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1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the Watts Water Technologies, Inc. (the Company) Consolidated Balance Sheet as of October 3, 2010, the Consolidated Statements of Operations for the third quarter and nine months ended October 3, 2010 and for the third quarter and nine months ended September 27, 2009, and the Consolidated Statements of Cash Flows for the nine months ended October 3, 2010 and the nine months ended September 27, 2009.
The balance sheet at December 31, 2009 has been derived from the audited consolidated financial statements at that date. The accounting policies followed by the Company are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The financial statements included in this report should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2009. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2010.
The Company operates on a 52-week fiscal year ending on December 31st. Any quarterly data contained in this Quarterly Report on Form 10-Q generally reflects the results of operations for a 13-week period. There were four additional working days in the nine months ended October 3, 2010 than there were in the nine months ended September 27, 2009.
Certain amounts in the year December 31, 2009 have been reclassified to permit comparison with the 2010 presentation. These reclassifications had no effect on reported results of operations or stockholders’ equity. |
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2. Accounting Policies
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Impairment of Goodwill and Long-Lived Assets
The changes in the carrying amount of goodwill by geographic segment are as follows:
Goodwill and intangible assets not subject to amortization are tested for impairment at least annually or more frequently if events or circumstances indicate that it is “more likely than not” that goodwill might be impaired, such as a change in business conditions. The Company performs its annual impairment assessment of goodwill and intangible assets not subject to amortization in the fourth quarter of each year.
Intangible assets with estimable lives and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of intangible assets with estimable lives and other long-lived assets are measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted pretax cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the impairment loss recognized is the amount by which the carrying amount of the asset or asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future pretax operating cash flows or appraised values, depending on the nature of the asset. The Company determines the discount rate for this analysis based on the weighted average cost of capital based on the market and guideline public companies market for the related business and does not allocate interest charges to the asset or asset group being measured. Judgment is required to estimate future operating cash flows.
Intangible assets include the following:
Aggregate amortization expense for amortized intangible assets for the third quarters of 2010 and 2009 was $3.6 million and $3.4 million, respectively, and for the first nine-month periods of 2010 and 2009 was $10.2 million and $9.7 million, respectively. Additionally, future amortization expense for the next five years on amortizable intangible assets approximates $3.8 million for the remainder of 2010, $14.1 million for 2011, $12.4 million for 2012, $11.2 million for 2013 and $11.2 million for 2014. Amortization expense is provided on a straight-line basis over the estimated useful lives of the intangible assets. The weighted-average remaining life of total amortizable intangible assets is 9.5 years. Patents, customer relationships, technology and other amortizable intangibles have weighted-average remaining lives of 8.1 years, 7.7 years, 13.6 years and 44.7 years, respectively. Intangible assets not subject to amortization consist of trademarks.
Stock-Based Compensation
The Company maintains three stock incentive plans under which key employees and non-employee members of the Company’s Board of Directors have been granted incentive stock options (ISOs) and nonqualified stock options (NSOs) to purchase the Company’s Class A Common Stock. Only one plan, the 2004 Stock Incentive Plan, is currently available for the grant of new equity awards. Stock options granted under prior plans became exercisable over a five-year period at the rate of 20% per year and expire ten years after the date of grant. Under the 2004 Stock Incentive Plan, options become exercisable over a four-year period at the rate of 25% per year and expire ten years after the grant date. ISOs and NSOs granted under the plans may have exercise prices of not less than 100% and 50% of the fair market value of the Class A Common Stock on the date of grant, respectively. The Company’s current practice is to grant all options at fair market value on the grant date. The Company issued 282,500 and 213,500 options to key employees, under the 2004 Stock Incentive Plan in the third quarters and in the first nine months of 2010 and 2009, respectively.
The fair value of each share issued under the 2004 Stock Incentive Plan is estimated on the date of grant, using the Black-Scholes-Merton Model, based on the following weighted average assumptions:
The above assumptions were used to determine the weighted average grant-date fair value of stock options of $12.36 and $9.70 in 2010 and 2009, respectively.
The Company has also granted shares of restricted stock to key employees and non-employee members of the Company’s Board of Directors under the 2004 Stock Incentive Plan, which vest either immediately, over a one-year period, or over a three-year period at the rate of one-third per year. The restricted stock awards are amortized to expense on a straight-line basis over the vesting period. The Company issued 104,975 and 84,535 shares of restricted stock under the 2004 Stock Incentive Plan in third quarters of 2010 and 2009, respectively. The Company issued 104,975 and 86,241 shares of restricted stock under the 2004 Stock Incentive Plan in the first nine months of 2010 and 2009, respectively.
The Company also has a Management Stock Purchase Plan that allows for the granting of restricted stock units (RSUs) to key employees. On an annual basis, key employees may elect to receive a portion of their annual incentive compensation in RSUs instead of cash. Each RSU provides the key employee with the right to purchase a share of Class A Common Stock at 67% of the fair market value on the date of grant. RSUs vest annually over a three-year period from the grant date. An aggregate of 2,000,000 shares of Class A Common Stock may be issued under the Management Stock Purchase Plan. The Company granted 158,473 and 150,098 RSUs in the first nine months of 2010 and 2009, respectively. The Company did not grant any RSU’s in the third quarters of 2010 or 2009.
The fair value of each RSU issued under the Management Stock Purchase Plan is estimated on the date of grant, using the Black-Scholes-Merton Model, based on the following weighted average assumptions:
The above assumptions were used to determine the weighted average grant-date fair value of RSUs of $12.81 and $8.14 in 2010 and 2009, respectively.
A more detailed description of each of these stock and stock option plans can be found in Note 13 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
Shipping and Handling
The Company’s shipping costs included in selling, general and administrative expenses were $8.6 million and $8.1 million for the third quarters of 2010 and 2009, respectively, and were $25.7 million and $23.2 million for the first nine months of 2010 and 2009, respectively.
Research and Development
Research and development costs included in selling, general and administrative expenses were $4.3 million and $4.2 million for the third quarters of 2010 and 2009, respectively, and were $14.0 million and $12.9 million for the first nine months of 2010 and 2009, respectively.
Taxes, Other than Income Taxes
Taxes assessed by governmental authorities on sale transactions are recorded on a net basis and excluded from sales in the Company’s consolidated statements of operations.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. During 2010, the Company recorded an income tax benefit of approximately $2.8 million primarily from the release of a valuation allowance on net operating losses in Europe.
New Accounting Standards
In October 2009, the Financial Accounting Standards Board (FASB) issued an accounting standard update to improve disclosures related to fair value measurements. This update requires new disclosures when significant transfers in and out of the various fair value levels occur. This update requires a reconciliation for fair value measurements using significant unobservable inputs (level 3) be prepared on a gross basis, separately presenting information about purchases, sales, issuance and settlements. In addition, this update amends current disclosure requirements for postretirement benefit plan assets. This update is effective for interim and annual periods beginning after December 15, 2009, except for disclosures regarding level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of this standard will not have a material impact on the Company’s consolidated financial statements.
In October 2009, the FASB issued an accounting standard update to address accounting for multiple-deliverable arrangements, specifically addressing how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. This update established a hierarchy for determining the selling price of a deliverable. This standard also expands disclosures relating to an entity’s multiple-deliverable revenue arrangements. This update is effective prospectively for all arrangements entered into or materially modified in fiscal years beginning after June 15, 2010. The adoption of this update will not have a material impact on the Company’s consolidated financial statements. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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3. Discontinued Operations
In September 2009, the Company’s Board of Directors approved the sale of its investment in Watts Valve (Changsha) Co., Ltd. (CWV). CWV manufactured large diameter hydraulic-actuated butterfly valves for thermo-power and hydro-power plants, water distribution projects and water works projects in China. Management determined that CWV’s business no longer fit strategically with the Company. The Company completed the sale of CWV in January 2010. During 2009, the Company evaluated the classification of the assets and liabilities of CWV and concluded that the net assets qualified as discontinued operations. The Company evaluated the fair value (less cost to sell) of the net assets of CWV and recorded a pre-tax loss of approximately $8.5 million in 2009, based on the final agreement with the buyer. The Company concluded that the future cash flows associated with CWV would be completely eliminated from the continuing operations of the Company. As such, the Company classified CWV’s results of operations and the loss from the disposition as discontinued operations for all periods presented. See Note 10 for further information related to CWV.
In May 2009, the Company liquidated its TEAM Precision Pipework, Ltd. (TEAM) business, located in Ammanford, U.K. TEAM custom designed and manufactured manipulated pipe and hose tubing assemblies and served the heating, ventilation and air conditioning and automotive markets in Western Europe. Management determined the business no longer fit strategically with the Company and that a sale of TEAM was not feasible. On May 22, 2009, the Company appointed an administrator for TEAM under the United Kingdom Insolvency Act of 1986. During the administration process, the administrator had sole control over, and responsibility for, TEAM’s operations, assets and liabilities. The Company deconsolidated TEAM when the administrator obtained control of TEAM. The deconsolidation resulted in the recognition of a $18.8 million pre-tax non-cash loss in the second quarter of 2009. The Company evaluated the operations of TEAM and determined that it would not have a continuing involvement in TEAM’s operations and cash flows. As a result of the loss of control, TEAM’s cash flows and operations were eliminated from the continuing operations of the Company. As such, the Company classified TEAM’s results of operations and the loss from deconsolidation as discontinued operations for all periods presented.
Discontinued operating expense for 2010 primarily includes an estimated reserve in connection with the Foreign Corrupt Practices Act (FCPA) investigation at CWV (see Note 10) and legal costs associated with the FCPA investigation. The discontinued operating expense for 2009 is related to the operations of TEAM and CWV and legal costs associated with the now concluded James Jones Litigation. See Note 15 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, for a description of the James Jones Litigation.
Condensed operating statements for discontinued operations are summarized below:
Revenues reported in discontinued operations are as follows:
Revenues reported in discontinued operations are as follows:
The carrying amounts of major classes of assets and liabilities associated with discontinued operations are as follows:
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4. Financial Instruments and Derivatives Instruments
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including short-term investment securities, foreign currency derivatives and deferred compensation plan assets and related liability. The fair values of these financial assets and liabilities were determined using the following inputs at October 3, 2010:
(1) Included in short-term investment securities on the Company’s consolidated balance sheet. (2) Included in other, net on the Company’s consolidated balance sheet. (3) Included in other noncurrent liabilities on the Company’s consolidated balance sheet.
The table below provides a summary of the changes in fair value of all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period December 31, 2009 to October 3, 2010.
The Company elected to participate in a settlement offer from UBS, AG (UBS) for all of its outstanding auction rate securities (ARS) investments. Under the terms of the settlement offer, the Company was issued rights by UBS entitling the holder to require UBS to purchase the underlying ARS at par value during the period from June 30, 2010, through July 2, 2012. The Company elected to exercise this right and, on July 1, 2010 received $6.3 million from UBS in settlement of all outstanding ARS investments. The Company had previously received $0.2 million from UBS during the first quarter of 2010. The Company recorded income of approximately $0.6 million to other (income) expense in the consolidated statement of operations for its investment in ARS in the first nine months of 2009.
As discussed in Note 12, a contingent liability of $1.9 million was recognized as a preliminary estimate of the acquisition date fair value of the contingent consideration in the Blue Ridge Atlantic Enterprises, Inc. (BRAE) acquisition. This liability was classified as Level 3 under the fair value hierarchy as it was based on the weighted probability as of the date of the acquisition of achievement of a performance metric, which was not observable in the market.
Short-term investment securities as of October 3, 2010 consist of certificates of deposit with remaining maturities of greater than three months at the date of purchase, for which the carrying amount is a reasonable estimate of fair value.
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 and certificates of deposit, 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.
The Company has exposure to a number of foreign currency rates, including the Canadian Dollar, the Euro, the Chinese Yuan and the British Pound. To manage this risk, the Company generally uses a layering methodology whereby at the end of any quarter, the Company has generally entered into forward exchange contracts, which hedge approximately 50% of the projected intercompany purchase transactions for the next twelve months. The Company uses this strategy for the purchases between Canada and the U.S., for purchases between the Euro zone and the U.S., and for purchases between the Euro zone and the United Kingdom. The average volume of contracts can vary but generally approximates $10 to $15 million in open contracts at the end of any given quarter. At October 3, 2010, the Company had contracts for purchases between Canada and the U.S. for notional amounts aggregating approximately $15.0 million to buy various currencies. The fair value of the foreign exchange contracts as of October 3, 2010 was immaterial. The Company accounts for the forward exchange contracts as an economic hedge and has not elected to use hedge accounting. Realized and unrealized gains and losses on the contracts are recognized in other (income) expense in the consolidated statements of operations. During the third quarters ended October 3, 2010 and September 27, 2009, the Company recorded unrealized losses of $0.2 million and $1.2 million, respectively, and during the nine months ended October 3, 2010 and September 27, 2009, the Company recorded unrealized gains of $0.7 million and unrealized losses of $0.3 million, respectively, on foreign currency derivatives contracts. These contracts do not subject the Company to significant market risk from exchange movement because they offset gains and losses on the related foreign currency denominated transactions.
Fair Value
The carrying amounts of cash and cash equivalents, short-term investments, trade receivables and trade payables approximate fair value because of the short maturity of these financial instruments.
The fair values of the Company’s 5.05% senior notes due 2020, 5.47% senior notes due 2013 and 5.85% senior notes due 2016 are based on a discounted cash flow model using like industrial companies, the Company’s credit metrics, the Company’s size, as well as, current market demand. The fair value of the Company’s variable rate debt approximates its carrying value. The carrying amount and the estimated fair market value of the Company’s long-term debt, including the current portion, are as follows:
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5. Restructuring and Other Charges
The Company’s Board of Directors approves all major restructuring programs that involve the discontinuance of product lines or the shutdown of facilities. From time to time, the Company takes additional restructuring actions, including involuntary terminations that are not part of a major program. The Company accounts for these costs in the period that the individual employees are notified or the liability is incurred. These costs are included in restructuring and other charges in the Company’s consolidated statements of operations. The Company also includes as part of other charges, expenses associated with asset impairments. See Note 4 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, for a detailed description of the 2009 and 2010 Europe actions. Additionally, on September 13, 2010, the Board of Directors of the Company approved a restructuring program with respect to certain of the Company’s operating facilities in the United States. The restructuring program includes the shutdown of two manufacturing facilities in North Carolina. Operations at these facilities will be consolidated into the Company’s manufacturing facilities in New Hampshire, Missouri and other locations. The program is expected to include pre-tax charges totaling approximately $4.9 million, including costs for severance, shutdown costs and equipment write-downs. Additionally, the Company is expecting pre-tax training and pre-production set-up costs of approximately $2.0 million. The total net after-tax charge for this restructuring program is expected to be approximately $4.1 million (including $0.4 million in non-cash charges), with costs being incurred through 2011. The Company expects to spend approximately $1.2 million in capital expenditures to consolidate operations. Annual cash savings, net of tax, are estimated to be approximately $1.6 million, which the Company expects to fully realize by the second half of 2012. The restructuring program is expected to be completed by the end of the third quarter of 2011.
A summary of the pre- tax cost by restructuring program is as follows:
The Company recorded net pre-tax restructuring and other charges in its business segments as follows:
The third quarter charge for 2010 of $3.0 million consists of approximately $1.9 million related to involuntary termination benefits and $0.8 million for other costs associated with the 2010 actions. Additionally, the Company recorded $0.2 million related to involuntary termination benefits associated with the 2009 actions. The remaining costs of approximately $0.1 million related to involuntary termination benefits which were not part of a previously announced restructuring plan.
The first nine months charge for 2010 of $9.9 million consists of approximately $5.2 million related to involuntary termination benefits, $1.3 million for accelerated depreciation for manufacturing operations, which was charged to cost of sales, and $1.8 million for other costs associated with the 2010 actions. Additionally, the Company recorded $0.7 million related to involuntary termination benefits and $0.6 million for relocation expenses associated with the 2009 actions. The remaining costs of approximately $0.3 million related to involuntary termination benefits which were not part of a previously announced restructuring plan. Additionally, the Company recorded $0.2 million and $0.3 million in the first nine months of 2010 and 2009, respectively, for charges associated with asset impairments.
In March 2010, in connection the Company’s manufacturing footprint consolidation, the Company closed the operations of Tianjin Watts Valve Company Ltd. (TWVC) and relocated its manufacturing to other facilities. On April 12, 2010, the Company signed a definitive equity transfer agreement with a third party to sell its equity ownership and remaining assets of TWVC. The sale is expected to be finalized before the end of 2010, subject to receiving all applicable government approvals. The Company expects to receive net proceeds of approximately $5.9 million from the sale. The Company recorded a tax charge of approximately $1.5 million in the first quarter of 2010 in connection with the expected sale of TWVC.
The following table summarizes the total estimated pre-tax charges expected, incurred and remaining cost for the footprint consolidation-restructuring program initiated in 2009 by the Company’s reportable segments:
The Company does not expect to incur the remaining cost associated with the North America segment, as the project is substantially complete.
Details of the Company’s 2009 footprint consolidation-restructuring program for the first nine months of 2010 are as follows:
The following table summarizes expected, incurred and remaining costs for 2009 restructuring actions by type:
The following table summarizes the total expected, incurred and remaining pre-tax costs for the 2010 Europe footprint consolidation-restructuring program by the Company’s reportable segments:
Details of the Company’s 2010 Europe footprint consolidation-restructuring program for the first nine months of 2010 are as follows:
The following table summarizes expected, incurred and remaining costs for 2010 Europe footprint consolidation- restructuring actions by type:
The following table summarizes the total expected, incurred and remaining pre-tax costs for the 2010 North America footprint consolidation-restructuring program by the Company’s reportable segments:
Details of the Company’s 2010 North America footprint consolidation-restructuring program for the first nine months of 2010 are as follows:
The following table summarizes expected, incurred and remaining costs for 2010 North America footprint consolidation- restructuring actions by type:
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7. Segment Information
The Company operates in three geographic segments: North America, Europe, and China. Each of these segments is managed separately and has separate financial results that are reviewed by the Company’s chief operating decision-maker. All intercompany sales transactions have been eliminated. Sales by region are based upon location of the entity recording the sale. The accounting policies for each segment are the same as those described in the summary of significant accounting policies.
The following is a summary of the Company’s significant accounts and balances by segment, reconciled to the consolidated totals:
* Corporate expenses are primarily for compensation expense, internal controls costs, professional fees, including legal and audit expenses, shareholder services and benefit administration costs. These costs are not allocated to the geographic segments as they are viewed as corporate functions that support all activities.
The above operating segments are presented on a basis consistent with the presentation included in the Company’s December 31, 2009 consolidated financial statements included in its Annual Report on Form 10-K.
The North American segment includes U.S. net sales of $172.7 million and $165.2 million for the third quarters of 2010 and 2009, respectively. The North American segment includes U.S. net sales of $541.3 million and $507.5 million for the first nine months of 2010 and 2009, respectively. The North American segment also includes U.S. long-lived assets of $74.4 million and $81.4 million at October 3, 2010 and September 27, 2009, respectively.
The North American and China segment include $4.8 million and $6.1million, respectively, in assets held for sale at October 3, 2010.
Intersegment sales for the third quarter of 2010 for North America, Europe and China were $1.0 million, $2.3 million and $25.8 million, respectively. Intersegment sales for the third quarter of 2009 for North America, Europe and China were $0.9 million, $1.4 million and $28.2 million, respectively.
Intersegment sales for the first nine months of 2010 for North America, Europe and China were $2.9 million, $6.2 million and $85.5 million, respectively. Intersegment sales for the first nine months of 2009 for North America, Europe and China were $2.9 million, $4.7 million and $83.6 million, respectively.
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8. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consists of the following:
Accumulated other comprehensive income (loss) in the consolidated balance sheets as of October 3, 2010 and September 27, 2009 consist primarily of cumulative translation adjustments and pension related prior service costs and net actuarial loss. The Company’s total comprehensive income was as follows:
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9. Debt
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 at 5.05%, due June 18, 2020 (the Notes). 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 18 and December 18 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 million by paying the principal amount plus a make-whole amount (as defined in the 2010 Note Purchase Agreement).
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. Events of defaults under the 2010 Note Purchase Agreement include failure to comply with the financial and operational covenants, as well as bankruptcy and other insolvency events. If an event of default occurs and is continuing, then a majority of the note holders have the right to accelerate and require the Company to repay all the outstanding notes under the 2010 Note Purchase Agreement. In limited circumstances, such acceleration is automatic. The Company will use the proceeds from the private placement for general corporate purposes. As of October 3, 2010, the Company was in compliance with all covenants related to the 2010 Note Purchase Agreement.
On June 18, 2010, the Company entered into a credit agreement (the Credit Agreement) among the Company, certain subsidiaries of the Company who become borrowers under the Credit Agreement, Bank of America, N.A., as Administrative Agent, swing line lender and letter of credit issuer, and the other lenders referred to therein. The Credit Agreement provides for a $300 million, five-year, senior unsecured revolving credit facility which may be increased by an additional $150 million under certain circumstances and subject to the terms of the Credit Agreement. The Credit Agreement has a sublimit of up to $75 million in letters of credit.
Borrowings outstanding under the Credit Agreement bear interest at a fluctuating rate per annum equal to an applicable percentage equal to (i) in the case of Eurocurrency rate loans, the British Bankers Association LIBOR rate plus an applicable percentage, ranging from 1.70% to 2.30%, determined by reference to the Company’s consolidated leverage ratio plus, in the case of certain lenders, a mandatory cost calculated in accordance with the terms of the Credit Agreement, or (ii) in the case of base rate loans and swing line loans, the highest of (a) the federal funds rate plus 0.5%, (b) the rate of interest in effect for such day as announced by Bank of America, N.A. as its “prime rate,” and (c) the British Bankers Association LIBOR rate plus 1.0%, plus an applicable percentage, ranging from 0.70% to 1.30%, determined by reference to the Company’s consolidated leverage ratio. In addition to paying interest under the Credit Agreement, the Company is also required to pay certain fees in connection with the credit facility, including, but not limited to, a facility fee and letter of credit fees.
The Credit Agreement matures on June 18, 2015. The Company may repay loans outstanding under the Credit Agreement from time to time without premium or penalty, other than customary breakage costs, if any, and subject to the terms of the Credit Agreement.
Under the Credit Agreement, the Company is required to satisfy and maintain specified financial ratios and other financial condition tests. The financial ratios include 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 Credit Agreement. The Company’s Credit Agreement defines Consolidated EBITDA to exclude unusual or non-recurring charges and gains. The Company is also required to maintain a consolidated leverage ratio of consolidated funded debt to Consolidated EBITDA. Consolidated funded debt, as defined in the Credit Agreement, includes all long and short-term debt, capital lease obligations and any trade letters of credit that are outstanding. Finally, the Company is required to maintain a consolidated net worth that exceeds a minimum net worth calculation. Consolidated net worth is defined as the total stockholders’ equity as reported adjusted for any cumulative translation adjustments and goodwill impairments.
As of October 3, 2010, the Company was in compliance with all covenants related to the Credit Agreement and had $265.3 million of unused and available credit under the Credit Agreement and $34.7 million of stand-by letters of credit outstanding on the Credit Agreement. There were no borrowings under the Credit Agreement at October 3, 2010.
On May 17, 2010, the Company repaid its $50.0 million principal obligations under the 4.87% senior notes upon their maturity.
The Company is a party to several note agreements as further detailed in Note 11 of Notes to Consolidated Financial Statements of the Annual Report on Form 10-K for the year ended December 31, 2009. These note agreements require the Company to maintain a fixed charge coverage ratio of consolidated EBITDA plus consolidated rent expense during the period to consolidated fixed charges. Consolidated fixed charges are the sum of consolidated interest expense for the period and consolidated rent expense. As of October 3, 2010, the Company was in compliance with all covenants regarding these note agreements.
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10. Contingencies and Environmental Remediation
As disclosed in Part I, Item 1, “Product Liability, Environmental and Other Litigation Matters” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, and Part II, Item 1, “Legal Proceedings” of the Company’s Quarterly Report on Form 10-Q for the quarter ended April 4, 2010, the Company is a party to certain litigation, has conducted an investigation regarding information that employees of CWV made payments to employees of state-owned agencies and whether such payments may violate the Foreign Corrupt Practices Act (FCPA), and the Company is engaged in certain environmental remediation. There have been no material developments with respect to its contingencies and environmental remediation proceedings during the first nine months ended October 3, 2010 except as discussed in the Company’s Form 10-Q for the quarter ended April 4, 2010 regarding the FCPA investigation. |
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11. Employee Benefit Plans
The Company sponsors funded and unfunded defined benefit pension plans covering substantially all of its domestic employees. Benefits are based primarily on years of service and employees’ compensation. The funding policy of the Company for these plans is to contribute an annual amount that does not exceed the maximum amount that can be deducted for federal income tax purposes.
The components of net periodic benefit cost are as follows:
The information related to the Company’s pension funds cash flow is as follows:
The Company expects to contribute approximately $2.6 million for the remainder of 2010. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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12. Acquisitions
On April 13, 2010, a wholly owned subsidiary of the Company acquired 100% of the outstanding stock of BRAE located in Oakboro, North Carolina for up to $5.3 million, net of cash acquired. Of the total purchase price, $0.5 million was paid at closing and the remaining $4.8 million is contingent upon BRAE achieving a certain performance metric during the year ending December 31, 2014, and, to the extent achieved, is expected to be paid in cash in 2015. The Company recognized a liability of $1.9 million as an estimate of the acquisition date fair value of the contingent consideration, which is based on the net present value of $3.7 million and the weighted probability of achievement of the performance metric as of the date of the acquisition. Failure to meet the performance metric would reduce this liability to $0, while complete achievement would increase this liability to the full remaining purchase price of $4.8 million. Any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date is recognized in earnings in the period the estimated fair value changes. The preliminary excess fair value of the consideration transferred over the fair value of the net assets acquired of $2.7 million was allocated to goodwill. None of the goodwill is expected to be tax deductible. BRAE is a provider of engineered rain water harvesting solutions and addresses the commercial, industrial and residential markets. BRAE had annual sales prior to the acquisition of approximately $2.0 million.
On June 28, 2010, a wholly owned subsidiary of the Company acquired 100% of the outstanding stock of Austroflex Rohr-Isoliersysteme GmbH (Austroflex) for approximately $33.7 million. Austroflex is an Austrian-based manufacturer of pre-insulated flexible pipe systems for district heating, solar applications and under-floor radiant heating systems. The acquisition of Austroflex provides the Company with a full range of pre-insulated PEX tubing, pre-insulated solar tubes and under-floor heating insulation, distribution capability and positions the Company as a major supplier of pre-insulated pipe systems in Europe. The Company completed a preliminary purchase price allocation that resulted in the recognition of $13.9 million of intangible assets and $14.7 million of goodwill. Intangible assets were based on preliminary fair value estimates and are comprised primarily of customer relationships with estimated useful lives of 8 years and trade names with indefinite lives. Goodwill is expected to be tax deductible up to a certain limit established under Austrian tax rules. Austroflex had annual sales prior to the acquisition of approximately $23.0 million.
The results of operations for BRAE are included in the Company’s North America segment and the results of operations of Austroflex are included in the Company’s Europe segment since their respective acquisition dates and were not material to the Company’s consolidated financial statements. Pro forma information has not been provided, as it is not material. |
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