | | | 34.0 | | | — | | | 34.0 | | | (12.9) | | | — | | | (12.9) | | | (1.5) | | | 19.6 |
Total | | $ | 767.8 | | $ | — | | $ | 767.8 | | $ | (167.1) | | $ | — | | $ | (167.1) | | $ | (8.3) | | $ | 592.4 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | |
| | Gross Balance | | Accumulated Impairment Losses | | Net Goodwill | |
| | | | Acquired | | Foreign | | | | | | | | | | | | |
| | Balance | | During | | Currency | | Balance | | Balance | | Impairment | | Balance | | | |
| | January 1, | | the | | Translation | | December 31, | | January 1, | | Loss During | | December 31, | | December 31, | |
| | 2017 | | Period (1) | | and Other | | 2017 | | 2017 | | the Period | | 2017 | | 2017 | |
| | (in millions) | |
Americas | | $ | 434.7 | | | 2.0 | | | 0.7 | | | 437.4 | | $ | (24.5) | | | — | | | (24.5) | | | 412.9 | |
Europe | | | 234.9 | | | — | | | 14.4 | | | 249.3 | | | (129.7) | | | — | | | (129.7) | | | 119.6 | |
APMEA | | | 30.2 | | | — | | | 0.7 | | | 30.9 | | | (12.9) | | | — | | | (12.9) | | | 18.0 | |
Total | | $ | 699.8 | | | 2.0 | | | 15.8 | | | 717.6 | | $ | (167.1) | | | — | | | (167.1) | | | 550.5 | |
| (1)
| | Americas goodwill additions during 2017 includes purchase accounting adjustments related to the PVI acquisition discussed in Note 5 of the Notes to the Consolidated Financial Statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Balance | | Accumulated Impairment Losses | | Foreign Currency Translation | | Net Goodwill |
| | | | Acquired | | | | | | | | | | January 1, | | |
| | Balance | | During | | Balance | | Balance | | Impairment | | Balance | | 2021 - | | |
| | January 1, | | the | | December 31, | | January 1, | | Loss During | | December 31, | | December 31, | | December 31, |
| | 2021 | | Period | | 2021 | | 2021 | | the Period | | 2021 | | 2021 | | 2021 |
|
| | (in millions) |
Americas | | $ | 482.5 | | $ | 8.4 | | $ | 490.9 | | $ | (24.5) | | $ | — | | $ | (24.5) | | $ | — | | $ | 466.4 |
Europe | | | 252.1 | | | — | | | 252.1 | | | (129.7) | | | — | | | (129.7) | | | (9.2) | | | 113.2 |
APMEA | | | 34.9 | | | — | | | 34.9 | | | (12.9) | | | — | | | (12.9) | | | (0.9) | | | 21.1 |
Total | | $ | 769.5 | | $ | 8.4 | | $ | 777.9 | | $ | (167.1) | | $ | — | | $ | (167.1) | | $ | (10.1) | | $ | 600.7 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | |
| | Gross Balance | | Accumulated Impairment Losses | | Net Goodwill | |
| | | | Acquired | | Foreign | | | | | | | | | | | |
| | Balance | | During | | Currency | | Balance | | Balance | | Impairment | | Balance | | | |
| | January 1, | | the | | Translation | | December 31, | | January 1, | | Loss During | | December 31, | | December 31, | |
| | 2016 | | Period | | and Other | | 2016 | | 2016 | | the Period | | 2016 | | 2016 | |
| | (in millions) | |
Americas | | $ | 391.2 | | | 43.3 | | | 0.2 | | | 434.7 | | $ | (24.5) | | | — | | | (24.5) | | | 410.2 | |
Europe | | | 238.6 | | | — | | | (3.7) | | | 234.9 | | | (129.7) | | | — | | | (129.7) | | | 105.2 | |
APMEA | | | 26.3 | | | 3.7 | | | 0.2 | | | 30.2 | | | (12.9) | | | — | | | (12.9) | | | 17.3 | |
Total | | $ | 656.1 | | | 47.0 | | | (3.3) | | | 699.8 | | $ | (167.1) | | | — | | | (167.1) | | | 532.7 | |
On November 2, 2016, the Company acquired 100% of the shares of PVI Riverside Holdings, Inc., the parent company of PVI. The aggregate purchase price recorded, including the final working capital adjustment, was approximately $79.1 million. The Company accounted for the transaction as a purchased business combination. The Company finalized the purchase price allocation that resulted in the recognition of $41.1 million in goodwill and $31.0 million in intangible during the second quarter of 2017.
On February 26, 2016, the Company acquired an additional 50% of the outstanding shares of Watts Korea for an aggregate purchase price of approximately $4 million. Prior to February 26, 2016, the Company held a 40% interest in Watts Korea, which operated as a joint venture. On December 30, 2016, the Company acquired the remaining 10% of the outstanding shares of Watts Korea for $0.8 million. The Company completed a valuation of the assets and liabilities acquired that resulted in the recognition of $3.7 million in goodwill and $1.6 million in intangible assets.
Long-Lived Assets
Indefinite‑livedIndefinite-lived intangibles are tested for impairment at least annually or more frequently if events or circumstances, such as a change in business conditions, indicate that it is “more likely than not” that an intangible asset might be impaired. The Company performs its annual indefinite‑livedindefinite-lived intangibles impairment assessment in the fourth quarter of each year. For the 2017, 2016In 2022 and 2015 impairment assessments,2021, the Company performed quantitative assessmentsa qualitative assessment for all indefinite‑lived intangible assets. The methodology employed was the relief from royalty method, a subset of the income approach.tradenames. Based on the results of the assessment,assessments, the Company did not recognize an impairment on any indefinite-lived intangibles in 2017. In 2016 and 2015, Company recognized non‑cash pre‑tax impairment charges of approximately $0.4 million and $0.6 million, respectively. The impairment charge of $0.4 million in 2016 related to a trade name in the Europe segment. The $0.6 million impairment charge in 2015 included tradenames in the Americas and Europe segment for $0.5 million and $0.1 million, respectively.2022 or 2021.
Intangible assets with estimable lives and other long‑livedlong-lived assets are reviewed for impairment wheneverat least quarterly or more frequently if events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of intangible assets with estimable lives and other long‑livedlong-lived assets is measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted pretaxpre-tax cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the impairment loss recognized is the amount by which the carrying amount of the asset or asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future pretaxpre-tax operating cash flows or appraised values, depending on the nature of the asset. The Company determines the discount rate for this analysis based on the weighted average cost of capital using the market and guideline public companies for the related businesses and does not allocate interest charges to the asset or asset group being measured. Judgment is required to estimate future operating cash flows. In 2022, the fourth quarter of 2017,Company recognized a $1.3 million impairment charge for an amortizable technology asset. In 2020, the Company recognized a $1.0 million impairment charge infor a long-lived asset and $0.4 million impairment charge for an amortizable technology asset. All impairments were recognized within the Americas segment for a technology asset as a changeand due to changes in market expectations indicated the carrying amount of this asset wasthese assets were no longer recoverable. In 2021, there were no indications of the carrying amounts of intangible assets with estimable lives not being recoverable.
Intangible assets include the following:
| | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | Gross | | | | | Net | | Gross | | | | | Net |
| | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying |
| | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount |
|
| | (in millions) |
Patents | | $ | 5.0 | | $ | (5.0) | | $ | — | | $ | 16.1 | | $ | (16.1) | | $ | — |
Customer relationships | | | 175.1 | | | (118.6) | | | 56.5 | | | 237.5 | | | (173.1) | | | 64.4 |
Technology | | | 53.2 | | | (40.5) | | | 12.7 | | | 58.6 | | | (40.7) | | | 17.9 |
Trade names | | | 19.8 | | | (10.8) | | | 9.0 | | | 26.8 | | | (16.9) | | | 9.9 |
Other | | | 1.1 | | | (0.6) | | | 0.5 | | | 4.3 | | | (3.8) | | | 0.5 |
Total amortizable intangibles | | | 254.2 | | | (175.5) | | | 78.7 | | | 343.3 | | | (250.6) | | | 92.7 |
Indefinite-lived intangible assets | | | 35.0 | | | — | | | 35.0 | | | 35.9 | | | — | | | 35.9 |
| | $ | 289.2 | | $ | (175.5) | | $ | 113.7 | | $ | 379.2 | | $ | (250.6) | | $ | 128.6 |
| | | | | | | | | | | | | | | | | | | |
| | December 31, | |
| | 2017 | | 2016 | |
| | Gross | | | | | Net | | Gross | | | | | Net | |
| | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying | |
| | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount | |
| | (in millions) | |
Patents | | $ | 16.1 | | $ | (15.4) | | $ | 0.7 | | $ | 16.1 | | $ | (14.9) | | $ | 1.2 | |
Customer relationships | | | 233.2 | | | (133.5) | | | 99.7 | | | 231.5 | | | (117.3) | | | 114.2 | |
Technology | | | 53.9 | | | (23.1) | | | 30.8 | | | 53.1 | | | (19.2) | | | 33.9 | |
Trade names | | | 25.5 | | | (9.7) | | | 15.8 | | | 25.1 | | | (8.1) | | | 17.0 | |
Other | | | 6.9 | | | (6.0) | | | 0.9 | | | 6.8 | | | (5.9) | | | 0.9 | |
Total amortizable intangibles | | | 335.6 | | | (187.7) | | | 147.9 | | | 332.6 | | | (165.4) | | | 167.2 | |
Indefinite-lived intangible assets | | | 37.3 | | | — | | | 37.3 | | | 35.3 | | | — | | | 35.3 | |
| | $ | 372.9 | | $ | (187.7) | | $ | 185.2 | | $ | 367.9 | | $ | (165.4) | | $ | 202.5 | |
The Company acquired $31.0 million in intangible assets as partTable of the PVI acquisition in 2016, consisting of customer relationships valued at $17.6 million, technology of $10.2 million, and the trade name of $3.2 million. The weighted-average amortization period in total and by asset category of customer relationships, technology, and the trade name is 16.1 years, 15 years, 10 years, and 20 years, respectively.Contents
The Company acquired $1.6 million in intangible assets as part of the Watts Korea acquisition in 2016, consisting entirely of customer relationships. The weighted-average amortization period for the customer relationships acquired in 10 years.
Aggregate amortization expense for amortized intangible assets for 2017, 20162022, 2021 and 20152020 was $22.5$12.1 million, $20.8$13.7 million and $20.9$15.2 million, respectively. Additionally, future amortization expense on amortizable intangible assets is expected to be $19.5$12.2 million for 2018, $15.52023, $12.0 million for 2019, $15.02024, $10.5 million for 2020, $13.32025, $9.6 million for 2021,2026 and $11.6$8.4 million for 2022.2027. Amortization expense is provided on a straight‑linestraight-line basis over the estimated useful lives of the intangible assets. The weighted‑averageweighted-average remaining life of total amortizable intangible assets is 12.57.9 years. Patents, customerCustomer relationships, technology, trade names and other amortizable intangibles have weighted‑averageweighted-average remaining lives of 3.38.0 years, 4.4 years, 11.3 years 8.1 years, 14.4 years and 19.718.9 years, respectively. Indefinite‑livedIndefinite-lived intangible assets primarily include trade names and trademarks. In 2022, we removed fully amortized intangible assets from both gross carrying amount and accumulated amortization, with no effect to net carrying amount, in the amounts of $11.1 million for patents, $61.9 million for customer relationships, $4.2 million for technology, $6.8 million for trade names and $3.2 million for other.
(7) Inventories, net
Inventories consist of the following:
| | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| | | | | | | | |
| | December 31, | | |
| | 2017 | | 2016 | | |
| | (in millions) | | |
| | | (in millions) |
Raw materials | | $ | 81.8 | | $ | 81.5 | | | $ | 138.0 | | $ | 119.4 |
Work-in-process | | | 17.5 | | | 13.7 | | | | 21.0 | | | 20.4 |
Finished goods | | | 159.8 | | | 144.2 | | | | 216.6 | | | 230.9 |
| | $ | 259.1 | | $ | 239.4 | | |
| | | $ | 375.6 | | $ | 370.7 |
Raw materials, work‑in‑processwork-in-process and finished goods are net of valuation reserves of $28.2$43.6 million and $28.4$36.7 million as of December 31, 20172022 and 2016,2021, respectively. Finished goods of $17.5$18.2 million and $13.0$10.6 million as of December 31, 20172022 and 2016,2021, respectively, were consigned.
(8) Property, Plant and Equipment
Property, plant and equipment consist of the following:
| | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| | | | | | | | |
| | December 31, | | |
| | 2017 | | 2016 | | |
| | (in millions) | | |
| | | (in millions) |
Land | | $ | 14.5 | | $ | 13.7 | | | $ | 11.1 | | $ | 12.6 |
Buildings and improvements | | | 164.6 | | | 146.9 | | | | 183.5 | | | 190.6 |
Machinery and equipment | | | 336.9 | | | 323.4 | | | | 387.4 | | | 394.5 |
Construction in progress | | | 9.8 | | | 14.1 | | | | 13.6 | | | 11.1 |
| | | 525.8 | | | 498.1 | | |
Property, plant and equipment, at cost | | | | 595.6 | | | 608.8 |
Accumulated depreciation | | | (327.3) | | | (308.4) | | | | (398.8) | | | (408.1) |
| | $ | 198.5 | | $ | 189.7 | | |
Property, plant, and equipment, net | | | $ | 196.8 | | $ | 200.7 |
(9) Income Taxes
The significant components of the Company’s deferred income tax liabilities and assets are as follows:
| | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| | | | | | | | |
| | December 31, | | |
| | 2017 | | 2016 | | |
| | (in millions) | | |
| | | (in millions) |
Deferred income tax liabilities: | | | | | | | | | | | | | |
Excess tax over book depreciation | | $ | 13.5 | | $ | 15.5 | | | $ | 21.3 | | $ | 21.5 |
Intangibles | | | 37.1 | | | 55.2 | | | | 26.3 | | | 29.0 |
Goodwill | | | 16.3 | | | 20.4 | | | | 26.6 | | | 25.1 |
Foreign earnings | | | 14.6 | | | — | | | | 0.6 | | | 2.2 |
Operating lease ROU assets | | | | 7.9 | | | 8.6 |
Other | | | 5.7 | | | 6.1 | | | | 5.7 | | | 3.2 |
Total deferred tax liabilities | | | 87.2 | | | 97.2 | | | | 88.4 | | | 89.6 |
Deferred income tax assets: | | | | | | | | | | | | | |
Accrued expenses | | | 17.8 | | | 22.9 | | | | 9.6 | | | 10.7 |
Capital loss carry forward | | | 0.3 | | | 1.4 | | |
Product liability | | | | 5.8 | | | 5.9 |
Operating lease liabilities | | | | 8.3 | | | 8.9 |
Stock based compensation | | | | 6.1 | | | 6.2 |
Foreign tax credits | | | 22.0 | | | — | | | | 13.6 | | | 13.8 |
Net operating loss carry forward | | | 6.5 | | | 7.3 | | | | 6.6 | | | 6.6 |
Capital loss carry forward | | | | 1.7 | | | 1.7 |
Inventory reserves | | | 5.8 | | | 13.5 | | | | 10.3 | | | 9.4 |
Intangibles | | | | 14.0 | | | - |
Capitalized R&D | | | | 14.7 | | | - |
Other | | | 9.9 | | | 13.5 | | | | 9.6 | | | 9.6 |
Total deferred tax assets | | | 62.3 | | | 58.6 | | | | 100.3 | | | 72.8 |
Less: valuation allowance | | | (28.7) | | | (7.1) | | | | (20.3) | | | (20.2) |
Net deferred tax assets | | | 33.6 | | | 51.5 | | | | 80.0 | | | 52.6 |
Net deferred tax liabilities | | $ | (53.6) | | $ | (45.7) | | | $ | (8.4) | | $ | (37.0) |
The provision for income taxes is based on the following pre‑taxpre-tax income:
| | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2017 | | 2016 | | 2015 | | |
| | (in millions) | | |
| | | (in millions) |
Domestic | | $ | 80.3 | | $ | 64.8 | | $ | (25.8) | | | $ | 204.3 | | $ | 139.6 | | $ | 96.8 |
Foreign | | | 62.8 | | | 63.0 | | | (85.2) | | | | 103.3 | | | 94.5 | | | 70.2 |
| | $ | 143.1 | | $ | 127.8 | | $ | (111.0) | | |
| | | $ | 307.6 | | $ | 234.1 | | $ | 167.0 |
The provision for income taxes consists of the following:
| | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2017 | | 2016 | | 2015 | | |
| | (in millions) | | |
| | | (in millions) |
Current tax expense: | | | | | | | | | | | | | | | | | | | |
Federal | | $ | 42.1 | | $ | 18.3 | | $ | 3.4 | | | $ | 51.0 | | $ | 32.0 | | $ | 13.4 |
Foreign | | | 17.3 | | | 17.2 | | | 18.1 | | | | 23.2 | | | 30.3 | | | 25.3 |
State | | | 4.2 | | | 3.9 | | | 2.0 | | | | 11.5 | | | 14.4 | | | 6.9 |
| | | 63.6 | | | 39.4 | | | 23.5 | | |
| | | | 85.7 | | | 76.7 | | | 45.6 |
Deferred tax expense (benefit): | | | | | | | | | | | | | | | | | | | |
Federal | | | 4.0 | | | 3.6 | | | (13.6) | | | | (12.1) | | | (4.8) | | | 14.8 |
Foreign | | | 8.5 | | | 0.6 | | | (7.0) | | | | (13.7) | | | (2.4) | | | (6.7) |
State | | | 5.9 | | | — | | | (1.0) | | | | (3.8) | | | (1.1) | | | (1.0) |
| | | 18.4 | | | 4.2 | | | (21.6) | | |
Deferred tax remeasurement of the 2017 Tax Act | | | (12.0) | | | — | | | — | | |
| | $ | 70.0 | | $ | 43.6 | | $ | 1.9 | | |
| | | | (29.6) | | | (8.3) | | | 7.1 |
Provision for income taxes | | | $ | 56.1 | | $ | 68.4 | | $ | 52.7 |
The 2017 Tax Cuts and Jobs Act (“2017 Tax Act”) was enacted on December 22, 2017 and has resulted in significant changes to the U.S. corporate income tax system. These changes include lowering the U.S. Corporate income tax rate from 35% to 21% and the elimination or reduction of certain domestic deductions and credits. The 2017 Tax Act also transitions international taxation from a worldwide system to a modified territorial system creating new taxes on certain foreign-sourced earnings and certain related party payments, which are referred to as the Global Intangible Low-taxed Income Tax and the Annual Anti-Base Erosion Tax, respectively. The 2017 Tax Act also imposes a one-time mandatory deemed repatriation tax (“Toll Tax”) on foreign subsidiaries’ previously untaxed accumulated foreign earnings.
Due to the timing of the enactment and the complexity involved applying the provisions of the 2017 Tax Act, the Company made reasonable estimates of the effects and recorded provisional amounts in its financial statements. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As additional regulatory guidance is issued by the applicable taxing authorities, as accounting treatment is clarified, as the Company performs additional analysis on the application of the law, and as the Company refines estimates in calculating the effect, the Company’s final analysis, which will be recorded in the period completed, may be different from the Company’s current provisional amounts, which could materially affect the Company’s tax obligations and effective tax rate in the period or periods in which the adjustments are made.
Changes in tax rates and tax laws are accounted for in the period of enactment. Therefore, the Company recorded a provisional tax expense of $25.1 million related to the 2017 Tax Act, as of December 31, 2017. This amount also includes an immaterial benefit to the Company’s 2017 current year tax expense.
The final determination of the Toll Tax, impacts to the Company’s deferred assets and liabilities, and valuation allowances will be completed as additional information becomes available, but no later than one year from the enactment of the 2017 Tax Act.
Toll Tax
The 2017 Tax Act imposes a one-time toll tax requiring the Company to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and cash equivalents and 8% on the remaining earnings. The Company recorded a provisional amount based on estimates of the
effects of the 2017 Tax Act of $23.3 million which will be paid over eight years starting in 2018 and will not accrue interest.
Deferred Tax Remeasurement
As the Company’s deferred tax liabilities exceeded the balance of the Company’s deferred tax assets, the Company recorded a provisional amount of tax benefit of $12 million, reflecting the decrease in the U.S. Corporate income tax rate.
Tax on Foreign Earnings
As a result of the 2017 Tax Act, the Company can repatriate its cumulative undistributed foreign earning back to the U.S. with minimal U.S. income tax consequences other than the one-time Toll Tax. The Company has recorded a provisional amount of deferred tax expense of $14.6 million for the future repatriation of foreign earnings.
Actual income taxes reported are different than what would have been computed by applying the federal statutory tax rate to income before income taxes. The reasons for these differences are as follows:
| | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2017 | | 2016 | | 2015 | | |
| | (in millions) | | |
| | | (in millions) |
Computed expected federal income expense | | $ | 50.1 | | $ | 44.7 | | $ | (38.8) | | | $ | 64.6 | | $ | 49.2 | | $ | 35.0 |
State income taxes, net of federal tax benefit | | | 2.7 | | | 2.2 | | | 0.8 | | | | 6.8 | | | 6.6 | | | 4.6 |
Foreign tax rate differential | | | (6.7) | | | (6.7) | | | 7.5 | | | | 3.5 | | | 4.3 | | | 2.7 |
Goodwill impairment | | | — | | | — | | | 29.0 | | |
Impact of the 2017 Tax Act | | | 25.1 | | | — | | | — | | |
Change in valuation allowance | | | — | | | — | | | (1.8) | | |
Restructuring of manufacturing supply chain operations | | | | (16.1) | | | 29.3 | | | — |
Valuation allowance | | | | 0.4 | | | (22.1) | | | 12.9 |
GILTI HTE | | | | — | | | — | | | (2.1) |
Unrecognized tax benefits, net | | | | (1.0) | | | 2.0 | | | (0.3) |
Other, net | | | (1.2) | | | 3.4 | | | 5.2 | | | | (2.1) | | | (0.9) | | | (0.1) |
| | $ | 70.0 | | $ | 43.6 | | $ | 1.9 | | |
| | | $ | 56.1 | | $ | 68.4 | | $ | 52.7 |
In 2020, final tax regulations were released with respect to the GILTI (Global Intangible Low-Taxed Income) tax regime. These regulations permit an exclusion from GILTI for items of foreign income subject to a high effective tax rate, referred to as the GILTI High Tax Exclusion (HTE). Under the new regulations, the Company was allowed to review its GILTI income for the 2018 and 2019 tax years. The Company elected the exclusion for both the 2018 and 2019 tax years resulting in a total tax benefit of $2.1 million which was recorded in 2020.
In 2021, the Company restructured its Mexican manufacturing supply chain operations, which resulted in $29.3 million in additional tax expense, and was offset by a $22.1 million release of the valuation allowance on foreign tax credits, for a net tax of $7.2 million. The additional tax expense was primarily related to the prepayment of future royalties from the new structure, which resulted in current foreign source income. The foreign tax credit benefit significantly offset the additional tax expense resulting from the new supply chain structure. In 2022, to further align the new supply chain structure with developments, the Company modified the restructuring of its Mexican manufacturing supply chain operations which resulted in the recognition of a $16.1 million deferred tax asset which will be amortized over 10 years.
At December 31, 2017,2022, the Company had foreign and domestic net operating loss carry forwards of $26.1$27.6 million and $1.1 million, respectively, for income tax purposes before considering valuation allowances; $26.1$23.2 million of the foreign losses can be carried forward indefinitely, $4.4 million of the foreign losses expire in 2029, and $0.3 million of the domestic losses expire between 2035 and 2040 and $0.8 million of the domestic losses can be carried forward indefinitely. The net operating losses consist of $26.1$23.2 million related to Austrian operations, $4.4 million related to Switzerland operations and $1.1 million related to United States operations.
At December 31, 2017,2022, the Company had a U.S. capital loss carry forwardsforward of $0.3$1.7 million for income tax purposes before considering valuation allowances. The U.S. capital loss carry forwardsallowances that will expire in 2018.2025.
At December 31, 2017,2022 and December 31, 2021, the Company had foreign tax credit carry forwards of $22.0$13.6 million and $13.8 million, respectively, for income tax purposes before considering valuation allowances. The foreign tax credit carry forwardscarryforwards expire in 2027.between 2027 and 2031.
At December 31, 20172022 and December 31, 2016,2021, the Company had valuation allowances of $28.7$20.3 million and $7.1$20.2 million, respectively. At December 31, 2017, $0.32022, $12.8 million relates to U.S. capital losses, $22.0 million relatesrelated to foreign tax credits, and $6.4$5.8 million relatesrelated to Austrian net operating losses. As a result oflosses, and $1.7 million related to the 2017 Tax Act, the Company recorded a provisional amount ofdomestic capital loss carry forward. At December 31, 2021, $12.4 million related to foreign tax credits, that was previously not recorded, and recognized a valuation allowance$6.1 million related to the credits. The provisional amount requires further analysis by the Company during the measurement period. At December 31, 2016, $1.5 million relates to U.S. capital losses and $5.7 million relates to Austrian net operating losses.losses, and $1.7 million related to the domestic capital loss carry forward. Management believes that the ability of the Company to use such foreign tax credits and losses within the applicable carry forward period does not rise to the level of the more likely than not threshold. The Company does not have a valuation allowance on other deferred tax assets, as management believes that it is more likely than not that the Company will recover the net deferred tax assets. Management believes it is more likely than not that the future reversals of the deferred tax liabilities, together with forecasted income, will be sufficient to fully recover the deferred tax assets.
AtSubsequent to recording the Toll Tax as part of the Tax Cuts and Jobs Act of 2017, after December 31, 2017, the Company considered noneconsiders all of the Company’sits foreign earnings to be permanently reinvested outside of the U.S. and therefore recorded a provisionalhas no plans to repatriate these foreign earnings to the U.S.
Unrecognized Tax Benefits
As of December 31, 2022, the Company had gross unrecognized tax benefits of approximately $7.2 million, approximately $4.5 million of which, if recognized, would affect the effective tax rate. The difference between the amount of deferredunrecognized tax liabilities associatedbenefits and the amount that would affect the effective tax rate consists of allowable correlative adjustments that are available for certain jurisdictions.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | |
| | (in millions) |
Balance at January 1, 2022 | | $ | 8.5 |
Increases related to prior year tax positions | | | 1.9 |
Increases related to current year tax positions | | | 0.2 |
Decreases due to lapse in statutes | | | (3.1) |
Currency movement | | | (0.3) |
Balance at December 31, 2022 | | $ | 7.2 |
The Company estimates that it is reasonably possible that the balance of unrecognized tax benefits as of December 31, 2022 may decrease by $0.4 million to $0.8 million in the next twelve months, as a result of lapses in statutes of limitations and settlements and $0.2 million to $0.4 million of which, if recognized, would affect the effective tax rate.
The Company conducts business in a variety of locations throughout the world resulting in tax filings in numerous domestic and foreign jurisdictions. The Company is subject to tax examinations regularly as part of the normal course of business. The Company’s major jurisdictions are the U.S., France, Germany, Italy and Canada. The statute of limitations in the U.S. is subject to tax examination for 2019 and later; France, Germany, Italy and Canada are subject to tax examination for 2016 and later. All other jurisdictions, with the repatriationfew exceptions, are no longer subject to tax examinations in state, local or international jurisdictions for tax years before 2015.
The Company accounts for interest and penalties related to uncertain tax positions as a component of those earnings.income tax expense.
(10) Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
| | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| | | | | | | | |
| | December 31, | | |
| | 2017 | | 2016 | | |
| | (in millions) | | |
| | | (in millions) |
Commissions and sales incentives payable | | $ | 40.1 | | $ | 36.0 | | | $ | 56.0 | | $ | 57.1 |
Product liability and workers’ compensation | | | 24.5 | | | 28.1 | | |
Product liability | | | | 22.4 | | | 22.2 |
Shipping / freight payable | | | | 6.4 | | | 16.9 |
Other | | | 57.6 | | | 68.6 | | | | 73.1 | | | 77.4 |
Income taxes payable | | | 3.6 | | | 4.1 | | | | 16.7 | | | 13.3 |
| | $ | 125.8 | | $ | 136.8 | | |
| | | $ | 174.6 | | $ | 186.9 |
(11) Financing Arrangements
The Company’s debt consists of the following:
| | | | | | |
| | December 31, |
| | 2022 | | 2021 |
|
| | (in millions) |
Line of Credit due March 2026 | | $ | 150.0 | | | 145.0 |
Less debt issuance costs (deduction from debt liability) | | | (2.4) | | | (3.1) |
Total long-term debt | | $ | 147.6 | | $ | 141.9 |
| | | | | | | |
| | December 31, | |
| | 2017 | | 2016 | |
| | (in millions) | |
5.05% notes due June 2020 | | $ | 75.0 | | | 75.0 | |
Term Loan due February 2021 | | | 277.5 | | | 300.0 | |
Term Loan due December 2017 | | | — | | | 115.8 | |
Line of Credit due February 2021 | | | 147.0 | | | 162.0 | |
Other—consists primarily of European borrowings (at interest rates ranging from 1.1% to 6.0%) | | | — | | | 0.8 | |
Total debt outstanding | | | 499.5 | | | 653.6 | |
Less debt issuance costs (deduction from debt liability) | | | (2.4) | | | (3.2) | |
Less current maturities | | | (22.5) | | | (139.1) | |
Total long-term debt | | $ | 474.6 | | $ | 511.3 | |
Principal payments during each of the next five years and thereafter are due as follows (in millions): 2018—$22.5; 2019—$30.0; 2020—$105.0; 2021—$342.0; and 2022 and thereafter - $0 2023: $0; 2024: $0; 2025: $0; 2026: $150.0; 2027: $0.
On February 12, 2016,March 30, 2021, the Company entered into athe Second Amended and Restated Credit Agreement (the “Credit Agreement”) among the Company, certain subsidiaries of the Company who become borrowers under the Credit Agreement,with JPMorgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender and Letter ofadministrative agent (the Credit Issuer, and the other lenders referred to therein.Agreement). The Credit Agreement provides for a $500amended the Company’s borrowings under the Amended and Restated Credit Agreement entered into on April 24, 2020 (the “Prior Credit Agreement”), to extend the maturity date of the $800 million five‑year, senior unsecured revolving credit facility from February 12, 2022 to March 30, 2026 (the “RevolvingRevolving Credit Facility”Facility). Among other changes from the Prior Credit Agreement, the 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 1.00% floor on the adjusted London interbank offered rate (LIBOR) rate to 0.00%. On August 2, 2022, the Company entered into Amendment No. 1 to the Credit Agreement (as so amended, the Amended Credit Agreement) to replace LIBOR as a reference rate for borrowings with the term secured overnight financing rate (Term SOFR), and to provide for a fixed adjustment of 10 basis points added to Term SOFR (Term Benchmark) for all Term SOFR borrowings, subject to a 0.00% floor. The Company elected the optional expedient under Accounting Standards Update (“ASC”) No. 2020-04, Reference Rate Reform (Topic 848), in connection with amending its credit agreement to replace the reference rate from LIBOR to Term Benchmark to consider the amendment as a sublimitcontinuation of upthe existing contract without having to perform an assessment that would otherwise be required under U.S. GAAP.
The Revolving Credit Facility also includes sublimits of $100 million for letters of credit and $15 million for swing line loans. As of December 31, 2022, the Company had drawn down $150.0 million on this line of credit and had $12.1 million in letters of credit. As of December 31, 2017, the Company had $147.0 million drawn on the line of credit. The Credit Agreement also provides for a $300 million, five‑year, term loan facility (the “Term Loan Facility”) available to the Companycredit outstanding, which resulted in a single draw, of which the entire $300 million had been drawn in February 2016. The Company had $277.5$637.9 million of borrowings outstanding onunused and available credit under the term loan as of December 31, 2017.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 rateTerm Benchmark loans, the ICETerm Benchmark Administration LIBOR rate plus an applicable percentage, ranging from 0.975%1.075% to 1.45%1.325%, determined by reference to the Company’sour 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 highestgreatest of (a) the federal funds rate plus 0.5%,Prime Rate in effect on such day, (b) the rate of interestFRBNY Rate in effect foron such day as announced by JPMorgan Chase Bank, N.A. as its “prime rate,”plus 0.50% and (c) the ICETerm Benchmark Administration LIBOR rate plus 1.0%, plus an applicable percentage, ranging from 0.00% to 0.45%, determined by reference to the Company’s consolidated leverage ratio. Borrowings1.00% for a one month interest period. The weighted average interest rate on debt outstanding under the Term LoanRevolving Credit Facility will bear interest at a fluctuating rate per annum equal to an applicable percentage defined as the ICE Benchmark Administration LIBOR rate plus an applicable percentage, ranging from 1.125% to 1.75%, determined by reference to the Company’s consolidated leverage ratio. The interest rates as of December 31, 20172022 was 5.35%. The weighted average interest rate on debt outstanding inclusive of the interest rate swap discussed in Note 16 of the Notes to Consolidated Financial Statements and interest rates under the Revolving Credit Facility and on the Term Loan Facility were 2.56% and 2.67%, respectively.
The loan under the Term Loan Facility amortizes as follows: 0% per annum during the first year, 7.5% in the second and third years, 10% in the fourth and fifth years, and the remaining unpaid balance paid in full on the maturity date.
Payments when due are made ratably each year in quarterly installments. The Company paid quarterly installments of $22.5 million during 2017.December 31, 2022 was 3.23%. In addition to paying interest under the Amended Credit Agreement, the Company is also required to pay certain fees in connection with the credit facility,Revolving Credit Facility, including, but not limited to, an unused facility fee and letter of credit fees. The Amended Credit Agreement matures on February 12, 2021,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. Once repaid, amounts borrowed underAs of December 31, 2022, the Term Loan Facility may not be borrowed again.Company was compliance with all covenants related to the Amended Credit Agreement.
The Amended Credit Agreement impose 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 $25.7$12.1 million as of December 31, 20172022 and $25.6$14.0 million as of December 31, 2016.2021. The Company’s letters of credit are primarily associated with insurance coverage. The Company’s letters of credit generally expire within one year of issuance and are drawn down against the revolving credit facility.issuance. These instruments may exist or expire without being drawn down. Therefore, they do not necessarily represent future cash flow obligations.
On December 16, 2016, Watts International Holdings Limited (“Watts International”), a wholly owned subsidiary of the Company, entered into a Facility Agreement (the “Facility Agreement”) among Watts International, as original borrower(12) Earnings per Share and original guarantor, Watts Water Technologies EMEA B.V., a wholly owned subsidiary of the Company (“Watts EMEA”), as original guarantor, JPMorgan Chase Bank, N.A., as sole bookrunner and sole lead arranger (“JP Morgan Chase Bank”), J.P. Morgan Europe Limited, as agent to the financial parties, and the other lenders referred to therein. The Facility Agreement provides for a €110 million, 364 day, term loan facility available to the Company in a single draw. On December 20, 2016, Watts International borrowed the full amount available for borrowing under the Facility Agreement. The loan made on December 20, 2016 bears interest at a rate per annum equal to (i) the Euro InterBank Offered Rate (EURIBOR), provided that if such rate is less than zero, then EURIBOR shall be deemed to be zero, plus (ii) a margin of 1.875%, provided that if no event of default is continuing and Watts International’s consolidated leverage ratio is at a specified level, the margin shall decrease to 1.50%. Accrued interest on the loan is payable on the last day of each interest period. The first interest period is set at one month and may be changed subsequently to a period of one, two, or three months (or such other period agreed with all the lenders). Substantially all of the proceeds of the borrowings made on December 20, 2016 under the Facility Agreement were used to pay down $113 million outstanding under the Revolving Credit Facility. As of the third quarter of 2017, the Company had repaid in full the Facility Agreement.Stock Repurchase Program
As of December 31, 2017, the Company had $327.3 million of unused and available credit under the Credit Agreement and $25.7 million of stand-by letters of credit outstanding on the Credit Agreement. As of December 31, 2017, the Company was in compliance with all covenants related to the Credit Agreement.
On June 18, 2010, the Company entered into a note purchase agreement with certain institutional investors (the 2010 Note Purchase Agreement). Pursuant to the 2010 Note Purchase Agreement, the Company issued senior notes of $75.0 million in principal, due June 18, 2020. The Company will pay interest on the outstanding balance of the Notes at the rate of 5.05% per annum, payable semi-annually on June 18th and December 18th until the principal on the Notes shall become due and payable. The Company may, at its option, upon notice, and subject to the terms of the 2010 Note Purchase Agreement, prepay at any time all or part of the Notes in an amount not less than $1.0 million by paying the principal amount plus a make-whole amount, which is dependent upon the yield of respective U.S. Treasury securities. The 2010 Note Purchase Agreement includes operational and financial covenants, with which the Company is required to comply, including, among others, maintenance of certain financial ratios and restrictions on additional indebtedness, liens and dispositions. As of December 31, 2017, the Company was in compliance with all covenants related to the 2010 Note Purchase Agreement.
(12) Common Stock
The Class A common stock and Class Class��B common stock have equal dividend and liquidation rights. Each share of the Company’s Class A common stock is entitled to one vote on all matters submitted to stockholders and each share of Class B common stock is entitled to ten votes on all such matters. Shares of Class B common stock are convertible into shares of Class A common stock on a one‑to‑oneone-to-one basis at the option of the holder. As of December 31, 2017,2022, the
Company had reserved a total of 2,673,0341,998,439 shares of Class A common stock for issuance under its stock‑basedstock-based compensation plans and 6,379,2905,958,290 shares for conversion of Class B common stock to Class A common stock.
common shares outstanding. The calculation of diluted net income per share assumes the conversion of all dilutive securities.
Net income and the number of shares used to compute net income per share, basic and assuming full dilution, are reconciled below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | | Per | | | | | | | Per | | | | | | | Per |
| | Net | | | | Share | | Net | | | | Share | | Net | | | | Share |
| | Income | | Shares | | Amount | | Income | | Shares | | Amount | | Income | | Shares | | Amount |
|
| | (Amounts in millions, except per share information) |
Basic EPS | | $ | 251.5 | | 33.5 | | $ | 7.51 | | $ | 165.7 | | 33.8 | | $ | 4.90 | | $ | 114.3 | | 33.9 | | $ | 3.37 |
Dilutive securities, principally common stock options | | | — | | 0.1 | | | (0.03) | | | — | | 0.1 | | | (0.02) | | | — | | 0.1 | | | (0.01) |
Diluted EPS | | $ | 251.5 | | 33.6 | | $ | 7.48 | | $ | 165.7 | | 33.9 | | $ | 4.88 | | $ | 114.3 | | 34.0 | | $ | 3.36 |
On July 27, 2015,February 6, 2019, the Company’s Board of Directors authorized the repurchase of up to $100$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. In connection with thisFor the stock repurchase program, the Company enteredenters into a Rule 10b5-1 plan,plans, which permitspermit 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 planplans the Company entered into with respect to the repurchase program. As of December 31, 2017,2022, there was approximately $37.8$28.0 million remaining authorized for share repurchases under thisthe $150 million program.
The following table summarizes the cost and the number of shares of Class A common stock repurchased under the July 27, 2015 programs forFor the years ended December 31, 20172022 2021 and 2016:2020, the Company repurchased 493,733 shares for $69.4 million, 109,998 shares for $16.0 million and 331,531 shares for $28.9 million, respectively.
| | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | |
| | Number of shares | | Cost of shares | | Number of shares | | Cost of shares | |
| | repurchased | | repurchased | | repurchased | | repurchased | |
| | (amounts in millions, except share amount) | |
Stock repurchase programs: | | | | | | | | | | | |
July 27, 2015 | | 277,886 | | | 18.2 | | 501,229 | | | 26.8 | |
Total | | 277,886 | | $ | 18.2 | | 501,229 | | $ | 26.8 | |
(13) Stock-Based Compensation
(13) Stock‑Based Compensation
As of December 31, 2017,2022, the Company maintains one stock incentive plan, the SecondThird Amended and Restated 2004 Stock Incentive Plan (the “20042004 Stock Incentive Plan”)Plan). At December 31, 2017, 1,342,8582022, 955,686 shares of Class A common stock were authorized for future grants of new equity awards under this plan. The Company currently grants shares of restricteddeferred stock and deferred sharesawards to key employees and stock awards to non‑employeenon-employee members of the Company’s Board of Directors under the 2004 Stock Incentive Plan. The Company also previously granted shares of restricted stock to key employees. Stock awards to non‑employeenon-employee members of the Company’s Board of Directors vest immediately. Employees’ restricted stock awards and deferred sharesstock awards typically vest over a three‑yearthree-year period at the rate of one‑thirdone-third per year. The restricted stock awards are outstanding upon grant whereas the deferred stock awards are outstanding upon vesting. The restricted stock awards and deferred stock awards are amortized to expense on a straight-line basis over the vesting period.
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.grant, which is currently 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 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 performance stock units in 2017, 20162022, 2021 and 2015.2020. The performance goals for the performance stock units are based on the compound annual growth rate of the Company’s revenue over the three-year performance period and the Company’s return on invested capital (“ROIC”)(ROIC) for the third year of the performance period.
Beginning in 2019, the Company included “retirement vesting” provisions in the agreements for its deferred stock awards and performance stock units. These provisions provide that an employee who retires from the Company after attaining age 55 and 10 years of service and who meets certain other requirements, including non-competition and non-solicitation requirements, would be allowed to continue to vest in his or her deferred stock awards for the duration of the vesting periods and would be entitled to receive a pro rata portion of his or her performance stock units based on the period of service elapsed during the performance period. Beginning in 2022, a provision was added that requires the employee remain employed through the last working day of the grant year in addition to the other provisions.
In 2015, the Company stopped granting stock options as part of its annual equity awards to employees. Previously under the 2004 Stock Incentive Plan, key employees were granted nonqualified stock options to purchase the Company’s Class A common stock. Options typically became exercisable over a four-year period at the rateMinimal options remain outstanding, all of 25% per yearwhich are vested and expire ten years afterfrom the grant date. However, most options granted in 2014 become exercisable over a three-year period at a ratedate of one-third per year.grant. Options granted under the plan may have exercise prices of not less than 100% of the fair market value of the Class A common stock on the date of grant. The Company’s practice was to grant all options at fair market value on the grant date. Upon exercise of options, the Company issues shares of Class A common stock. Beginning in 2015, the Company stopped granting stock options as part of its annual equity awards to employees.
The Company also has a Management Stock Purchase Plan that allows for the granting of restricted stock units (RSUs) to key employees. On an annual basis, key employees may elect to receive a portion of their annual incentive compensation in RSUs instead of cash. Participating employees may use up to 50% of their annual incentive bonus to purchase RSUs for a purchase price equal to 80% of the fair market value of the Company’s Class A common stock as
of the date of grant. Beginning with annual incentive compensation for 2016, the purchase price for RSUs was increased from 67% to 80% of the fair market value of the Company’s Class A common stock. RSUs vest either annually over a 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 three years, or such greater number of years as is chosen by the employee, from the date of grant. An aggregate of 2,000,000 shares of Class A common stock may be issued under the Management Stock Purchase Plan. At December 31, 2017, 763,2332022, 705,188 shares of Class A common stock were authorized for future grants under the Company’s Management Stock Purchase Plan.
2004 Stock Incentive Plan
The following is a summary of unvested restricted stock and deferred sharesstock awards activity and related information:
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | | | | Weighted | | | | Weighted | | | | Weighted |
| | | | | Average | | | | Average | | | | Average |
| | | | | Grant Date | | | | Grant Date | | | | Grant Date |
| | | Shares | | Fair Value | | Shares | | Fair Value | | Shares | | Fair Value |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2017 | | 2016 | | 2015 | | |
| | | | Weighted | | | | Weighted | | | | Weighted | | |
| | | | Average | | | | Average | | | | Average | | |
| | | | Grant Date | | | | Grant Date | | | | Grant Date | | |
| | Shares | | Fair Value | | Shares | | Fair Value | | Shares | | Fair Value | | |
| | (Shares in thousands) | | |
| | | (Shares in thousands) |
Unvested at beginning of year | | 210 | | $ | 53.79 | | 244 | | $ | 52.61 | | 214 | | $ | 53.74 | | | 138 | | $ | 97.43 | | 166 | | $ | 77.97 | | 196 | | $ | 76.56 |
Granted | | 139 | | | 60.88 | | 140 | | | 56.33 | | 180 | | | 50.87 | | | 64 | | | 143.86 | | 61 | | | 128.32 | | 92 | | | 75.77 |
Vested | | | (78) | | | 94.33 | | (84) | | | 81.70 | | (100) | | | 74.84 |
Cancelled/Forfeitures | | (9) | | | 55.55 | | (42) | | | 54.43 | | (28) | | | 53.99 | | | (3) | | | 120.31 | | (5) | | | 93.98 | | (22) | | | 75.73 |
Vested | | (123) | | | 55.35 | | (132) | | | 53.10 | | (122) | | | 51.72 | | |
Unvested at end of year | | 217 | | $ | 57.31 | | 210 | | $ | 53.79 | | 244 | | $ | 52.61 | | | 121 | | $ | 121.39 | | 138 | | $ | 97.43 | | 166 | | $ | 77.97 |
The total fair value of shares vested during 2017, 20162022, 2021 and 20152020 was $7.7$11.1 million, $7.9$10.5 million and $6.6$8.1 million, respectively. At December 31, 2017,2022, total unrecognized compensation cost related to unvested restricted stock and deferred sharesstock awards was approximately $8.3$7.5 million with a total weighted average remaining term of 1.631.22 years. For 2017, 20162022, 2021 and 2015,2020, the Company recognized compensation costs of $6.9$7.7 million, $7.6 million and $6.7$7.7 million, respectively.
The aggregate intrinsic value of restricted stock and deferred shares granted and outstanding approximated $16.5 million representing the total pre‑tax intrinsic value based on the Company’s closing Class A common stock price of $75.95 as of December 31, 2017.
The following is a summary of unvested performance share award activity and related information:
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| | | | Weighted | | | | Weighted | | | | Weighted | |
| | | | Average | | | | Average | | | | Average | |
| | | | Grant Date | | | | Grant Date | | | | Grant Date | |
| | Shares | | Fair Value | | Shares | | Fair Value | | Shares | | Fair Value | |
| | (Shares in thousands) | |
Unvested at beginning of year | | 267 | | $ | 56.96 | | 201 | | $ | 57.98 | | 107 | | $ | 56.97 | |
Granted | | 98 | | | 60.45 | | 107 | | | 55.27 | | 106 | | | 58.94 | |
Cancelled/Forfeitures | | (38) | | | 57.12 | | (41) | | | 57.56 | | (12) | | | 57.51 | |
Vested | | (54) | | | 56.81 | | — | | | — | | — | | | — | |
Unvested at end of year | | 273 | | $ | 58.23 | | 267 | | $ | 56.96 | | 201 | | $ | 57.98 | |
The total fair value of shares vested during 2017 was $3.5 million. For 2016 and 2015, no performance share awards vested. At December 31, 2017, total unrecognized compensation cost related to unvested performance shares was approximately $5.3 million with a total weighted average remaining term of 1.51 years. For 2017, 2016, and 2015, the Company recognized compensation costs of $4.8 million, $4.0 million and $1.7 million, respectively.
The aggregate intrinsic value of performance shares granted and outstanding approximated $20.7$17.6 million representing the total pre-tax intrinsic value based on the Company’s closing Class A common stock price of $75.95$146.23 as of December 31, 2017.2022.
The following is a summary of unvested performance stock award activity and related information:
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | Weighted | | | | Weighted | | | | Weighted |
| | | | Average | | | | Average | | | | Average |
| | | | Grant Date | | | | Grant Date | | | | Grant Date |
| | Shares | | Fair Value | | Shares | | Fair Value | | Shares | | Fair Value |
|
| | (Shares in thousands) |
Unvested at beginning of year | | 178 | | $ | 88.32 | | 208 | | $ | 78.06 | | 238 | | $ | 73.84 |
Granted | | 108 | | | 102.98 | | 61 | | | 113.37 | | 94 | | | 70.65 |
Vested | | (136) | | | 78.82 | | (85) | | | 81.50 | | (97) | | | 60.45 |
Cancelled/Forfeitures | | (4) | | | 110.43 | | (6) | | | 83.53 | | (27) | | | 78.59 |
Unvested at end of year | | 146 | | $ | 107.29 | | 178 | | $ | 88.32 | | 208 | | $ | 78.06 |
The granted and vested shares activity include any adjustments required based on performance goal attainment on vesting. The total fair value of shares vested during 2022, 2021 and 2020 was $20.4 million, $10.8 million and $10.0 million, respectively. At December 31, 2022, total unrecognized compensation cost related to unvested performance stock awards was approximately $9.8 million with a total weighted average remaining term of 1.47 years. For 2022, 2021 and 2020, the Company recognized compensation costs of $9.8 million, $14.6 million and $4.3 million, respectively.
The aggregate intrinsic value of performance shares granted and outstanding approximated $21.3 million representing the total pre-tax intrinsic value based on the Company’s closing Class A common stock price of $146.23 as of December 31, 2022.
The following is a summary of stock option activity and related information:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | | | | Weighted | | Weighted | | | | Weighted | | | Weighted | | | | Weighted |
| | | | | Average | | Average | | | | Average | | | Average | | | | Average |
| | | | | Exercise | | Intrinsic | | | | Exercise | | | Intrinsic | | | | Exercise |
| | | Options | | Price | | Value | | Options | | Price | | | Value | | Options | | Price |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2017 | | 2016 | | 2015 | | |
| | | | Weighted | | Weighted | | | | Weighted | | | | Weighted | | |
| | | | Average | | Average | | | | Average | | | | Average | | |
| | | | Exercise | | Intrinsic | | | | Exercise | | | | Exercise | | |
| | Options | | Price | | Value | | Options | | Price | | Options | | Price | | |
| | (Options in thousands) | | |
| | | (Options in thousands) |
Outstanding at beginning of year | | 130 | | $ | 54.46 | | | | | 362 | | $ | 48.46 | | 495 | | $ | 47.34 | | | 4 | | $ | 52.92 | | | | | 5 | | $ | 52.40 | | | | | 10 | | $ | 53.65 |
Granted | | — | | | — | | | | | — | | | — | | — | | | — | | |
Cancelled/Forfeitures | | (3) | | | 55.81 | | | | | (43) | | | 52.93 | | (69) | | | 51.66 | | | — | | | — | | | | | — | | | — | | | | | — | | | — |
Exercised | | (32) | | | 53.19 | | | | | (189) | | | 43.31 | | (64) | | | 36.29 | | | (3) | | | 51.36 | | | | | (1) | | | 51.04 | | | | | (5) | | | 55.03 |
Outstanding at end of year | | 95 | | $ | 54.91 | | $ | 21.04 | | 130 | | $ | 54.46 | | 362 | | $ | 48.46 | | | 1 | | $ | 57.47 | | $ | 88.76 | | 4 | | $ | 52.92 | | $ | 141.25 | | 5 | | $ | 52.40 |
Exercisable at end of year | | 93 | | $ | 54.85 | | $ | 21.10 | | 82 | | $ | 53.38 | | 192 | | $ | 45.10 | | | 1 | | $ | 57.47 | | $ | 88.76 | | 4 | | $ | 52.92 | | $ | 141.25 | | 5 | | $ | 52.40 |
For 2022, 2021 and 2020, the Company did not recognize any compensation costs for options. As of December 31, 2017, substantially all stock options that have been granted under the 2004 Stock Incentive plan have vested. For 2017, 2016 and 2015, the Company recognized compensation cost for options of $0.5 million, $1.1 million and $1.9 million, respectively. As of December 31, 2017,2022, there iswas no unrecognized compensation cost related to unvested options. As of December 31, 2017,2022, the aggregate intrinsic value of exercisable options was approximately $2.0$0.1 million, representing the total pre‑taxpre-tax intrinsic value, based on the Company’s closing Class A common stock price of $75.95$146.23 as of December 31, 2017,2022, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised for 2017, 20162022, 2021 and 20152020 was approximately $0.5$0.3 million, $3.5$0.2 million and $1.2$0.3 million, respectively.
The following table summarizes information about options outstanding at December 31, 2017:2022:
| | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
| | | | Weighted Average | | Weighted Average | | | | Weighted Average |
| | Number | | Remaining Contractual | | Exercise | | Number | | Exercise |
Range of Exercise Prices | | Outstanding | | Life (years) | | Price | | Exercisable | | Price |
|
| | (Options in thousands) |
$57.47–$57.47 | | 1 | | 0.86 | | $ | 57.47 | | 1 | | $ | 57.47 |
| | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable | |
| | | | Weighted Average | | Weighted Average | | | | Weighted Average | |
| | Number | | Remaining Contractual | | Exercise | | Number | | Exercise | |
Range of Exercise Prices | | Outstanding | | Life (years) | | Price | | Exercisable | | Price | |
| | (Options in thousands) | |
$29.05-$37.41 | | 7,150 | | 4.45 | | $ | 36.24 | | 7,150 | | $ | 36.24 | |
$54.76–$54.76 | | 39,781 | | 5.59 | | | 54.76 | | 39,781 | | | 54.76 | |
$57.47–$60.10 | | 47,613 | | 6.35 | | | 57.84 | | 46,411 | | | 57.78 | |
| | 94,544 | | 5.88 | | $ | 54.91 | | 93,342 | | $ | 54.85 | |
Management Stock Purchase Plan
Total unrecognized compensation cost related to unvested RSUs was approximately $1.2$1.4 million at December 31, 20172022 with a total weighted average remaining term of 1.41.58 years. For 2017, 2016 and 2015 theThe Company recognized compensation cost of $1.0$0.9 million for 2022, $0.7 million for 2021, and $0.6$0.7 million respectively.in 2020. Dividends declared for RSUs that are paid to individuals thatbut remain unpaid and accrued at December 31, 2017 total2022 totaled approximately $0.1 million.
A summary of the Company’s RSU activity and related information is shown in the following table:
| | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | | | | Weighted | | Weighted | | | | Weighted | | | | Weighted |
| | | | | Average | | Average | | | | Average | | | | Average |
| | | | | Purchase | | Intrinsic | | | | Purchase | | | | Purchase |
| | | RSUs | | Price | | Value | | RSUs | | Price | | RSUs | | Price |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2017 | | 2016 | | 2015 | | |
| | | | Weighted | | Weighted | | | | Weighted | | | | Weighted | | |
| | | | Average | | Average | | | | Average | | | | Average | | |
| | | | Purchase | | Intrinsic | | | | Purchase | | | | Purchase | | |
| | RSUs | | Price | | Value | | RSUs | | Price | | RSUs | | Price | | |
| | (RSU’s in thousands) | | |
| | | (RSUs in thousands) |
Outstanding at beginning of year | | 148 | | $ | 36.37 | | | | | 101 | | $ | 36.14 | | 80 | | $ | 32.08 | | | 85 | | $ | 75.34 | | | | 95 | | $ | 64.54 | | 110 | | $ | 57.91 |
Granted | | 47 | | | 49.92 | | | | | 89 | | | 35.41 | | 60 | | | 37.13 | | | 29 | | | 115.14 | | | | 25 | | | 97.98 | | 28 | | | 69.76 |
Settled | | | (35) | | | 64.15 | | | | (34) | | | 61.38 | | (40) | | | 49.76 |
Cancelled/Forfeitures | | (3) | | | 41.55 | | | | | (28) | | | 32.25 | | (9) | | | 36.92 | | | (2) | | | 92.09 | | | | (1) | | | 77.03 | | (3) | | | 65.69 |
Settled | | (18) | | | 39.09 | | | | | (14) | | | 36.91 | | (30) | | | 27.10 | | |
Outstanding at end of year | | 174 | | $ | 39.68 | | 36.27 | | $ | 148 | | $ | 36.37 | | 101 | | $ | 36.14 | | | 77 | | $ | 94.78 | $ | 51.45 | | 85 | | $ | 75.34 | | 95 | | $ | 64.54 |
Vested at end of year | | 57 | | $ | 36.26 | | 39.69 | | $ | 28 | | $ | 37.78 | | 25 | | $ | 33.35 | | | 24 | | $ | 77.69 | $ | 68.54 | | 31 | | $ | 65.29 | | 32 | | $ | 61.89 |
As of December 31, 2017,2022, the aggregate intrinsic values of outstanding and vested RSUs were approximately $6.3$4.0 million and $2.3$1.6 million, respectively, representing the total pre‑taxpre-tax intrinsic value, based on the Company’s closing Class A common stock price of $75.95$146.23 as of December 31, 2017,2022, which would have been received by the RSUs holders had all RSUs settled as of that date. The total intrinsic value of RSUs settled for 2017, 20162022, 2021 and 20152020 was approximately $0.4$2.7 million, $1.5$2.1 million and $0.8$2.3 million, respectively. Upon settlement of RSUs, the Company issues shares of Class A common stock.
The following table summarizes information about RSUs outstanding at December 31, 2017:2022:
| | | | | | | | | | | |
| | RSUs Outstanding | | RSUs Vested | |
| | | | Weighted Average | | | | Weighted Average | |
| | Number | | Purchase | | Number | | Purchase | |
Range of Purchase Prices | | Outstanding | | Price | | Vested | | Price | |
| | (RSUs in thousands) | |
$31.63-$35.41 | | 85 | | $ | 35.37 | | 28 | | $ | 35.30 | |
$37.13–$49.92 | | 89 | | | 43.75 | | 29 | | | 37.21 | |
| | 174 | | $ | 39.68 | | 57 | | $ | 36.26 | |
| | | | | | | | | | |
| | RSUs Outstanding | | RSUs Vested |
| | | | Weighted Average | | | | Weighted Average |
| | Number | | Purchase | | Number | | Purchase |
Range of Purchase Prices | | Outstanding | | Price | | Vested | | Price |
|
| | (RSUs in thousands) |
$49.92-$63.77 | | 1 | | $ | 63.77 | | 1 | | $ | 63.77 |
$69.76-$97.28 | | 47 | | | 83.19 | | 23 | | | 78.30 |
$97.29-$115.14 | | 29 | | | 115.14 | | — | | | — |
| | 77 | | $ | 94.78 | | 24 | | $ | 77.69 |
The fair value of each share issued under the Management Stock Purchase Plan is estimated on the date of grant, using the Black‑Scholes‑MertonBlack-Scholes-Merton Model, based on the following weighted average assumptions:
| | | | | | | | |
| | Year Ended | | |
| | December 31, | | |
| | 2017 | | 2016 | | 2015 | | |
| | | | | | |
| | | 2022 | | 2021 | |
Expected life (years) | | 3.0 | | 3.0 | | 3.0 | | | 3.0 | | 3.0 | |
Expected stock price volatility | | 25.0 | % | 24.8 | % | 23.4 | % | | 33.7 | % | 32.7 | % |
Expected dividend yield | | 1.2 | % | 1.3 | % | 1.2 | % | | 0.80 | % | 0.75 | % |
Risk-free interest rate | | 1.5 | % | 0.9 | % | 1.1 | % | | 2.0 | % | 0.3 | % |
The risk‑freerisk-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‑dategrant-date fair value of RSUs granted of $16.84, $18.15$47.26, $37.49 and $19.04$22.36 during 2017, 20162022, 2021 and 2015,2020, respectively.
The Company distributed dividends of $0.75 per share for 2017, $0.71 per share for 2016, $0.66 per share for 2015, respectively, on the Company’s Class A common stock and Class B common stock.
At December 31, 2022, the Company had total unrecognized compensation costs related to unvested stock-based compensation arrangements of approximately $18.7 million and a total weighted average remaining term of 1.38 years. For 2022, 2021 and 2020, the Company recognized compensation costs related to stock-based programs of $18.4 million, $22.9 million, and $12.7 million, respectively. For 2022, 2021 and 2020, stock compensation expense of $1.3 million, $1.4 million and $0.9 million, respectively, was recorded in cost of goods sold and $17.1 million, $21.5 million and $11.8 million, respectively, was recorded in selling, general and administrative expenses. For 2022, 2021 and 2020, the Company recorded $2.8 million, $3.7 million and $2.1 million, respectively, of tax benefit for its other stock-based plans. For 2022, 2021 and 2020, the recognition of total stock-based compensation expense impacted both basic and diluted net income per common share by $0.43, $0.53 and $0.30, respectively.
(14) Employee Benefit Plans
The Company’s domestic employees are eligible to participate in the Company’s 401(k) savings plan. Since January 1, 2012, the Company has provided a base contribution of 2% of an employee’s salary, regardless of whether the employee participates in the plan. Further, the Company matches the contribution of up to 100% of the first 4% of an employee’s contribution. The Company’s match contributions for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, were $5.0$7.6 million, $5.4$6.6 million and $4.3$6.7 million, respectively. Charges for Europe pension plans approximated $4.1$4.3 million, $4.5$4.6 million and $4.9$3.4 million for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively. These costs relate to plans administered by certain European subsidiaries, with benefits calculated according to government requirements and paid out to employees upon retirement or change of employment.
Prior to January 1, 2012, for the majority of its U.S. employees, the Company had sponsored a funded non-contributory defined benefit pension plan, the Watts Water Technologies, Inc. Pension Plan (the “Pension Plan”), and an unfunded non-contributory defined benefit pension plan, the Watts Water Technologies, Inc. Supplemental Employees Retirement Plan (the “SERP”). On April 28, 2014, the Company’s Board of Directors voted to terminate the Company’s Pension Plan and the SERP. The Board of Directors authorized the Company to make such contributions to the Pension Plan and SERP as may be necessary to make the plans sufficient to settle all plan liabilities. The Pension Plan was terminated effective July 31, 2014, and on June 4, 2015 the Company received the Internal Revenue Service’s favorable determination letter for terminating the Pension Plan. The SERP was terminated effective May 15, 2014. In September 2015, the Company settled its Pension Plan and SERP benefit obligations. The Company made cash contributions in September 2015 of $43.2 million to fully fund the settlement actions.
The cumulative actuarial losses of $59.7 million that were previously recorded in accumulated other comprehensive income were recognized in selling, general and administrative expenses for the quarter ended September 27, 2015. The associated deferred tax asset of $23.0 million that was previously recorded in accumulated other comprehensive income and netted within long-term deferred tax liabilities was reversed in the quarter ended September 27, 2015.
On August 18, 2015, the Company entered into Amendment No. 3 to Supplemental Compensation Agreement (the “Amendment”) with Timothy P. Horne, the Company’s former Chief Executive Officer and President and a principal stockholder. Under the Supplemental Compensation Agreement, dated September 1, 1995, as amended on July 25, 2000 and October 23, 2002 (the “Compensation Agreement”), between the Company and Mr. Horne, Mr. Horne received payments for consulting services equal to the greater of (i) one-half of the average of his annual base salary as an employee of the Company during the three years immediately prior to his retirement or (ii) $400,000 for each calendar year following his retirement until the date of his death, subject to certain cost-of-living increases each year. Mr. Horne was paid $598,562 for his consulting services in 2014. Under the Compensation Agreement Mr. Horne was also entitled to receive lifetime benefits, including use of secretarial services, use of an office, retiree health insurance, reimbursement of tax and financial planning expenses, and certain other benefits. The Amendment provided for a $6 million lump-sum buyout of all of the Company’s ongoing lifetime payment obligations and all benefits under the Compensation Agreement, except for the use of an office and administrative support. The Amendment also provides for consulting services from Mr. Horne as requested by the Company rather than per year hourly requirements. The Company paid the $6 million lump-sum buyout amount to Mr. Horne in September 2015, which resulted in a $5 million pre-tax charge for the year ended December 31, 2015.
(15) Contingencies and Environmental Remediation
Accrual and Disclosure Policy
The Company is a defendant in numerous legal matters arising from its ordinary course of operations, including those involving product liability, environmental matters, and commercial disputes.
The Company reviews its lawsuits and other legal proceedings on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for matters when the Company assesses that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company does not establish accruals for such matters when the Company does not believe both that it is probable that a loss has been incurred and that the amount of the loss can be reasonably estimated. The Company’s assessment of whether a loss is probable is based on its assessment of the ultimate outcome of the matter following all appeals.
Under the FASB issuedFASB-issued ASC 450 “Contingencies”, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight”. Thus, references to the upper end of the range of reasonably possible loss for cases in which the Company is able to estimate a range of reasonably possible loss mean the upper end of the range of loss for cases for which the Company believes the risk of loss is more than slight.
There may continue to be exposure to loss in excess of any amount accrued. When it is possible to estimate the reasonably possible loss or range of loss above the amount accrued for the matters disclosed, that estimate is aggregated and disclosed. The Company records legal costs associated with its legal contingencies as incurred, except for legal costs associated with product liability claims which are included in the actuarial estimates used in determining the product liability accrual.
As of December 31, 2017,2022, the Company estimates that the aggregate amount of reasonably possible loss in excess of the amount accrued for its legal contingencies is approximately $6.1$3.4 million pre‑tax.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, depending in part upon the operating results of such 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.Company.
Connector Class Actions
In November and December 2014, Watts Water Technologies, Inc. and Watts Regulator Co. were named as defendants in three separate putative nationwide class action complaints (Meyers v. Watts Water Technologies, Inc., United States District Court for the Southern District of Ohio; Ponzo v. Watts Regulator Co., United States District Court for the District of Massachusetts; Sharp v. Watts Regulator Co., United States District Court for the District of Massachusetts) seeking to recover damages and other relief based on the alleged failure of water heater connectors. On June 26, 2015, plaintiffs in the three actions filed a consolidated amended complaint, under the case captioned Ponzo v. Watts Regulator Co., in the United States District Court for the District of Massachusetts (hereinafter “Ponzo”). Watts Water Technologies was voluntarily dismissed from the Ponzo case. The complaint sought among other items, damages in an unspecified amount, replacement costs, injunctive relief, declaratory relief, and attorneys’ fees and costs. On August 7, 2015, the Company filed a motion to dismiss the complaint, which motion was mooted by the class settlements.
In February 2015, Watts Regulator Co. was named as a defendant in a putative nationwide class action complaint (Klug v. Watts Water Technologies, Inc., et al., United States District Court for the District of Nebraska) seeking to recover damages and other relief based on the alleged failure of the Company’s Floodsafe connectors (hereinafter “Klug”). On June 26, 2015, the Company filed a partial motion to dismiss the complaint. In response, on July 17, 2015, plaintiff filed an amended complaint which added additional named plaintiffs and sought to correct deficiencies in the original complaint, Klug v. Watts Regulator Co., United States District Court for the District of Nebraska. The complaint seeks among other items, damages in an unspecified amount, injunctive relief, declaratory relief, and attorneys’ fees and costs. On July 31, 2015, the Company filed a partial motion to dismiss the complaint which was granted in part and denied in part on December 29, 2015. The Company answered the amended complaint on February 2, 2016. No formal discovery was conducted.
The Company participated in mediation sessions of the Ponzo and Klug cases in December 2015 and January 2016. On February 16, 2016, the Company reached an agreement in principle to settle all claims. The proposed total settlement amount is $14 million, of which the Company is expected to pay approximately $4.1 million after insurance proceeds of up to $9.9 million. The parties executed final written settlement agreements in April 2016. Motions for preliminary approval of the settlements were submitted on May 4, 2016 before the District of Nebraska Federal Court. On December 7, 2016, the Court issued an order preliminarily approving the settlements. After a fairness hearing held on April 12,
2017, the Court entered Final Orders and Judgments approving the settlements on April 13, 2017. No appeals were filed and the settlements became final on May 15, 2017.
During the fourth quarter of 2015, the Company recorded a liability of $14 million related to the Ponzo and Klug matters of which $7.8 million was included in current liabilities and $6.2 million in other noncurrent liabilities. The liability was reduced by $8.7 million during the first nine months of 2017 for $0.8 million in notice and claims administrator payments, counsel fees of $4.3 million and initial contributions to the class action fund of $3.6 million. The remaining liability of $5.3 million will be paid over four years. A $9.5 million receivable was recorded in current assets related to insurance proceeds due as of December 31, 2015 and was subsequently increased in the first quarter of 2017 to $9.9 million based on costs incurred as of April 3, 2017. The Company received the $9.9 million insurance proceeds in the second quarter of 2017.
Product Liability
The Company is subject to a variety of potential liabilities in connection with product liability cases. TheFor our most significant volume of liability matters, the Company maintains a high self-insured retention limit within ourits product liability and general liability coverage, which the Company believes to be generally in accordance with industry practices. For product liability cases in the U.S., management establishes its product liability accrual, which includes estimated legal costs associated with accrued claims, by utilizing third‑partyclaims. For its most significant volume of liability matters, the Company utilizes third-party actuarial valuations which incorporate historical trend factors, including, but not limited to, claim frequency and loss severity, and the Company’s specific claims experience derived from loss reports provided by third‑partythird-party claims administrators. The product liability accrual is established after considering any applicable insurance coverage. The product liability accrual represents the estimated ultimate losses for all reported and incurred but not reported claims. Changes in the nature of product liability claims or the actual settlement amounts could affect the adequacy of the estimates and require changes to the provisions. Because the liability is an estimate, the ultimate liability may be more or less than reported.
Environmental Remediation
The Company has been named as a potentially responsible party with respect to a limited number of identified contaminated sites. The levels of contamination vary significantly from site to site as do the related levels of remediation efforts. Environmental liabilities are recorded based on the most probable cost, if known, or on the estimated minimum cost of remediation. Accruals are not discounted to their present value, unless the amount and timing of expenditures are fixed and reliably determinable. The Company accrues estimated environmental liabilities based on assumptions, which are subject to a number of factors and uncertainties. Circumstances that can affect the reliability and precision of these estimates include identification of additional sites, environmental regulations, level of clean‑upclean-up required, technologies available, number and financial condition of other contributors to remediation and the time period over which remediation may occur. The Company recognizes changes in estimates as new remediation requirements are defined or as new information becomes available.
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 U.S. Environmental Protection AgencyChemetco Site Group (“USEPA”Group”) alleging that it is a potentially responsible party for the Chemetco, Inc. Superfund Site in Hartford, Illinois (the Site). The letter from the Chemetco Site Group (“Group”“Site”) alleges that Watts Regulator Co. is a potentially responsible party 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. As of August 2017, 162 companies were members of the Group; the final number of members is subject to change and unknown at this time. The letter offered Watts Regulator Co. the opportunity to join the Group and participate in the Remedial Investigation and Feasibility Study (“RI/FS”) atfor a portion of the Site. Watts Regulator Co. joined the Group in September 2017. 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”) and the Illinois Environmental Protection Agency (“IEPA”) 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 USEPA and IEPA for review and comment in September 2021. USEPA and IEPA, respectively, have now issued comments on the draft FS, with additional EPA comments to follow. There is not yet a date for submission of a revised draft responding to those comments. Comments and final approval from the EPA are required to complete the FS process. 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 RI/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 planplans will be implemented and the costs of such plan;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, hashave not yet 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 complete the RI/FS and implement a remediation plan acceptable to USEPA and IEPA is uncertain.
Asbestos Litigation
The Company is defending approximately 355550 lawsuits in different jurisdictions, alleging injury or death as a result of exposure to asbestos. The complaints in these cases typically name a large number of defendants and do not identify any particular Company products as a source of asbestos exposure. To date, discovery has failed to yield evidence of substantial exposure to any Company products and no judgments have been entered against the Company.
Other Litigation
Other lawsuits and proceedings or claims, arising from the ordinary course of operations, are also pending or threatened against the Company.
(16) Financial Instruments
Fair Value
The carrying amounts of cash and cash equivalents, trade receivables and trade payablespayable approximate fair value because of the short maturity of these financial instruments.
The fair value of the Company’s 5.05% senior notes due 2020 is based on quoted market prices of similar notes (level 2). The fair value of the Company’s borrowings outstandingvariable rate debt under the New Revolving Credit Agreement, Facility Agreement, and the Company’s variable rate debt approximates its carrying value. The carrying amount and the estimated fair market value of the Company’s long-term debt, including the current portion, are as follows:
| | | | | | | |
| | December 31, | |
| | 2017 | | 2016 | |
| | (in millions) | |
Carrying amount | | $ | 499.5 | | $ | 653.6 | |
Estimated fair value | | $ | 501.1 | | $ | 658.3 | |
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, redeemable financial instruments,contingent consideration and derivatives. The fair values of these certain financial assets and liabilities were determined using the following inputs at December 31, 20172022 and December 31, 2016:2021:
| | | | | | | | | | | | | |
| | | Fair Value Measurement at December 31, 2022 Using: |
| | | | | | Quoted Prices in Active | | Significant Other | | Significant |
| | | | | | Markets for Identical | | Observable | | Unobservable |
| | | | | | Assets | | Inputs | | Inputs |
| | | Total | | (Level 1) | | (Level 2) | | (Level 3) |
| | | | | | | | | | | | | | |
| | Fair Value Measurement at December 31, 2017 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) | | |
| | | (in millions) |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | |
Plan asset for deferred compensation(1) | | $ | 3.2 | | $ | 3.2 | | $ | — | | $ | — | | | $ | 1.9 | | $ | 1.9 | | $ | — | | $ | — |
Interest rate swaps (1) | | $ | 5.6 | | $ | — | | $ | 5.6 | | $ | — | | |
Interest rate swap(2) | | | $ | 9.3 | | $ | — | | $ | 9.3 | | $ | — |
Designated foreign currency hedges(4) | | | $ | 0.2 | | $ | — | | $ | 0.2 | | $ | — |
Total assets | | $ | 8.8 | | $ | 3.2 | | $ | 5.6 | | $ | — | | | $ | 11.4 | | $ | 1.9 | | $ | 9.5 | | $ | — |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | |
Plan liability for deferred compensation(2) | | $ | 3.2 | | $ | 3.2 | | $ | — | | $ | — | | |
Redeemable financial instrument(3) | | $ | 2.9 | | $ | — | | $ | — | | $ | 2.9 | | |
Plan liability for deferred compensation(3) | | | $ | 1.9 | | $ | 1.9 | | $ | — | | $ | — |
Contingent consideration(6) | | | $ | 2.5 | | $ | — | | $ | — | | $ | 2.5 |
Total liabilities | | $ | 6.1 | | $ | 3.2 | | $ | — | | $ | 2.9 | | | $ | 4.4 | | $ | 1.9 | | $ | — | | $ | 2.5 |
| | | | | | | | | | | | |
| | 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) | | $ | 2.6 | | $ | 2.6 | | $ | — | | $ | — |
Interest rate swap(1) | | $ | 1.4 | | $ | — | | $ | 1.4 | | $ | — |
Total assets | | $ | 4.0 | | $ | 2.6 | | $ | 1.4 | | $ | — |
Liabilities | | | | | | | | | | | | |
Interest rate swap(5) | | $ | 0.6 | | $ | — | | $ | 0.6 | | $ | — |
Plan liability for deferred compensation(3) | | $ | 2.6 | | $ | 2.6 | | $ | — | | $ | — |
Contingent consideration(6) | | $ | 6.3 | | $ | — | | $ | — | | $ | 6.3 |
Total liabilities | | $ | 9.5 | | $ | 2.6 | | $ | 0.6 | | $ | 6.3 |
| | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2016 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) | | $ | 3.0 | | $ | 3.0 | | $ | — | | $ | — | |
Interest rate swaps (1) | | $ | 4.6 | | $ | — | | $ | 4.6 | | $ | | |
Total assets | | $ | 7.6 | | $ | 3.0 | | $ | 4.6 | | $ | — | |
Liabilities | | | | | | | | | | | | | |
Plan liability for deferred compensation(2) | | $ | 3.0 | | $ | 3.0 | | $ | — | | $ | — | |
Redeemable financial instrument(3) | | | 5.8 | | | — | | | — | | | 5.8 | |
Total liabilities | | $ | 8.8 | | $ | 3.0 | | $ | — | | $ | 5.8 | |
| (1) | (1)
| | Included on the Company’s consolidated balance sheet in other assets (other, net). |
| (2) | (2)As of December 31, 2022, $3.5 million classified in prepaid expenses and other current assets on the Company’s consolidated balance sheet and $5.8 million classified in other assets (other, net).
|
| (3) | | Included on the Company’s consolidated balance sheet in accrued compensation and benefits. |
| (4) | (3)
| | Included on the Company’s consolidated balance sheet in prepaid expenses and other current liabilities asassets. |
| (5) | Included on the Company’s consolidated balance sheet in accrued expenses and other liabilities. |
| (6) | As of December 31, 2017 and2022, contingent consideration of $2.5 million related to an immaterial acquisition was classified in other noncurrent liabilities ason the Company’s consolidated balance sheet. As of December 31, 20162021, contingent consideration of $6.3 million related to two immaterial acquisitions, of which $3.8 million was classified in accrued expenses and relates to a mandatorily redeemable equity instrument as part ofother liabilities and $2.5 million was classified in other noncurrent liabilities on the Apex acquisition in 2015.Company’s consolidated balance sheet. |
The table below provides a summary of the changes in fair value of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period December 31, 2016 to December 31, 2017.
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Total realized and unrealized | | | | |
| | Balance | | | | | | | (gains) losses included in: | | Balance | |
| | December 31, | | | | | | | Net earnings | | Comprehensive | | December 31, | |
| | 2016 | | Settlements | | Purchases | | adjustments | | income | | 2017 | |
| | (in millions) | |
Redeemable financial instrument | | $ | 5.8 | | | (2.9) | | $ | — | | | — | | $ | — | | $ | 2.9 | |
In connection with the immaterial acquisition of Apex, a liabilityAustralian Valve Group Pty Ltd (AVG), completed during the third quarter of $5.52020, and Sentinel Hydrosolutions, LLC (Sentinel), completed during the fourth quarter of 2021, contingent liabilities of $2.8 million wasand $2.5 million, respectively, were recognized on November 30, 2015 as the estimateestimates of the acquisition date fair valuevalues of the mandatorily redeemable equity instrument.contingent consideration. During the third quarter of 2022 and second quarter of 2021, the AVG contingent liability was reduced by $0.7 million and increased by $0.8 million, respectively, due to adjusted probability of achieving lower or higher performance metrics, and foreign exchange translations. The Company acquired an additional 10% ownershipAVG contingent liability was settled in the firstfourth quarter of 20172022 for approximately $2.9 million and now owns 90% of Apex outstanding shares. The remaining liability is$2.5 million. These liabilities were classified as Level 3 under the fair value hierarchy as it isthey were based on the commitment to purchaseprobability of achievement of future performance metrics as of the remaining 10%respective dates of Apex shares within the next year,acquisition, which iswere not observable in the market. Failure to meet the performance metrics would reduce this liability to zero, while complete achievement would increase the liability to a maximum contingent consideration.
Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase and consist primarily of money market funds, for which the carrying amount is a reasonable estimate of fair value.
The Company uses financial instruments from time to time to enhance its ability to manage risk, including foreign currency and commodity pricing exposures, which exist as part of its ongoing business operations. The use of derivatives exposes the Company to counterparty credit risk for nonperformance and to market risk related to changes in currency exchange rates and commodity prices. The Company manages its exposure to counterparty credit risk through diversification of counterparties. The Company’s counterparties in derivative transactions are substantial commercial banks with significant experience using such derivative instruments. The impact of market risk on the fair value and cash flows of the Company’s derivative instruments is monitored and the Company restricts the use of derivative financial instruments to hedging activities. The Company does not enter into contracts for trading purposes nor does the Company enter into any contracts for speculative purposes. The use of derivative instruments is approved by senior management under written guidelines.
Interest Rate Swaps
On February 12, 2016,March 30, 2021, the Company entered into athe Credit Agreement (the “Credit Agreement”) pursuant to which it received a funding commitment under a Term Loanextended the maturity date of $300the $800 million of which the entire $300 million has been drawn on, and a Revolving Commitment (“Revolver”) of $500 million, of which $147 million has been drawn as of December 31, 2017. Both facilities mature onsenior unsecured revolving credit facility from February 12, 2021. For each facility,2022 to March 30, 2026. On August 2, 2022, the Company can choose either an Adjusted LIBOR or Alternative Base Rate (“ABR”). Upon intended election of Adjustedentered into Amendment No. 1 to the Credit Agreement to replace the LIBOR as a reference rate for borrowings with Term SOFR and to provide for a fixed adjustment of 10 basis points added to Term SOFR for all Term SOFR borrowings, subject to a 0.00% floor. Borrowings outstanding under the Revolving Credit Facility bear interest at a fluctuating rate the Term Loan has quarterly interest payments that beganper annum as further detailed in May 2016, quarterly principal repayments commencing on March 31, 2017, with a balloon payment of principal on maturity date. The Revolver has quarterly interest payments that began on in July 2016.Note 11.
Accordingly, the Company’s earnings and cash flows are exposed to interest rate risk from changes in Adjusted LIBOR. 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 twoan interest rate swapsswap on February 12, 2016. For eachMarch 30, 2021. Under the interest rate swap agreement, the Company received the one-month USD-LIBOR subject to a 0.00% floor and paid a fixed rate of 1.02975% on a notional amount of $100.0 million. On August 2, 2022, the Company amended the interest rate swap to replace LIBOR as a reference rate for borrowings with Term SOFR. Under the amended interest rate swap agreement, the Company receives the three-month USD-LIBORone-month Term SOFR subject to a 0%-0.1% floor and pays a fixed rate of 1.31375%0.942% on a notional amount of $225.0$100.0 million. The swaps matureswap matures on February 12, 2021. March 30, 2026. The Company elected the optional expedient in connection with amending its interest rate swap to replace the reference rate from LIBOR to Term SOFR to consider the amendment as a continuation of the existing contract without having to perform an assessment that would otherwise be required under U.S. GAAP. 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 swaps areswap 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 years ended December 31, 20172022 and 2016,2021, a net of tax gain of $0.6$6.3 million and $2.9$0.7 million, respectively, was recorded in Accumulated Other Comprehensive IncomeLoss to recognize the effective portion of the fair value of the interest rate swapsswap that qualifyqualifies as a cash flow hedge. The Company did not enter into any interest rate swaps during 2017.
Non-Designated 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 materialsmaterials. The Company has exposure to a number of foreign currencies, including the Canadian dollar, the euro, and are denominated in European currencies or the U.S. or Canadian dollar.Chinese yuan. The Company uses foreign currencya layering methodology, whereby at the end of each quarter, the Company enters into forward exchange contracts from timehedging Canadian dollar to timeU.S. dollar, which hedge up to manage85% of the risk related toforecasted intercompany loans, intercompany purchases that occur duringpurchase transactions between one of the course of a year,Company’s Canadian subsidiaries and certain open foreign currency denominated commitments to sell products to third parties.the Company’s U.S. operating subsidiaries for the next twelve months. The Company entereduses a similar layering methodology when entering into one forward contract in the fourth quarter of 2016 and one forward contract in the first quarter of 2017 to manage the foreign currency rate exposure in 2016 and 2017. These forward contracts were entered into to manage the foreign currency rate exposure between the Hong Kong Dollar and the euro regarding two intercompany loans. These forward contracts are marked-to-market with changes in the fair value recorded to earnings. The Company recognized a loss of $2.9 million related to forward exchange contracts in 2017hedging U.S. dollar to the Chinese yuan, which hedge up to 60% of the forecasted intercompany sales transactions between one of the Company’s Chinese subsidiaries and recognized a gain on this forward contract in 2016one of $0.3 million.the Company’s U.S. operating subsidiaries for the next twelve months. As of December 31, 2022, all designated foreign exchange hedge contracts were cash flow hedges under ASC 815, Derivatives and Hedging. The Company did not have any forwardrecords the effective portion of the designated foreign currency hedge contracts in 2015. These forward contracts were not renewed in September 2017 asother comprehensive income until inventory turns and is sold to a third-party. Once the intercompany loans for whichthird-party transaction associated with the Company was hedginghedged forecasted transaction occurs, the effective portion of any related gain or loss on the designated foreign currency rate exposure were settled.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.
Leases
The Company leases certain manufacturing facilities, sales offices, warehouses, automobiles, and equipment. Generally, the leases carry renewal provisions and require the Company to pay maintenance costs. Future minimum lease payments under capital leases and non‑cancelable operating leasesnotional amounts outstanding as of December 31, 2017 are2022 for the Canadian dollar to U.S. dollar contracts and the U.S. dollar to the Chinese yuan were $8.8 million and $0.9 million, respectively. The fair value of the Company’s designated foreign hedge contracts outstanding as follows:of December 31, 2022 was an asset of $0.2 million. As of December 31, 2022, the amount expected to be reclassified into cost of goods sold from other comprehensive income in the next twelve months is a gain of $0.2 million.
| | | | | | | |
| | Capital Leases | | Operating Leases | |
| | (in millions) | |
2018 | | $ | 1.4 | | $ | 11.4 | |
2019 | | | 1.3 | | | 9.5 | |
2020 | | | 1.2 | | | 7.5 | |
2021 | | | 0.2 | | | 3.5 | |
2022 | | | — | | | 1.8 | |
Thereafter | | | — | | | 3.2 | |
Total | | $ | 4.1 | | $ | 36.9 | |
Less amount representing interest (at rates ranging from 4.3% to 7.0%) | | | 0.3 | | | | |
Present value of net minimum capital lease payments | | | 3.8 | | | | |
Less current installments of obligations under capital leases | | | 1.3 | | | | |
Obligations under capital leases, excluding current installments | | $ | 2.5 | | | | |
Carrying amounts of assets under capital lease include:
| | | | | | | |
| | | December 31, | |
| | | 2017 | | 2016 | |
| | | (in millions) | |
Buildings | | $ | 15.3 | | $ | 13.4 | |
Machinery and equipment | | | 1.7 | | | 1.5 | |
| | | 17.0 | | | 14.9 | |
Less accumulated depreciation | | | (6.8) | | | (5.4) | |
| | $ | 10.2 | | $ | 9.5 | |
(17) Segment Information
The Company operates in 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. decision-maker.
Each segment earns revenue and income almost exclusively from the sale of ourthe 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. Products are sold into fourSee Note 4 for further detail on sales by region of the product categories: 1) residential & commercial flow control products, 2) HVAC & gas products, 3) drainage and water re-use products, and 4) water quality products. The Americas sells products across all four product categories, Europe primarily sells residential & commercial flow products, HVAC & gas products, and drainage products, and APMEA primarily sells residential & commercial flow products and HVAC & gas products.categories. All intercompany sales transactions have been eliminated. The accounting policies for each segment are the same as those described in the summary of significant accounting policies (see Note 2).
As of January 1, 2017, the Company began reporting the results of Watts Middle East as part2 of the Company’s former Asia-Pacific segment, which is now referredNotes to as APMEA. Watts Middle East had previously been reported within the former EMEA segment, which is now referred to as Europe. This change in segment composition aligns with the structure of the Company’s internal organization and did not result in a material change to previously reported segment information. The 2016 and 2015 results by segment have been retrospectively revised for comparative purposes.Consolidated Financial Statements.
The following is a summary of the Company’s significant accounts and balances by segment, reconciled to its consolidated totals:
| | | | | | | | | |
| | Year Ended December 31, |
| | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
|
| | (in millions) |
Net sales | | | | | | | | | |
Americas | | $ | 1,390.0 | | $ | 1,207.2 | | $ | 1,025.7 |
Europe | | | 499.1 | | | 517.4 | | | 424.9 |
APMEA | | | 90.4 | | | 84.6 | | | 58.0 |
Consolidated net sales | | $ | 1,979.5 | | $ | 1,809.2 | | $ | 1,508.6 |
Operating income (loss) | | | | | | | | | |
Americas | | $ | 283.9 | | $ | 211.0 | | $ | 166.3 |
Europe | | | 66.7 | | | 63.6 | | | 50.2 |
APMEA | | | 14.0 | | | 14.4 | | | 3.5 |
Subtotal reportable segments | | | 364.6 | | | 289.0 | | | 220.0 |
Corporate(*) | | | (49.6) | | | (49.4) | | | (38.9) |
Consolidated operating income | | | 315.0 | | | 239.6 | | | 181.1 |
Interest income | | | (0.6) | | | — | | | (0.2) |
Interest expense | | | 7.0 | | | 6.3 | | | 13.3 |
Other (income) expense, net | | | 1.0 | | | (0.8) | | | 1.0 |
Income before income taxes | | $ | 307.6 | | $ | 234.1 | | $ | 167.0 |
Capital expenditures | | | | | | | | | |
Americas | | $ | 16.2 | | $ | 17.6 | | $ | 31.2 |
Europe | | | 11.2 | | | 8.5 | | | 11.4 |
APMEA | | | 0.7 | | | 0.6 | | | 1.2 |
Consolidated capital expenditures | | $ | 28.1 | | $ | 26.7 | | $ | 43.8 |
Depreciation and amortization | | | | | | | | | |
Americas | | $ | 27.4 | | $ | 29.8 | | $ | 29.7 |
Europe | | | 10.3 | | | 12.6 | | | 14.3 |
APMEA | | | 2.0 | | | 2.7 | | | 2.5 |
Consolidated depreciation and amortization | | $ | 39.7 | | $ | 45.1 | | $ | 46.5 |
Identifiable assets (at end of period) | | | | | | | | | |
Americas | | $ | 1,222.8 | | $ | 1,133.5 | | $ | 1,075.1 |
Europe | | | 583.5 | | | 584.8 | | | 537.2 |
APMEA | | | 124.6 | | | 137.3 | | | 125.9 |
Consolidated identifiable assets | | $ | 1,930.9 | | $ | 1,855.6 | | $ | 1,738.2 |
Property, plant and equipment, net (at end of period) | | | | | | | | | |
Americas | | $ | 124.1 | | $ | 121.3 | | $ | 122.9 |
Europe | | | 68.4 | | | 74.5 | | | 83.8 |
APMEA | | | 4.3 | | | 4.9 | | | 5.6 |
Consolidated property, plant and equipment, net | | $ | 196.8 | | $ | 200.7 | | $ | 212.3 |
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| | (in millions) | |
Net Sales | | | | | | | | | | |
Americas | | $ | 951.9 | | $ | 900.9 | | $ | 978.5 | |
Europe | | | 440.3 | | | 431.3 | | | 436.0 | |
APMEA | | | 64.5 | | | 66.2 | | | 53.2 | |
Consolidated net sales | | $ | 1,456.7 | | $ | 1,398.4 | | $ | 1,467.7 | |
Operating income (loss) | | | | | | | | | | |
Americas | | $ | 146.8 | | $ | 127.1 | | $ | 109.9 | |
Europe(**) | | | 47.6 | | | 40.0 | | | (99.6) | |
APMEA(***) | | | 4.7 | | | 15.1 | | | 0.5 | |
Subtotal reportable segments | | | 199.1 | | | 182.2 | | | 10.8 | |
Corporate(*) | | | (36.8) | | | (37.2) | | | (100.9) | |
Consolidated operating income (loss) | | | 162.3 | | | 145.0 | | | (90.1) | |
Interest income | | | (1.0) | | | (1.0) | | | (1.0) | |
Interest expense | | | 19.1 | | | 22.6 | | | 24.3 | |
Other expense (income), net | | | 1.1 | | | (4.4) | | | (2.4) | |
Income (loss) before income taxes | | $ | 143.1 | | $ | 127.8 | | $ | (111.0) | |
Capital Expenditures | | | | | | | | | | |
Americas | | $ | 20.7 | | $ | 25.7 | | $ | 19.0 | |
Europe | | | 8.0 | | | 8.9 | | | 7.5 | |
APMEA | | | 0.7 | | | 1.4 | | | 1.2 | |
Consolidated capital expenditures | | $ | 29.4 | | $ | 36.0 | | $ | 27.7 | |
Depreciation and Amortization | | | | | | | | | | |
Americas | | $ | 30.8 | | $ | 28.8 | | $ | 29.0 | |
Europe | | | 18.6 | | | 19.3 | | | 21.0 | |
APMEA | | | 2.8 | | | 3.1 | | | 2.4 | |
Consolidated depreciation and amortization | | $ | 52.2 | | $ | 51.2 | | $ | 52.4 | |
Identifiable assets (at end of period) | | | | | | | | | | |
Americas | | $ | 1,069.2 | | $ | 1,054.7 | | $ | 969.6 | |
Europe | | | 524.0 | | | 577.3 | | | 602.2 | |
APMEA | | | 143.3 | | | 131.2 | | | 119.0 | |
Consolidated identifiable assets | | $ | 1,736.5 | | $ | 1,763.2 | | $ | 1,690.8 | |
Property, plant and equipment, net (at end of period) | | | | | | | | | | |
Americas | | $ | 109.3 | | $ | 106.2 | | $ | 88.6 | |
Europe | | | 82.1 | | | 75.6 | | | 82.2 | |
APMEA | | | 7.1 | | | 7.9 | | | 13.6 | |
Consolidated property, plant and equipment, net | | $ | 198.5 | | $ | 189.7 | | $ | 184.4 | |
* 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. Included in Corporate’s operating loss for 2015 is a $59.7 million charge related to the Company���s settlement of its Pension Plan and SERP benefit obligations. Refer to Note 14 “Employee Benefit Plans” for further discussion.
** Included in Europe’s operating loss for 2015 is a $129.7 million charge related to goodwill impairment of the Europe reporting unit. Refer to Note 6 “Goodwill and Intangibles” for further discussion.
*** Included in APMEA’s operating income for 2016 is $8.7 million gain related to the sale of an operating subsidiary in China. Refer to Note 4 “Sale of Business” for further discussion.
The following includes U.S. net sales and U.S. property, plant and equipment of the Company’s Americas segment:
| | | | | | | | | | |
| | | |
| | | December 31, |
| | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | | |
| | December 31, | | |
| | 2017 | | 2016 | | 2015 | | |
| | (in millions) | | |
| | | (in millions) |
U.S. net sales | | $ | 886.2 | | $ | 839.2 | | $ | 909.2 | | | $ | 1,301.2 | | $ | 1,123.9 | | $ | 956.5 |
U.S. property, plant and equipment, net (at end of year) | | $ | 105.1 | | $ | 102.5 | | $ | 85.2 | | | $ | 119.0 | | $ | 116.2 | | $ | 118.9 |
The following includes intersegment sales for Americas, Europe and APMEA:
| | | | | | | | | | |
| | | December 31, |
| | | | | | | | | | |
| | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | | |
| | December 31, | | |
| | 2017 | | 2016 | | 2015 | | |
| | (in millions) | | |
| | | (in millions) |
Intersegment Sales | | | | | | | | | | | | | | | | | | | |
Americas | | $ | 12.1 | | $ | 12.0 | | $ | 8.2 | | | $ | 11.1 | | $ | 9.3 | | $ | 8.7 |
Europe | | | 14.6 | | | 12.3 | | | 10.5 | | | | 24.7 | | | 29.1 | | | 18.9 |
APMEA | | | 69.7 | | | 76.7 | | | 110.0 | | | | 71.4 | | | 120.5 | | | 71.4 |
Intersegment sales | | $ | 96.4 | | $ | 101.0 | | $ | 128.7 | | | $ | 107.2 | | $ | 158.9 | | $ | 99.0 |
The Company sells its products into various end markets around the world and groups net sales to third parties into four product categories. Net sales to third parties for the four product categories are as follows:
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| | (in millions) | |
Net Sales | | | | | | | | | | |
Residential & commercial flow control | | $ | 758.9 | | $ | 779.2 | | $ | 831.1 | |
HVAC & gas | | | 472.4 | | | 408.1 | | | 425.1 | |
Drains & water re-use | | | 145.4 | | | 132.3 | | | 131.0 | |
Water quality | | | 80.0 | | | 78.8 | | | 80.5 | |
Consolidated net sales | | $ | 1,456.7 | | $ | 1,398.4 | | $ | 1,467.7 | |
(18) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of the following:
| | | | | | | | | | |
| | | | | | | | Accumulated | |
| | Foreign | | | | | Other | |
| | Currency | | | Cash Flow | | Comprehensive | |
| | Translation | | | Hedges | | Loss | |
| | (in millions) | |
| | | | | | | | | | |
Balance December 31, 2016 | | $ | (153.7) | | $ | 2.9 | | $ | (150.8) | |
Change in period | | | 7.9 | | | 0.1 | | | 8.0 | |
Balance April 2, 2017 | | $ | (145.8) | | $ | 3.0 | | $ | (142.8) | |
Change in period | | | 21.5 | | | (0.7) | | | 20.8 | |
Balance July 2, 2017 | | $ | (124.3) | | $ | 2.3 | | $ | (122.0) | |
Change in period | | | 15.4 | | | 0.1 | | | 15.5 | |
Balance October 1, 2017 | | $ | (108.9) | | $ | 2.4 | | $ | (106.5) | |
Change in period | | | 6.3 | | | 1.1 | | | 7.4 | |
Balance December 31, 2017 | | $ | (102.6) | | $ | 3.5 | | $ | (99.1) | |
| | | | | | | | | | |
Balance December 31, 2015 | | $ | (128.2) | | $ | — | | $ | (128.2) | |
Change in period | | | 24.4 | | | (0.2) | | | 24.2 | |
Balance April 03, 2016 | | $ | (103.8) | | $ | (0.2) | | $ | (104.0) | |
Change in period | | | (19.1) | | | (1.7) | | | (20.8) | |
Balance July 03, 2016 | | $ | (122.9) | | $ | (1.9) | | $ | (124.8) | |
Change in period | | | 3.3 | | | 1.3 | | | 4.6 | |
Balance October 02, 2016 | | $ | (119.6) | | $ | (0.6) | | $ | (120.2) | |
Change in period | | | (34.1) | | | 3.5 | | | (30.6) | |
Balance December 31, 2016 | | $ | (153.7) | | $ | 2.9 | | $ | (150.8) | |
| | | | | | | | | |
| | | | | | | | Accumulated |
| | Foreign | | | | | Other |
| | Currency | | | Cash Flow | | Comprehensive |
| | Translation | | | Hedges (1) | | Loss |
|
| | (in millions) |
| | | | | | | | | |
Balance December 31, 2020 | | $ | (99.9) | | $ | (0.1) | | $ | (100.0) |
Change in period | | | (28.0) | | | 0.7 | | | (27.3) |
Balance December 31, 2021 | | $ | (127.9) | | $ | 0.6 | | $ | (127.3) |
Change in period | | | (29.1) | | | 6.5 | | | (22.6) |
Balance December 31, 2022 | | $ | (157.0) | | $ | 7.1 | | $ | (149.9) |
| | | | | | | | | |
(19) Quarterly Financial Information (unaudited)
| | | | | | | | | | | | | |
| | First | | Second | | Third | | Fourth | |
| | Quarter | | Quarter | | Quarter | | Quarter | |
| | (in millions, except per share information) | |
Year ended December 31, 2017 | | | | | | | | | | | | | |
Net sales | | $ | 347.2 | | $ | 378.5 | | $ | 364.7 | | $ | 366.3 | |
Gross profit | | | 143.8 | | | 156.7 | | | 152.7 | | | 149.2 | |
Net income (loss) | | | 21.7 | | | 27.2 | | | 26.5 | | | (2.3) | |
Per common share: | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | |
Net income (loss) | | | 0.63 | | | 0.79 | | | 0.77 | | | (0.07) | |
Diluted | | | | | | | | | | | | | |
Net income (loss) | | | 0.63 | | | 0.79 | | | 0.77 | | | (0.07) | |
Dividends declared per common share | | | 0.18 | | | 0.19 | | | 0.19 | | | 0.19 | |
Year ended December 31, 2016 | | | | | | | | | | | | | |
Net sales | | $ | 344.2 | | $ | 371.1 | | $ | 341.1 | | $ | 342.0 | |
Gross profit | | | 135.2 | | | 150.7 | | | 142.0 | | | 137.7 | |
Net income | | | 16.2 | | | 28.6 | | | 21.9 | | | 17.5 | |
Per common share: | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | |
Net income | | | 0.47 | | | 0.83 | | | 0.63 | | | 0.51 | |
Diluted | | | | | | | | | | | | | |
Net income | | | 0.47 | | | 0.83 | | | 0.63 | | | 0.51 | |
Dividends declared per common share | | | 0.17 | | | 0.18 | | | 0.18 | | | 0.18 | |
| | |
(1) | | Four quarters may not sum to full year due to rounding.Cash flow hedges include interest rate swaps and designated foreign currency hedges. See Note 16 for further details.
|
(20)(19) Subsequent Events
On February 8, 2018,6, 2023, the Company declared a quarterly dividend of nineteenthirty cents ($0.19)0.30) per share on each outstanding share of Class A common stock and Class B common stock payable on March 16, 201815, 2023 to stockholders of record on March 2, 2018.1, 2023.
Watts Water Technologies, Inc. and Subsidiaries
Schedule II—Valuation and Qualifying Accounts
(Amounts in millions)
| | | | | | | | | | | | | | |
| | Balance At | | Additions | | Additions | | | | Balance At | |
| | Beginning of | | Charged To | | Charged To | | | | End of | |
| | Period | | Expense | | Other Accounts | | Deductions | | Period | |
Year Ended December 31, 2015 | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 10.6 | | | 2.8 | | — | | (3.3) | | $ | 10.1 | |
Reserve for excess and obsolete inventories | | $ | 29.3 | | | 11.8 | | — | | (12.0) | | $ | 29.1 | |
Year Ended December 31, 2016 | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 10.1 | | $ | 5.5 | | 0.5 | | (1.9) | | $ | 14.2 | |
Reserve for excess and obsolete inventories | | $ | 29.1 | | $ | 7.0 | | 0.6 | | (10.6) | | $ | 26.1 | |
Year Ended December 31, 2017 | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 14.2 | | $ | 3.7 | | 0.4 | | (4.0) | | $ | 14.3 | |
Reserve for excess and obsolete inventories | | $ | 26.1 | | $ | 7.3 | | 1.5 | | (9.5) | | $ | 25.4 | |
| | | | | | | | | | | | | |
| | Balance At | | Additions | | Foreign | | | | Balance At |
| | Beginning of | | Charged To | | Exchange/Acquisitions | | | | End of |
| | Period | | Expense | | Impact | | Deductions | | Period |
Year Ended December 31, 2020 | | | | | | | | | | | | | |
Accounts Receivable Reserve Allowances | | $ | 14.3 | | $ | 1.1 | | 0.9 | | (5.2) | | $ | 11.1 |
Reserve for excess and obsolete inventories | | $ | 25.0 | | $ | 13.3 | | 1.4 | | (6.3) | | $ | 33.4 |
Year Ended December 31, 2021 | | | | | | | | | | | | | |
Accounts Receivable Reserve Allowances | | $ | 11.1 | | $ | 3.4 | | (0.2) | | (4.0) | | $ | 10.3 |
Reserve for excess and obsolete inventories | | $ | 33.4 | | $ | 8.7 | | (0.9) | | (8.2) | | $ | 33.0 |
Year Ended December 31, 2022 | | | | | | | | | | | | | |
Accounts Receivable Reserve Allowances | | $ | 10.3 | | $ | 5.2 | | (0.3) | | (4.5) | | $ | 10.7 |
Reserve for excess and obsolete inventories | | $ | 33.0 | | $ | 17.5 | | (0.9) | | (10.1) | | $ | 39.5 |
| | Exhibit No. |
| Description |
|---|
3.1 | | | Exhibit No.
| | Description
| 3.1 | | Restated Certificate of Incorporation, as amended. Incorporated by reference to the Registrant’s Quarterly Report on Form 10‑Q10-Q for the quarter ended July 3, 2005June 30, 2019 (File No. 001‑001- 11499). | 3.2 | | Amended and Restated By‑Laws.By-Laws. Incorporated by reference to the Registrant’s Current Report on Form 8‑K8-K dated July 27, 2015November 1, 2021 (File No. 001‑11499)001-11499). | 9.14† | | Description of the Registrant’s Class A Common Stock. | 9.1 | | The Amended and Restated George B. Horne Voting Trust Agreement—1997 dated as of September 14, 1999. Incorporated by reference to the Registrant’s Annual Report on Form 10‑K10-K for year ended June 30, 1999 (File No. 001‑11499)001-11499). | 10.1* | | Supplemental Compensation Agreement effective as of September 1, 1996 between the Registrant and Timothy P. Horne. Incorporated by reference to the Registrant’s Annual Report on Form 10‑K10-K for year ended June 30, 1996 (File No. 001‑11499)001-11499). | 10.2* | | Amendment No. 1, dated July 25, 2000, to Supplemental Compensation Agreement effective as of September 1, 1996 between the Registrant and Timothy P. Horne. Incorporated by reference to the Registrant’s Quarterly Report on Form 10‑Q10-Q for quarter ended September 30, 2000 (File No. 001‑001- 11499). | 10.3* | | Amendment No. 2, dated October 23, 2002, to Supplemental Compensation Agreement effective as of September 1, 1996 between the Registrant and Timothy P. Horne. Incorporated by reference to the Registrant’s Annual Report on Form 10‑K10-K for the year ended December 31, 2002 (File No. 001‑001- 11499). | 10.4* | | Amendment No. 3, dated August 18, 2015, to Supplemental Compensation Agreement effective as of September 1, 1996 between the Registrant and Timothy P. Horne. Incorporated by reference to the Registrant’s Current Report on Form 8‑K8-K dated August 18, 2015 (File No. 001‑001- 11499). | 10.5 | | Amended and Restated Stock Restriction Agreement dated October 30, 1991. Incorporated by reference to the Registrant’s Current Report on Form 8‑K8-K dated November 14, 1991 (File No. 001‑11499)001-11499). | 10.6 | | Amendment, dated August 26, 1997, to Amended and Restated Stock Restriction Agreement dated October 30, 1991. Incorporated by reference to the Registrant’s Annual Report on Form 10‑K10-K for year ended June 30, 1997 (File No. 001‑11499)001-11499). | 10.7 | | Registration Rights Agreement dated July 25, 1986. Incorporated by reference to the Registrant’s Form S‑1S-1 (No. 33‑6515)33-6515) as part of the Second Amendment to such Form S‑1S-1 dated August 21, 1986. | 10.8*† | | Form of Indemnification Agreement between the Registrant and certain directors and officers of the Registrant. Incorporated by reference to the Registrant’s Annual Report on Form 10‑K for the year ended December 31, 2016 (File No. 001‑ 11499). | 10.9* | | Watts Water Technologies, Inc. Executive Officer Incentive Bonus Plan. Incorporated by reference to the Registrant’s AnnualCurrent Report on Form 10‑K for year ended December 31, 20158-K dated February 6, 2019 (File No. 001‑11499)001-11499). | 10.10* | | Non‑EmployeeNon-Employee Director Compensation Arrangements. Incorporated by reference to the Registrant’s AnnualQuarterly Report on Form 10‑K10-Q for the yearquarter ended December 31, 2014March 27, 2022 (File No. 001‑ 11499)001-11499).
| 10.11* | | Watts Water Technologies, Inc. Management Stock Purchase Plan Amended and Restated as of October 27, 2015.November 1, 2021. Incorporated by reference to the Registrant’s CurrentAnnual Report on Form 8‑K dated October 26, 201510-K for the year ended December 31, 2021 (File No. 001‑ 11499)001-11499). | 10.12* | | Watts Water Technologies, Inc. SecondThird Amended and Restated 2004 Stock Incentive Plan. Incorporated by reference to the Registrant’s Current Report on Form 8‑K8-K dated May 15, 201311, 2022 (File No. 001‑11499)001-11499). | 10.13* | | Form of Non‑Qualified Stock Option Agreement under the Watts Water Technologies, Inc. Second Amended and Restated 2004 Stock Incentive Plan. Incorporated by reference to the Registrant’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2013 (File No. 001‑ 11499).
| 10.14*
| | Form of Restricted Stock Award Agreement for Employees under the Watts Water Technologies, Inc. Second Amended and Restated 2004 Stock Incentive Plan. Incorporated by reference to the Registrant’s Quarterly Report on Form 10‑Q10-Q for the quarter ended September 27, 2015July 1, 2018 (File No. 001‑11499)001-11499). | 10.14* | | Form of Deferred Stock Award Agreement under the Watts Water Technologies, Inc. Third Amended and Restated 2004 Stock Incentive Plan. Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 26, 2022 (File No. 001-11499). |
| | | |
|---|
Exhibit No. | |
| | Description |
|---|
Exhibit No.
| | Description
| 10.15* | | Form of 20152020 Performance Stock Unit Award Agreement under the Watts Water Technologies, Inc. Second Amended and Restated 2004 Stock Incentive Plan. Incorporated by reference to the Registrant’s Quarterly Report on Form 10‑Q10-Q for the quarter ended September 27, 2015March 29, 2020 (File No. 001‑11499).001-11499) | 10.16* | | Form of 2016 Performance Stock Unit Award Agreement under the Watts Water Technologies, Inc. Second Amended and Restated 2004 Stock Incentive Plan. Incorporated by reference to the Registrant’s Annual Report on Form 10‑K for the year ended December 31, 2016 (File No. 001‑ 11499). | 10.17*
| | Form of 20172021 Performance Stock Unit Award Agreement under the Watts Water Technologies, Inc. Second Amended and Restated 2004 Stock Incentive Plan. Incorporated by reference to the Registrant’s Quarterly Report on Form 10‑Q10-Q for the quarter ended April 2, 2017March 28, 2021 (File No. 001‑11499).001-11499)
| 10.18*10.17*
| | Form of 2014 Non‑Qualified2022 Performance Stock OptionUnit Award Agreement under the Watts Water Technologies, Inc. Second Amended and Restated 2004 Stock Incentive Plan. Incorporated by reference to the Registrant’s Quarterly Report on Form 10‑Q10-Q for the quarter ended June 29, 2014March 27, 2022 (File No. 001‑ 11499).001-11499) | 10.19*10.18*
| † | Watts Water Technologies, Inc. Executive Severance Plan, as amended and restated as of February 8, 2018. | 10.19 | | Second Amended and Restated Credit Agreement, dated as of March 30, 2021, by and among the Registrant, the Subsidiary Borrowers party thereto, the Lenders party thereto, JP Morgan Chase Bank, N.A., as Administrative Agent, Bank of America N.A., Keybank National Association, Wells Fargo Bank, National Association, and T.D. Bank, N.A., as Co-Syndication Agents, and PNC Bank, National Association, U.S. Bank National Association, HSBC Bank USA, National Association and HSBC Bank Canada, as Co-Documentation Agents. Incorporated by reference to the Registrant’s Current Report on Form 8-K dated February 8, 2018March 30, 2021 (File No. 001-11499). | 10.20 | | Credit Agreement, dated as of February 12, 2016, among the Registrant, certain subsidiaries of the Registrant as Borrowers, JPMorgan Chase Bank N.A., as Administrative Agent, Swing Line LenderSecond Amended and L/C Issuer and the other lenders referred to therein. Incorporated by reference to the Registrant’s Current Report on Form 8‑K dated February 9, 2016 (File No. 001‑11499).
| 10.21 | | Restated Guaranty, dated as of February 12, 2016,March 30, 2021, by the Registrant and the Subsidiaries of the Registrant set forth therein, in favor of JPMorgan Chase Bank N.A. and other lenders referred to therein. Incorporated by reference to the Registrant’s Current Report on Form 8‑K dated February 9, 2016 (File No. 001‑11499). | 10.22 | | Note Purchase Agreement, dated as of June 18, 2010, between the Registrant and Purchasers named in Schedule A thereto relating to the Registrants $75,000,000 5.05% Senior Notes due June 18, 2020. Incorporated by reference to the Registrant’s Current Report on Form 8‑K dated June 18, 2010 (File No. 001‑11499).
| 10.23 | | Form of 5.05% Senior Note due June 18, 2020. Incorporated by reference to the Registrant’s Current Report on Form 8‑K dated June 18, 2010 (File No. 001‑11499).
| 10.24 | | Form of Subsidiary Guaranty in connection with the Registrant’s 5.05% Senior Notes due June 18, 2020, including the form of Joinder to Subsidiary Guaranty. Incorporated by reference to the Registrant’s Current Report on Form 8‑K dated June 18, 2010 (File No. 001‑11499).
| 10.25 | | Facility Agreement dated as of December 16, 2016, among Watts International Holdings Limited, as original borrower and original guarantor, Watts Water Technologies EMEA B.V., as original guarantor, JPMorgan Chase Bank, N.A., as sole bookrunner and sole lead arranger, J.P. Morgan Europe Limited, as agent to the financial parties, and the other lenders referred to therein. Incorporated by reference to the Registrant’s Current Report on Form 8‑K8-K dated December 16, 2016March 30, 2021 (File No. 001‑11499)001-11499).
| 11 | 10.21 | Statement Regarding Computation
| Amendment No. 1, dated August 2, 2022, to Second Amended and Restated Credit Agreement, dated March 30, 2021, by and among the Registrant, the Subsidiary Borrowers party thereto, the Lenders party thereto, JP Morgan Chase Bank, N.A., as Administrative Agent, Bank of Earnings per Common Share.America N.A., Keybank National Association, Wells Fargo Bank, National Association, and T.D. Bank, N.A., as Co-Syndication Agents, and PNC Bank, National Association, U.S. Bank National Association, HSBC Bank USA, National Association and HSBC Bank Canada, as Co-Documentation Agents. Incorporated by reference to notesthe Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 25, 2022 (File No. 001-11499). | 10.22 | | Transition and Retention Agreement dated as of March 23, 2022 between Watts Water Technologies, Inc. and Munish Nanda. Incorporated by reference to Consolidated Financial Statements, Note 2 of this Report.the Registrant’s Current Report on Form 8-K dated March 23, 2022 (File No. 001-11499). | 21† | | Subsidiaries | 23† | | Consent of KPMG LLP, Independent Registered Public Accounting Firm | 31.1† | | Certification of Principal Executive Officer pursuant to Rule 13a‑14(a)13a-14(a) or Rule 15d‑14(a)15d-14(a) of the Securities Exchange Act of 1934, as amended | 31.2† | | Certification of Principal Financial Officer pursuant to Rule 13a‑14(a)13a-14(a) or Rule 15d‑14(a)15d-14(a) of the Securities Exchange Act of 1934, as amended | 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. |
| | | Exhibit No.
| | Description
| 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) |
* | Management contract or compensatory plan or arrangement. |
†Filed herewith. ††Furnished herewith. Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations for the Years Ended December 31, 2017, 20162022, 2021 and 2015,2020, (ii) Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2017, 20162022, 2021 and 2015,2020, (iii) Consolidated Balance Sheets at December 31, 20172022 and December 31, 2016,2021, (iv) Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 20162022, 2021 and 2015,2020, (v) Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 20162022, 2021 and 2015,2020, and (vi) Notes to Consolidated Financial Statements. SIGNATURES 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. | | | | | By: | /s/ Robert J. Pagano, Jr. | | | Robert J. Pagano, Jr. | | | Chief Executive Officer and President |
DATED: February 23, 201821, 2023 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. | | | | | Signature |
| Title |
| Date | Signature
| | Title
| | Date
| | | | | | /s/ ROBERT J. PAGANO, JR. | | Chief Executive Officer, President, Chairperson of the Board and Director | | February 23, 201821, 2023 | Robert J. Pagano, Jr. | ��� | (Principal Executive Officer) | | | | | | | | /s/ TODD A. TRAPPSHASHANK PATEL | | Chief Financial Officer | | February 23, 201821, 2023 | Todd A. TrappShashank Patel
| | (Principal Financial Officer) | | | | | | | | /s/ VIRGINIA A. HALLORAN | | Chief Accounting Officer | | February 23, 201821, 2023 | Virginia A. Halloran | | (Principal Accounting Officer) | | | | | | | | /s/ ROBERT L. AYERS
| | Director
| | February 15, 2018
| Robert L. Ayers
| | | /s/ CHRISTOPHER L. CONWAY | | Director | | February 18, 201814, 2023 | Christopher L. Conway | | | | | | | | | | /s/ MICHAEL J. DUBOSE | | Director | | February 14, 2023 | Michael J. Dubose | | | | | | | | | | /s/ DAVID A. DUNBAR | | Director | | February 15, 201813, 2023 | David A. Dunbar | | | | | | | | | | /s/ JES MUNK HANSENLOUISE K. GOESER | | Director | | February 16, 201813, 2023 | Jes Munk HansenLouise K. Goeser
| | | | | | | | | | /s/ W. CRAIG KISSEL | | Chairman of the BoardLead Independent Director
| | February 21, 201813, 2023 | W. Craig Kissel | | | | | | | | | | /s/ JOSEPH T. NOONAN | | Director | | February 20, 201813, 2023 | Joseph T. Noonan | | | | | | | | | | /s/ MERILEE RAINES | | Director | | February 15, 201813, 2023 | Merilee Raines | | | | | | | | | | /s/ JOSEPH W. REITMEIER | | Director | | February 17, 201816, 2023 | Joseph W. Reitmeier | | | | |
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