WATTS WATER TECHNOLOGIES INC, 10-K filed on 2/20/2020
Annual Report
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Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2019
Jan. 26, 2020
Jun. 30, 2019
Document Type 10-K    
Document Annual Report true    
Document Transition Report false    
Document Period End Date Dec. 31, 2019    
Entity File Number 001-11499    
Entity Registrant Name WATTS WATER TECHNOLOGIES INC    
Entity Incorporation, State or Country Code DE    
Entity Tax Identification Number 04-2916536    
Entity Address, Address Line One 815 Chestnut Street    
Entity Address, City or Town North Andover    
Entity Address, State or Province MA    
Entity Address, Postal Zip Code 01845    
City Area Code 978    
Local Phone Number 688-1811    
Title of 12(b) Security Class A common stock, par value $0.10 per share    
Trading Symbol WTS    
Security Exchange Name NYSE    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Large Accelerated Filer    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Entity Public Float     $ 2,561,832,123
Current Fiscal Year End Date --12-31    
Document Fiscal Year Focus 2019    
Document Fiscal Period Focus FY    
Entity Central Index Key 0000795403    
Amendment Flag false    
Class A      
Entity Common Stock, Shares Outstanding   27,584,896  
Class B      
Entity Common Stock, Shares Outstanding   6,279,290  
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Consolidated Statements of Operations - USD ($)
shares in Millions, $ in Millions
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Consolidated Statements of Operations      
Net Sales $ 1,600.5 $ 1,564.9 $ 1,456.7
Cost of goods sold 923.0 908.4 854.3
GROSS PROFIT 677.5 656.5 602.4
Selling, general and administrative expenses 476.1 464.7 432.3
Restructuring 4.3 3.4 6.8
Other long-lived impairment charges     1.0
OPERATING INCOME 197.1 188.4 162.3
Other (income) expense:      
Interest income (0.4) (0.8) (1.0)
Interest expense 14.1 16.3 19.1
Other income (0.5) (1.7) 1.1
Total other expense 13.2 13.8 19.2
INCOME BEFORE INCOME TAXES 183.9 174.6 143.1
Provision for income taxes 52.4 46.6 70.0
NET INCOME $ 131.5 $ 128.0 $ 73.1
BASIC EPS      
NET INCOME PER SHARE $ 3.86 $ 3.73 $ 2.12
Weighted average number of shares (in shares) 34.1 34.3 34.4
DILUTED EPS      
NET INCOME PER SHARE $ 3.85 $ 3.73 $ 2.12
Weighted average number of shares (in shares) 34.2 34.3 34.4
Dividends declared per share (in dollars per share) $ 0.90 $ 0.82 $ 0.75
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Consolidated Statements of Comprehensive Income - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Consolidated Statements of Comprehensive Income      
Net income $ 131.5 $ 128.0 $ 73.1
Other comprehensive (loss) income, net of tax:      
Foreign currency translation adjustments (5.0) (23.7) 51.1
Cash flow hedges (4.7) 1.7 0.6
Other comprehensive (loss) income (9.7) (22.0) 51.7
Comprehensive income $ 121.8 $ 106.0 $ 124.8
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Consolidated Balance Sheets - USD ($)
$ in Millions
Dec. 31, 2019
Dec. 31, 2018
CURRENT ASSETS:    
Cash and cash equivalents $ 219.7 $ 204.1
Trade accounts receivable, less allowance for doubtful accounts of $14.3 million at December 31, 2019 and $15.0 million at December 31, 2018 219.8 205.5
Inventories, net 270.1 286.8
Prepaid expenses and other assets 25.3 24.9
Total Current Assets 734.9 721.3
PROPERTY, PLANT AND EQUIPMENT, NET    
Property, plant and equipment, at cost 557.9 537.4
Accumulated depreciation (357.9) (335.5)
Property, plant and equipment, net 200.0 201.9
OTHER ASSETS:    
Goodwill 581.1 544.8
Intangible assets, net 151.4 165.2
Deferred income taxes 2.7 1.6
Other, net 53.0 18.9
TOTAL ASSETS 1,723.1 1,653.7
CURRENT LIABILITIES:    
Accounts payable 123.3 127.2
Accrued expenses and other liabilities 133.4 130.6
Accrued compensation and benefits 57.6 60.9
Current portion of long-term debt 105.0 30.0
Total Current Liabilities 419.3 348.7
LONG-TERM DEBT, NET OF CURRENT PORTION 204.2 323.4
DEFERRED INCOME TAXES 38.6 38.5
OTHER NONCURRENT LIABILITIES 83.0 51.8
STOCKHOLDERS' EQUITY:    
Preferred Stock, $0.10 par value; 5,000,000 shares authorized; no shares issued or outstanding
Additional paid-in capital 591.5 568.3
Retained earnings 513.9 440.7
Accumulated other comprehensive loss (130.8) (121.1)
Total Stockholders' Equity 978.0 891.3
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 1,723.1 1,653.7
Class A    
STOCKHOLDERS' EQUITY:    
Common Stock 2.8 2.8
Class B    
STOCKHOLDERS' EQUITY:    
Common Stock $ 0.6 $ 0.6
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Consolidated Balance Sheets (Parenthetical)
$ in Millions
Dec. 31, 2019
USD ($)
$ / shares
shares
Dec. 31, 2018
USD ($)
$ / shares
shares
Trade accounts receivable, allowance for doubtful accounts (in dollars) | $ $ 14.3 $ 15.0
Preferred Stock, par value (in dollars per share) | $ / shares $ 0.10 $ 0.10
Preferred Stock, shares authorized 5,000,000 5,000,000
Preferred Stock, shares issued 0 0
Preferred Stock, shares outstanding 0 0
Class A    
Common Stock, par value (in dollars per share) | $ / shares $ 0.10 $ 0.10
Common Stock, shares authorized 120,000,000 120,000,000
Common Stock, votes per share (Number of votes) 1 1
Common Stock, issued shares 27,586,416 27,646,465
Common Stock, outstanding shares 27,586,416 27,646,465
Class B    
Common Stock, par value (in dollars per share) | $ / shares $ 0.10 $ 0.10
Common Stock, shares authorized 25,000,000 25,000,000
Common Stock, votes per share (Number of votes) 10 10
Common Stock, issued shares 6,279,290 6,329,290
Common Stock, outstanding shares 6,279,290 6,329,290
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Consolidated Statements of Stockholders' Equity - USD ($)
$ in Millions
Class A
Common Stock
Class B
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Total
Balance at the beginning of the period at Dec. 31, 2016 $ 2.8 $ 0.6 $ 535.2 $ 348.5 $ (150.8) $ 736.3
Balance (in shares) at Dec. 31, 2016 27,831,013 6,379,290        
Increase (Decrease) in Stockholders' Equity            
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     1.7     1.7
Shares of Class A common stock issued upon the exercise of stock options (in shares) 31,377          
Stock-based compensation     13.9     13.9
Stock repurchase       (18.2)   (18.2)
Stock repurchase (in shares) (277,886)          
Issuance of net shares of restricted Class A common stock       (2.4)   (2.4)
Issuance of net shares of restricted Class A common stock (in shares) 87,443          
Net change in restricted stock units     1.0 (1.7)   (0.7)
Net change in restricted and performance stock units (in shares) 52,245          
Common stock dividends       (25.9)   (25.9)
Balance at the end of the period at Dec. 31, 2017 $ 2.8 $ 0.6 551.8 372.9 (99.1) 829.0
Balance (in shares) at Dec. 31, 2017 27,724,192 6,379,290        
Increase (Decrease) in Stockholders' Equity            
Change in accounting principle       (0.7)   (0.7)
Net income       128.0   128.0
Other comprehensive income         (22.0) (22.0)
Comprehensive income           106.0
Shares of Class B common stock converted to Class A common stock (in shares) 50,000 (50,000)        
Shares of Class A common stock issued upon the exercise of stock options     2.5     2.5
Shares of Class A common stock issued upon the exercise of stock options (in shares) 45,939          
Stock-based compensation     13.8     13.8
Stock repurchase       (26.0)   (26.0)
Stock repurchase (in shares) (340,106)          
Issuance of net shares of restricted Class A common stock       (3.1)   (3.1)
Issuance of net shares of restricted Class A common stock (in shares) 115,120          
Net change in restricted stock units     0.2 (2.1)   (1.9)
Net change in restricted and performance stock units (in shares) 51,320          
Common stock dividends       (28.3)   (28.3)
Balance at the end of the period at Dec. 31, 2018 $ 2.8 $ 0.6 568.3 440.7 (121.1) 891.3
Balance (in shares) at Dec. 31, 2018 27,646,465 6,329,290        
Increase (Decrease) in Stockholders' Equity            
Net income       131.5   131.5
Other comprehensive income         (9.7) (9.7)
Comprehensive income           121.8
Shares of Class B common stock converted to Class A common stock (in shares) 50,000 (50,000)        
Shares of Class A common stock issued upon the exercise of stock options     2.1     2.1
Shares of Class A common stock issued upon the exercise of stock options (in shares) 38,288          
Stock-based compensation     17.8     17.8
Stock repurchase       (19.5)   (19.5)
Stock repurchase (in shares) (227,620)          
Net change in restricted stock units     3.3 (7.4)   (4.1)
Net change in restricted and performance stock units (in shares) 79,283          
Common stock dividends       (31.4)   (31.4)
Balance at the end of the period at Dec. 31, 2019 $ 2.8 $ 0.6 $ 591.5 $ 513.9 $ (130.8) $ 978.0
Balance (in shares) at Dec. 31, 2019 27,586,416 6,279,290        
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Consolidated Statements of Cash Flows - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
OPERATING ACTIVITIES      
Net income $ 131.5 $ 128.0 $ 73.1
Adjustments to reconcile net income to net cash used in operating activities:      
Depreciation 31.0 28.9 29.7
Amortization of intangibles 15.6 19.6 22.5
Loss on disposal and impairment of property, plant and equipment and other 0.8 0.2 2.1
Stock-based compensation 17.8 13.8 13.9
Deferred income tax 1.3 (15.3) 6.4
Changes in operating assets and liabilities, net of effects from business acquisitions:      
Accounts receivable (15.0) 6.0 (7.5)
Inventories 17.0 (34.5) (8.4)
Prepaid expenses and other assets (1.6) 0.6 14.7
Accounts payable, accrued expenses and other liabilities (4.4) 22.1 9.4
Net cash provided by operating activities 194.0 169.4 155.9
INVESTING ACTIVITIES      
Additions to property, plant and equipment (29.2) (35.9) (29.4)
Proceeds from the sale of property, plant and equipment 0.1 2.2 0.4
Net proceeds from the sale of asset, and other   0.2 3.1
Purchase of intangible assets   (0.7) (1.5)
Business acquisitions, net of cash acquired and other (42.7) (1.7) 0.1
Net cash used in investing activities (71.8) (35.9) (27.3)
FINANCING ACTIVITIES      
Proceeds from long-term borrowings 82.0 50.0 20.0
Payments of long-term debt (127.0) (194.5) (178.0)
Payments for withholdings on vested stock, finance leases and other (11.8) (6.6) (4.9)
Proceeds from share transactions under employee stock plans 2.1 2.5 1.7
Payments to repurchase common stock (19.5) (26.0) (18.2)
Dividends (31.4) (28.3) (25.9)
Net cash used in financing activities (105.6) (202.9) (205.3)
Effect of exchange rate changes on cash and cash equivalents (1.0) (6.7) 18.5
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15.6 (76.1) (58.2)
Cash and cash equivalents at beginning of year 204.1 280.2 338.4
CASH AND CASH EQUIVALENTS AT END OF YEAR 219.7 204.1 280.2
Acquisition of businesses:      
Fair value of assets acquired 43.3 4.1  
Cash paid, net of cash acquired 42.7 1.7  
Gain on acquisition     (0.1)
Liabilities assumed 0.6 2.4  
Issuance of stock under management stock purchase plan 1.8 1.9 0.9
CASH PAID FOR:      
Interest 17.1 19.1 18.8
Income taxes $ 50.8 $ 55.3 $ 39.4
v3.19.3.a.u2
Description of Business
12 Months Ended
Dec. 31, 2019
Description of Business  
Description of Business

(1) Description of Business

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

v3.19.3.a.u2
Accounting Policies
12 Months Ended
Dec. 31, 2019
Accounting Policies  
Accounting Policies

(2) Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its majority and wholly owned subsidiaries. Upon consolidation, all intercompany accounts and transactions are eliminated.

Cash Equivalents

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.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is established to represent the Company’s best estimate of the net realizable value of the outstanding accounts receivable. The development of the Company’s allowance for doubtful accounts varies by region but in general is based on a review of past due amounts, historical write-off experience, as well as aging trends affecting specific accounts and general operational factors affecting all accounts. 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 considers current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. The Company also 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 2019, 2018, and 2017, no customer accounted for 10% or more of the Company’s total sales or accounts receivable.

Inventories

Inventories are stated at the lower of cost or market, using the first-in, first-out method. Market value is determined by replacement cost or net realizable value. The Company utilizes both specific product identification and historical product demand as the basis for determining its excess or obsolete inventory reserve. The Company identifies all inventories that exceed a range of one to three years in sales. 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 recoverable amounts. Changes in market conditions, lower-than- expected customer demand or changes in technology or features could result in additional 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-lived assets are reviewed for indicators of 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.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, which range from 10 to 40 years for buildings and improvements and 3 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.

Leases

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 statement of financial position 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 twelve 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 straight-line basis over the lease term in the consolidated statement 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:
oFixed 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;
oVariable lease payments that depend on an index or rate initially measured using the index or rate at the commencement date;
oAmounts expected to be payable under a Company-provided residual value guarantee; and
oThe 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 periodically assessed for impairment. 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 statement of operations.

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.

The Company recognizes tax benefits when the item in question meets the more–likely–than-not (greater than 50% likelihood of being sustained upon examination by the taxing authorities) threshold.

Foreign Currency Translation

The functional currency for most of the Company’s foreign subsidiaries is their local currency. For 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 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 for these subsidiaries are included in other (income) expense, net in the consolidated statements of operations.

Stock-Based Compensation

The Company records compensation expense in the financial statements for share-based awards based on the grant date fair value of those awards for restricted stock awards and deferred stock awards. Stock-based compensation expense for restricted stock awards and deferred stock awards is recognized over the requisite service periods of the awards on a straight-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. The Company accounts for forfeitures as they occur, rather than estimate expected forfeitures over the vesting period of the respective grant. The Company does not reclassify the benefits associated with tax deductions in excess of recognized compensation cost from operating activities to financing activities in the Consolidated Statement of Cash Flows.

Net Income Per Common Share

Basic net income per common share is calculated by dividing net income by the weighted average number of 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,

2019

2018

2017

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

$

131.5

34.1

$

3.86

$

128.0

34.3

$

3.73

$

73.1

34.4

$

2.12

Dilutive securities, principally common stock options

 

0.1

 

(0.01)

 

 

 

 

 

Diluted EPS

$

131.5

34.2

$

3.85

$

128.0

34.3

$

3.73

$

73.1

 

34.4

$

2.12

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 two interest rate swaps designated as cash flow hedges as of December 31, 2019 and 2018. The Company also has foreign exchange hedges designated as cash flow hedges as of December 31, 2019 and 2018. 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 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-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 $57.6 million, $56.3 million and $52.1 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Research and Development

Research and development costs included in selling, general, and administrative expense amounted to $39.6 million, $34.5 million and $29.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Revenue Recognition

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

The Company’s revenue for product sales is recognized on a point in time model, at the point control transfers to the customer, which is generally when products are shipped from the Company’s manufacturing or distribution facilities or when delivered to the customer’s named location. Sales tax, value-added tax, or other taxes collected concurrent with revenue producing activities are excluded from revenue. Freight costs billed to customers for shipping and handling activities are included in revenue with the related cost included in selling, general and administrative expenses. See Note 4 for further disclosures and detail regarding revenue recognition.

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.

Recently Adopted Accounting Standards

In August 2017, the Financial Accounting Standards Board (“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 was effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. The Company adopted this standard in the first quarter of 2019, and it did not 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 an ROU asset representing the right to use the underlying asset for the lease term for both finance and operating leases with a term longer than twelve months. Topic 842 was subsequently amended by ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842,” ASU 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU 2018-11 “Targeted Improvements.” ASU 2016-02 was effective for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Under ASC 842, leases are classified as finance or operating, with the classification determining the pattern and classification of expense recognition in the income statement.

A modified retrospective transition approach was required, applying the new standard to all leases existing at the date of initial application. The Company could choose to use either 1) the effective date of the standard or 2) the beginning of the earliest comparable period presented in the financial statements as the date of initial application. The Company adopted the new standard on January 1, 2019 and used the effective date of the standard as the date of the Company’s initial application. By electing this approach, the financial information and the disclosures required under the new

standard are not provided for dates and periods before January 1, 2019. The Company designed the necessary changes to its existing processes and configured all system requirements that were necessary to implement this new standard.

 

The new standard provides a number of optional practical expedients throughout the transition. The Company elected the “package of practical expedients,” which permitted the Company to not reassess under the new standard the Company’s prior conclusions about lease identification, lease classification, and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements, the latter not being applicable to the Company. The Company also elected the practical expedient to not separate lease and non-lease components for all of the Company’s leases.

As a result of adopting ASC 842, the Company recorded operating ROU assets of $33.6 million and operating lease liabilities of $33.9 million as of January 1, 2019 on the consolidated balance sheet. The difference between the ROU assets and lease liabilities related to the impact of eliminating deferred and prepaid lease payments recognized under the previous lease accounting standard. The Company’s adoption of ASC 842 did not result in a change to the Company’s recognition of its existing finance leases as of January 1, 2019. The adoption of the new lease accounting standard did not have a material impact on either the consolidated statement of operations or the consolidated statement of cash flows. However, ASU 2016-02 has significantly affected the Company’s disclosures about noncash activities related to leases. Additionally, the Company’s lease-related disclosures have significantly increased as of and for the year ended December 31, 2019 as compared to prior years. See Note 5 to the consolidated financial statements.

Accounting Standards Updates

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU simplifies the accounting for income taxes by clarifying and amending existing guidance related to the recognition of franchise tax, the evaluation of a step up in the tax basis of goodwill, and the effects of enacted changes in tax laws or rates in the effective tax rate computation, among other clarifications. The effective date for adoption of this ASU is the calendar year beginning January 1, 2021 with early adoption permitted. The Company is currently evaluating the impact of this guidance on the Company’s financial statements, and does not expect the adoption of this guidance to have a material impact on the Company’s financial statements.

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

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

In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” ASU 2016-13 replaces the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivable, loans, and other financial instruments. This standard is effective for reporting periods beginning after December 15, 2019. The standard requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company plans to adopt the new credit loss standard effective January 1, 2020. The Company does not expect the new credit loss standard to have a material effect on the Company’s financial statements.

v3.19.3.a.u2
Restructuring
12 Months Ended
Dec. 31, 2019
Restructuring  
Restructuring

(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-tax cost by restructuring program is as follows:

Year Ended December 31,

    

2019

    

2018

    

2017

(in millions)

Restructuring costs:

Other Actions

$

4.3

$

3.4

$

4.4

2015 Actions

 

 

 

2.4

Total restructuring charges

$

4.3

$

3.4

$

6.8

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

Year Ended December 31,

    

2019

    

2018

    

2017

(in millions)

Americas

$

$

$

3.1

Europe

 

4.3

 

3.4

 

3.3

APMEA

 

 

 

0.4

Total

$

4.3

$

3.4

$

6.8

Other Actions

The Company periodically initiates other actions which are not part of a major program. Total “Other Actions” pre-tax restructuring expense was $4.3 million, $3.4 million and $4.4 million for the years ended December 31, 2019, 2018 and 2017, respectively. Included in “Other Actions” for the years ended 2019 and 2018 were European restructuring activities that were initiated in 2018 and extended through 2019, as discussed below. “Other Actions” also include certain minor initiatives for which the Company incurred restructuring expenses or adjusted prior restructuring reserves in the years ended December 31, 2019, 2018 and 2017.

In the third quarter of 2018, management initiated restructuring actions primarily associated with the European headquarters as well as cost savings initiatives at certain European manufacturing facilities.  These actions included reductions in force and other related costs within the Company’s Europe segment.  The pre-tax charges for the year ended December 31, 2018 were approximately $4.0 million and primarily included severance benefits. The total restructuring charges associated with the program were initially estimated to be approximately $5.0 million.  Total pre-tax charges for the program increased in 2019, resulting in total program restructuring charges of approximately $8.3 million. The additional restructuring costs primarily related to increased severance and other related costs. Restructuring charges incurred in 2019 related to this action were $4.3 million, of which $1.6 million was incurred in the fourth quarter of 2019.  The restructuring reserve associated with these actions as of December 31, 2019 was approximately $3.2 million, and primarily relates to severance benefits.

In the fourth quarter of 2017, management initiated certain restructuring actions related to reductions in force within the Company’s Europe segment. The restructuring activities primarily included severance benefits. The total pre-tax charges associated with the Europe restructuring activities were initially expected to be approximately $4.1 million with costs being fully incurred in 2017. The company reduced its total pre-tax charges for the program to approximately $3.4 million as of September 30, 2018, primarily related to reduced severance costs. As of December 31, 2019, no amounts are reserved associated with these actions and the actions are complete.

2015 Actions in the Americas and APMEA

In 2015, the Board of Directors of the Company approved a transformation program relating to the Company’s Americas and APMEA businesses, which primarily involved the exit of low-margin, non-core product lines, and enhancing global sourcing capabilities. The Company eliminated approximately $165 million of the combined Americas and APMEA net sales primarily within the Company’s do-it-yourself (DIY) distribution channel. As part of this program the Company also sold an operating subsidiary in China that was previously dedicated to manufacturing products being discontinued. The program also involved the consolidation of manufacturing facilities and distribution center network optimization, including reducing the square footage and net operating footprint of the Company’s Americas facilities. On a combined basis, the total pre-tax cost for this transformation program 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 $28.2 million. The other transformation and deployment costs included consulting and project management fees, inventory write-offs, and other associated costs. All costs associated with the Americas and APMEA transformation program were incurred as of December 31, 2017, with no amounts remaining reserved for as of December 31, 2018. The Company incurred pre-tax charges for the year ended December 31, 2017 of approximately $2.4 million primarily related to asset write-downs and facility exit costs.

v3.19.3.a.u2
Revenue Recognition
12 Months Ended
Dec. 31, 2019
Revenue Recognition  
Revenue Recognition

(4) Revenue Recognition

The Company is a leading supplier of products that manage and conserve the flow of fluids and energy into, through and out of buildings in the commercial and residential markets. The Company has designed and produced valve systems that safeguard and regulate water systems, energy efficient heating and hydronic systems, drainage systems and water filtration technology that helps purify and conserve water.

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

Residential & commercial flow control products—includes products typically sold into plumbing and hot water applications such as backflow preventers, water pressure regulators, temperature and pressure relief valves, and thermostatic mixing valves.
HVAC & gas products—includes commercial high-efficiency boilers, water heaters and heating solutions, hydronic and electric heating systems for under-floor radiant applications, custom heat and hot water solutions, hydronic pump groups for boiler manufacturers and alternative energy control packages, and flexible stainless steel connectors for natural and liquid propane gas in commercial food service and residential applications. HVAC is an acronym for heating, ventilation and air conditioning.
Drainage & water re-use products—includes drainage products and engineered rain water harvesting solutions for commercial, industrial, marine and residential applications.
Water quality products—includes point-of-use and point-of-entry water filtration, conditioning and scale prevention systems for commercial, marine and residential applications.

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

Year ended December 31, 2019

(in millions)

Distribution Channel

Americas

Europe

APMEA

Consolidated

Wholesale

$

609.5

$

305.0

$

59.2

$

973.7

OEM

83.5

 

143.2

 

1.9

 

228.6

Specialty

326.8

 

 

4.3

 

331.1

DIY

 

64.3

 

2.8

 

 

67.1

Total

$

1,084.1

$

451.0

$

65.4

$

1,600.5

Year ended December 31, 2019

(in millions)

Principal Product Line

Americas

Europe

APMEA

Consolidated

Residential & Commercial Flow Control

$

610.5

$

171.3

$

45.7

$

827.5

HVAC and Gas Products

294.6

 

188.2

 

15.2

 

498.0

Drainage and Water Re-use Products

80.2

 

88.8

 

3.4

 

172.4

Water Quality Products

 

98.8

 

2.7

 

1.1

 

102.6

Total

$

1,084.1

$

451.0

$

65.4

$

1,600.5

Year ended December 31, 2018

(in millions)

Distribution Channel

Americas

Europe

APMEA

Consolidated

Wholesale

$

578.8

$

314.2

$

59.9

$

952.9

OEM

79.0

 

150.0

 

1.4

 

230.4

Specialty

312.1

 

 

4.5

 

316.6

DIY

 

62.2

 

2.8

 

 

65.0

Total

$

1,032.1

$

467.0

$

65.8

$

1,564.9

Year ended December 31, 2018

(in millions)

Principal Product Line

Americas

Europe

APMEA

Consolidated

Residential & Commercial Flow Control

$

582.0

$

176.2

$

46.2

$

804.4

HVAC and Gas Products

289.2

 

201.6

 

16.2

 

507.0

Drainage and Water Re-use Products

73.1

 

87.8

 

2.2

 

163.1

Water Quality Products

 

87.8

 

1.4

 

1.2

 

90.4

Total

$

1,032.1

$

467.0

$

65.8

$

1,564.9

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 observable input which depicts the price as if sold to a similar customer in similar circumstances. Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment from the Company’s manufacturing site or distribution center, or delivery to the customer’s named location. In certain circumstances, revenue from shipments to retail customers is recognized only when the product is consumed by the customer, as based on the terms of

the arrangement, transfer of control is not satisfied until that point in time. In determining whether control has transferred, the Company considers if there is a present right to payment, physical possession and legal title, along with risks and rewards of ownership having transferred to the customer. In certain circumstances, the Company manufactures customized product without alternative use for its customers. However, as these arrangements do not entitle the Company to a right to payment of cost plus a profit for work completed, the Company has concluded that 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 revenues for each distinct product delivered, assuming transfer of control has occurred. As scheduled delivery dates are within one year, under the optional exemption provided by the guidance, revenues allocated to future shipments of partially completed contracts are not disclosed.

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

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

in arrears are recognized as receivables. The opening and closing balances of the Company’s contract assets and contract liabilities are as follows:

Contract

Contract

Contract

Assets

Liabilities - Current

Liabilities - Noncurrent

(in millions)

Balance - January 1, 2019

$

1.0

$

11.3

$

2.7

Change in period

(0.7)

0.1

Balance - March 31, 2019

$

0.3

$

11.4

$

2.7

Change in period

(0.2)

0.7

0.1

Balance - June 30, 2019

$

0.1

$

12.1

$

2.8

Change in period

(0.3)

0.2

Balance - September 29, 2019

$

0.1

$

11.8

$

3.0

Change in period

0.3

(0.3)

(0.1)

Balance - December 31, 2019

$

0.4

$

11.5

$

2.9

Balance - January 1, 2018

$

0.6

$

11.3

$

2.1

Change in period

1.1

0.2

0.3

Balance - April 1, 2018

$

1.7

$

11.5

$

2.4

Change in period

(0.3)

0.1

0.3

Balance - July 1, 2018

$

1.4

$

11.6

$

2.7

Change in period

0.4

(0.4)

Balance - September 30, 2018

$

1.8

$

11.2

$

2.7

Change in period

(0.8)

0.1

Balance - December 31, 2018

$

1.0

$

11.3

$

2.7

The amount of revenue recognized that was included in the opening contract liability balance was $11.8 million and $11.3 million for the years ended December 31, 2019 and 2018, respectively. This revenue consists primarily of revenue recognized for shipments of product which had been prepaid as well as the amortization of extended warranty and service policy revenue. The Company did not recognize any material revenue from obligations satisfied in prior periods. There were no impairment losses related to Contract Assets for the years ended December 31, 2019 and 2018.

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

v3.19.3.a.u2
Leases
12 Months Ended
Dec. 31, 2019
Leases  
Leases

(5) Leases

The Company adopted ASC 842 effective January 1, 2019. 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 85% of the Company’s operating lease liabilities and generally have a lease term 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 ranging from 1 to 5 years. The majority of the Company’s real estate, automobile, and equipment leases consist of fixed lease payments plus, for many of the Company’s leases, variable 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 Company 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 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.

Some of the Company’s lease agreements include Company options to either extend and/or early terminate the lease, the costs of which are included in the Company’s 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 does not generally enter into leases involving the construction or design of the underlying asset, and nearly all of the assets the Company leases are not specialized in nature. The Company’s leases generally do not include termination options for either party to the lease or restrictive financial or other covenants. The Company’s lease agreements generally do not include residual value guarantees.

Right-of-use asset amounts reported in the consolidated balance sheet by asset category as of December 31, 2019 were as follows:

December 31, 2019

(in millions)

Operating Leases (1)

Real Estate

$

33.1

Automobile

 

3.0

Machinery and equipment

 

3.0

Total operating lease ROU Asset

$

39.1

Finance Leases (2)

Real Estate

$

14.4

Machinery and equipment

 

4.8

Less: Accumulated depreciation

 

(8.5)

Finance Leases, net

$

10.7

(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.

The maturity of the Company’s operating and finance lease liabilities as of December 31, 2019 was as follows:

December 31, 2019

    

Operating Leases

    

Finance Leases

(in millions)

2020

$

10.8

$

1.9

2021

 

6.8

 

1.1

2022

 

4.7

 

0.7

2023

 

3.7

 

0.3

2024

 

3.2

 

0.2

Thereafter

 

21.5

 

0.1

Total undiscounted minimum lease payments

$

50.7

$

4.3

Less imputed interest

9.2

0.2

Total lease liabilities

$

41.5

$

4.1

Included in the consolidated balance sheet

Current lease liabilities (included in other current liabilities)

 

9.6

 

1.9

Non-Current lease liabilities (included in other non-current liabilities)

 

31.9

 

2.2

Total lease liabilities

$

41.5

$

4.1

The total lease cost consisted of the following amounts:

Year Ended

December 31, 2019

(in millions)

Operating lease cost

$

11.9

Amortization of finance lease right-of-use assets

 

1.2

Interest on finance lease liabilities

 

0.2

Variable lease cost

3.1

Total lease cost

$

16.4

The following information represents supplemental disclosure for the statement of cash flows related to operating and finance leases:

December 31, 2019

(in millions)

Operating cash flows from operating leases

$

11.4

Operating cash flows from finance leases

 

0.2

Financing cash flows from finance leases

 

1.7

Total cash paid for amounts included in the measurement of lease liabilities

 

13.3

Finance lease liabilities arising from obtaining right-of-use assets

1.4

Operating lease liabilities arising from obtaining right-of-use assets

19.8

The following summarizes additional information related to operating and finance leases:

December 31, 2019

Weighted-average remaining lease term - finance leases

2.8

years

Weighted-average remaining lease term - operating leases

 

9.1

years

Weighted-average discount rate - finance leases

 

3.8

%

Weighted-average discount rate - operating leases

 

3.7

%

v3.19.3.a.u2
Goodwill & Intangibles
12 Months Ended
Dec. 31, 2019
Goodwill and Intangibles  
Goodwill & Intangibles

(6) Goodwill & Intangibles

Goodwill

The Company performs its annual goodwill impairment testing for each reporting unit as of fiscal October month end or earlier if there is a triggering event or circumstance that indicates an impairment loss may have occurred. As of the October 27, 2019 testing date, the Company had $579.4 million of goodwill on its balance sheet. In 2019, the Company had seven reporting units. One of these reporting units, Water Quality, had no goodwill. The Company performed a qualitative analysis for each of the six remaining reporting units, which include Blücher, US Drains, Fluid Solutions-Europe, Fluid Solutions-Americas, Heating and Hot Water Solutions (“HHWS”) and APMEA. As a result of the qualitative analyses, the Company determined that the fair values of the reporting units were more likely than not greater than the carrying amounts. In 2019 and 2018, the Company did not need to proceed beyond the qualitative analysis, and no goodwill impairments were recorded.

In the third quarter of 2019, the Company completed an acquisition within the Americas segment resulting in $38.3 million of goodwill. The acquisition is not considered material to the Company’s consolidated financial statements. The changes in the carrying amount of goodwill by geographic segment are as follows:

December 31, 2019

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,

    

2019

    

Period

    

and Other

    

2019

    

2019

    

the Period

    

2019

    

2019

(in millions)

Americas

$

438.1

38.3

$

0.4

$

476.8

$

(24.5)

$

(24.5)

$

452.3

Europe

 

243.7

 

 

(2.3)

 

241.4

 

(129.7)

 

 

(129.7)

 

111.7

APMEA

 

30.1

 

 

(0.1)

 

30.0

 

(12.9)

 

 

(12.9)

 

17.1

Total

$

711.9

38.3

$

(2.0)

$

748.2

$

(167.1)

$

(167.1)

$

581.1

December 31, 2018

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,

    

2018

    

Period

    

and Other

    

2018

    

2018

    

the Period

    

2018

    

2018

(in millions)

Americas

$

437.4

$

1.5

$

(0.8)

$

438.1

$

(24.5)

$

$

(24.5)

$

413.6

Europe

 

249.3

 

 

(5.6)

 

243.7

 

(129.7)

 

 

(129.7)

 

114.0

APMEA

 

30.9

 

 

(0.8)

 

30.1

 

(12.9)

 

 

(12.9)

 

17.2

Total

$

717.6

$

1.5

$

(7.2)

$

711.9

$

(167.1)

$

$

(167.1)

$

544.8

Long-Lived Assets

Indefinite-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-lived intangibles impairment assessment in the fourth quarter of each year. In 2019, the Company performed a qualitative assessment for certain tradenames where the fair value significantly exceeded the carrying value in the 2018 quantitative assessment, had sales growth in 2019, and no other indicators of impairment were present. For the remaining tradenames in 2019, the Company performed a quantitative assessment. For the 2018 and 2017 impairment assessments, the Company performed quantitative assessments for all indefinite-lived intangible assets. The methodology employed for quantitative assessments was the relief from royalty method, a subset of the income approach. Based on the results of the assessments, the Company did not recognize an impairment on any indefinite-lived intangibles in 2019, 2018, or 2017.

Intangible assets with estimable lives and other long-lived assets are reviewed 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. 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 pre-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 pre-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 2019 and 2018, there were no indications of the carrying amounts of intangible assets with estimable lives not being recoverable. In 2017, the Company recognized a $1.0 million impairment charge in the Americas segment for a technology asset as a change in market expectations indicated the carrying amount of this asset was no longer recoverable.

Intangible assets include the following:

December 31, 2019

December 31, 2018

Gross

Net

Gross

Net

Carrying

Accumulated

Carrying

Carrying

Accumulated

Carrying

    

Amount

    

Amortization

    

Amount

    

Amount

    

Amortization

    

Amount

(in millions)

Patents

$

16.1

$

(15.9)

$

0.2

$

16.1

$

(15.8)

$

0.3

Customer relationships

 

232.8

 

(156.3)

 

76.5

 

232.9

 

(146.9)

 

86.0

Technology

 

56.9

 

(31.6)

 

25.3

 

54.6

 

(27.3)

 

27.3

Trade names

 

26.0

 

(13.1)

 

12.9

 

26.1

 

(11.5)

 

14.6

Other

 

4.3

 

(3.6)

 

0.7

 

4.3

 

(3.5)

 

0.8

Total amortizable intangibles

 

336.1

 

(220.5)

 

115.6

 

334.0

 

(205.0)

 

129.0

Indefinite-lived intangible assets

 

35.8

 

 

35.8

 

36.2

 

 

36.2

$

371.9

$

(220.5)

$

151.4

$

370.2

$

(205.0)

$

165.2

Aggregate amortization expense for amortized intangible assets for 2019, 2018 and 2017 was $15.6 million, $19.6 million and $22.5 million, respectively. Additionally, future amortization expense on amortizable intangible assets is expected to be $14.3 million for 2020, $13.2 million for 2021, $11.9 million for 2022, $11.5 million for 2023, and $11.3 million in 2024. 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 11.0 years. Patents, customer relationships, technology, trade names and other amortizable intangibles have weighted-average remaining lives of 1.9 years, 10.3 years, 6.6 years, 13.3 years and 17.5 years, respectively. Indefinite-lived intangible assets include trade names and trademarks.

v3.19.3.a.u2
Inventories, net
12 Months Ended
Dec. 31, 2019
Inventories, net  
Inventories, net

(7) Inventories, net

Inventories consist of the following:

December 31,

    

2019

    

2018

(in millions)

Raw materials

$

83.4

$

87.4

Work-in-process

 

15.5

 

17.3

Finished goods

 

171.2

 

182.1

$

270.1

$

286.8

Raw materials, work-in-process and finished goods are net of valuation reserves of $27.9 million and $27.4 million as of December 31, 2019 and 2018, respectively. Finished goods of $16.7 million and $17.4 million as of December 31, 2019 and 2018, respectively, were consigned.

v3.19.3.a.u2
Property, Plant and Equipment
12 Months Ended
Dec. 31, 2019
Property, Plant and Equipment  
Property, Plant and Equipment

(8) Property, Plant and Equipment

Property, plant and equipment consist of the following:

December 31,

    

2019

    

2018

(in millions)

Land

$

13.9

$

14.1

Buildings and improvements

 

175.8

 

165.7

Machinery and equipment

 

354.7

 

342.2

Construction in progress

 

13.5

 

15.4

 

557.9

 

537.4

Accumulated depreciation

 

(357.9)

 

(335.5)

$

200.0

$

201.9

v3.19.3.a.u2
Income Taxes
12 Months Ended
Dec. 31, 2019
Income Taxes  
Income Taxes

(9) Income Taxes

The significant components of the Company’s deferred income tax liabilities and assets are as follows:

December 31,

    

2019

    

2018

(in millions)

Deferred income tax liabilities:

Excess tax over book depreciation

$

18.8

$

16.2

Intangibles

 

32.1

 

33.8

Goodwill

21.0

17.4

Foreign earnings

3.9

5.1

Operating lease ROU assets

10.3

Other

 

4.9

 

3.2

Total deferred tax liabilities

 

91.0

 

75.7

Deferred income tax assets:

Accrued expenses

 

7.8

 

7.0

Product liability

6.3

6.0

Operating lease liabilities

10.4

Stock based compensation

5.4

4.8

Foreign tax credits

32.7

33.5

Net operating loss carry forward