WTS · Read the filing

Item 1A. RISK FACTORS.

Industry Risk Factors

Economic cycles, particularly those involving reduced levels of commercial and residential starts and remodeling, may have adverse effects on our revenues and operating results.

We have experienced and expect to continue to experience fluctuations in revenues and operating results due to economic and business cycles. The businesses of most of our customers, particularly plumbing and heating wholesalers and OEM manufacturers, are cyclical. Therefore, the level of our business activity has been cyclical, fluctuating with economic cycles. An economic downturn may also affect the financial stability of our customers, which could affect their ability to pay amounts owed to their vendors, including us. We also believe our level of business activity is influenced by commercial and residential starts and renovation and remodeling, which are, in turn, heavily influenced by interest rates, consumer debt levels, changes in disposable income, employment growth and consumer confidence. Credit market conditions may prevent commercial and residential builders or developers from obtaining the necessary capital to continue existing projects or to start new projects. This may result in the delay or cancellation of orders from our customers or potential customers and may adversely affect our revenues and our ability to manage inventory levels, collect customer receivables and maintain profitability. If economic conditions worsen in the future, our revenues and profits could decrease or trigger additional goodwill, indefinite-lived intangible assets, or long-lived asset impairments and could have a material effect on our financial condition and results of operations.

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The COVID-19 pandemic has adversely affected, and may continue to adversely affect, our business, financial condition, results of operations and prospects.

Future sales expansion or contraction may be dependent on the duration and severity of the evolving COVID-19 pandemic as well as a number of macroeconomic challenges caused by the pandemic, which could have a material adverse effect on our business, financial condition and results of operations. Global health concerns pertaining to COVID-19 and related government actions taken to reduce the spread of the virus continue to impact the economic environment and significantly increase economic uncertainty. The pandemic has caused governmental authorities to implement numerous measures to try to contain the virus, including ongoing travel restrictions, quarantines, and business limitations and shutdowns. The health and safety measures we’ve adopted to slow and limit the spread of the COVID-19 pandemic have resulted in reduced production capacity and, in some cases, required temporary closures of certain of our facilities, among other impacts. The duration of these measures is unknown, and they may be lifted, extended, or reinstated, and additional measures may be imposed due to new outbreaks and variants of COVID-19 in various regions. The measures imposed have resulted in supply chain disruption, volatility in demand and higher absenteeism in our manufacturing facilities. There remains a risk of future employee health concerns, and we cannot predict whether any of our manufacturing facilities will experience disruptions or how long such disruptions would last. While we are unable to predict the magnitude of such impact at this time, the loss of, or significant reduction in, purchases by our customers could materially impair our business, operating results, prospects and financial condition.

The reopening of global economies in 2021 created supply chain disruptions and inflationary pressures, and virus variants have caused labor shortages and the need for additional health and safety measures. These challenges could cause economic disruption and could have a material adverse effect on our business if customers reduce capital or overall spending and if the supply chain disruptions continue. The severity of the impact of the COVID-19 pandemic on our business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on our facilities, customers and suppliers, as well as the time it takes for normal economic and business conditions to resume, all of which are uncertain and cannot be predicted. We may also incur additional costs to remedy damages caused by business disruptions, performance delays or interruptions, payment delays, and defaults or bankruptcy of our third-party customers and suppliers, which could adversely affect our consolidated financial condition, liquidity and results of operations. The impact of the COVID-19 pandemic may also have the effect of heightening many of the other risks and uncertainties described in this “Risk Factors” section.

The extent of the effects of the COVID-19 pandemic on us remains uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic ends. There is no guarantee that our efforts to mitigate the impact of COVID-19 will be effective.

The impact of supply chain and logistics disruptions may adversely affect our business and operations. Changes in the costs of raw materials and purchased components, including imposition of or changes in tariff rates, could reduce our profit margins. Reductions or interruptions in the supply of raw materials, components or finished goods from supply sources could adversely affect our ability to meet our customer delivery commitments.

Our products are made using various purchased components and raw materials, including primarily bronze, brass, cast iron, stainless steel, steel and plastic. Substantially all of the raw materials we require to manufacture our products are purchased from outside sources. The costs and availability of raw materials and components may be subject to change due to, among other things, interruptions in production by suppliers, changes in worldwide price, demand levels, exchange rates and imposition of or changes in tariff rates. We typically do not enter into long-term supply agreements. Our inability to obtain supplies of raw materials and purchased components for our products at favorable costs could have a material adverse effect on our business, financial condition or results of operations by decreasing our profit margins. Commodity prices, particularly copper and stainless-steel prices, have experienced tremendous volatility over the past several years. Should commodity costs or purchased component costs increase substantially, we may not be able to recover such costs, through selling price increases to our customers or other product cost reductions, which would have a negative effect on our financial results. If commodity costs or purchased component costs decline, we may experience pressure from customers to reduce our selling prices. Additionally, we continue to purchase components and finished goods from international sources. In limited cases, these components or finished goods are single-sourced. The availability of components and finished goods from international sources could be adversely impacted by, among other things, interruptions in production by suppliers including due to pandemics or other public health crises, suppliers’ allocations to other purchasers and new laws, tariffs or regulations.

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As a global manufacturer and distributor, we are facing additional risks related to ongoing disruptions and increased costs in our supply chain and logistics, including:

We face intense competition and, if we are not able to respond to competition in our markets, our revenues and profits may decrease.

Competitive pressures in our markets could adversely affect our competitive position, leading to a possible loss of market share or a decrease in prices, either of which could result in decreased revenues and profits. We encounter intense competition in all areas of our business. To remain competitive, we will need to invest continually in manufacturing, product development, marketing, customer service and support and our distribution networks. We may not have sufficient resources to continue to make such investments and we may be unable to maintain our competitive position. In addition, we may have to reduce the prices of some of our products to stay competitive, potentially resulting in a reduction in the profit margin for, and inventory valuation of, these products. Some of our competitors are based in foreign countries and have cost structures and prices in foreign currencies. Accordingly, currency fluctuations could cause our U.S. dollar costed products to be less competitive than our competitors’ products costed in other currencies.

We are subject to risks associated with changing technology, manufacturing techniques, distribution channels and business continuity, which could place us at a competitive disadvantage.

The successful implementation of our business strategy requires us to continually evolve our existing products and introduce new products to meet customers’ needs in the industries we serve, as evidenced by our investments in our smart and connected strategy. Many of our products are characterized by stringent performance and specification requirements that mandate a high degree of manufacturing, engineering, and technological expertise. If we fail to meet these requirements, or if our product offerings, including our smart and connected products, are not accepted by the market, our business could be at risk. We believe that our customers rigorously evaluate their suppliers on the basis of a number of factors, including product quality, price competitiveness, technical and manufacturing expertise, development and product design capability, new product innovation, reliability and timeliness of delivery, operational flexibility, customer service and overall management. Our success will depend on our ability to continue to meet customers’ changing specifications with respect to these criteria. We cannot ensure that we will be able to address technological advances or introduce new products that may be necessary to remain competitive within our business. We cannot ensure that we can adequately protect any of our technological developments to produce a sustainable competitive advantage. Furthermore, we may be subject to business continuity risk in the event of an unexpected loss of a material facility or operation. We cannot ensure that we adequately protect against such loss.

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Economic and other risks associated with international sales and operations could adversely affect our business and future operating results.

Since we sell and manufacture our products worldwide, our business is subject to risks associated with doing business internationally. Our business and future operating results could be harmed by a variety of factors, including:

Company Risk Factors

Our business and financial performance may be adversely affected by information technology and other business disruptions.

Our business may be impacted by disruptions, including information technology attacks or failures, threats to physical security, as well as damaging weather or other acts of nature. Our information technology risks relate to cyber security attacks and disruptions caused by potential failures in the performance of our primary enterprise resource planning (ERP) system.

Cyber security attacks, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. Cyber security may also be breached due to employee error, malfeasance, system errors or vulnerabilities, including vulnerabilities of our customers, distributors, vendors, suppliers, and their products. We currently have a larger percentage of our workforce working remotely due to the COVID-19 pandemic, which may heighten these risks. In addition, we have designed products and services that connect to and are part of the “Internet of Things” which may also be vulnerable to cyber security breaches. We have experienced cyber security attacks and may continue to experience them going forward, potentially with more frequency. In addition, cybersecurity and data privacy and protection laws and regulations are evolving and present increasing compliance challenges, which may increase our costs, affect our competitiveness and expose us to substantial fines or other penalties.

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We also may experience unplanned system interruptions or outages of our primary ERP system as it continues to age, which may affect our ability to support and maintain the system in an effective manner. Any disruptions, delays or deficiencies related to our primary ERP system could lead to substantial business interruption, including our ability to perform routine business transactions, which could have a material adverse effect on our financial results.

Given the unpredictability of the timing, nature and scope of such disruptions, we could potentially be subject to production downtimes, operational delays, other detrimental impacts on our operations or ability to provide products to our customers, the compromising of confidential or otherwise protected information, misappropriation, destruction or corruption of data, security breaches, other manipulation or improper use of our systems, networks or our products, financial losses from remedial actions, loss of business or potential liability, and/or damage to our reputation, any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

Implementation of our acquisition strategy may not be successful, which could affect our ability to increase our revenues or our profitability.

One of our strategies is to increase our revenues and profitability and expand our business through acquisitions that will provide us with complementary products and solutions and increase market share for our existing product lines. We cannot be certain that we will be able to identify, acquire or profitably manage additional companies or successfully integrate such additional companies without substantial costs, delays or other problems. Also, companies acquired recently and in the future may not achieve anticipated revenues, cost synergies, profitability or cash flows that justify our investment in them. We have faced increasing competition for acquisition candidates, which has resulted in significant increases in the purchase prices of many acquisition candidates. This competition, and the resulting purchase price increases, may limit the number of acquisition opportunities available to us, possibly leading to a decrease in the rate of growth of our revenues and profitability. In addition, acquisitions may involve a number of risks, including, but not limited to:

● adverse short-term effects on our reported operating results;

● diversion of management’s attention;

● investigations of, or challenges to, acquisitions by competition authorities;

● loss of key personnel at acquired companies;

● unanticipated management or operational problems or legal liabilities; and

We are subject to risks related to product defects, which could result in product recalls and could subject us to warranty claims in excess of our warranty provisions or which are greater than anticipated due to the unenforceability of liability limitations.

We cannot be certain that our quality controls and procedures, including the testing of raw materials and safety testing of selected finished products, will reveal latent defects in our products or the materials from which they are made, which may not become apparent until after the products have been sold into the market. We also cannot be certain that our suppliers will always eliminate latent defects in products we purchase from them. Accordingly, there is a risk that product defects will occur, which could require a product recall. Product recalls can be expensive to implement and, if a product recall occurs during the product’s warranty period, we may be required to replace the defective product. In addition, a product recall may damage our relationship with our customers and we may lose market share with our customers. Our insurance policies may not cover the costs of a product recall.

Our standard warranties contain limits on damages and exclusions of liability for consequential damages and for misuse, improper installation, alteration, accident or mishandling while in the possession of someone other than us. We may incur additional operating expenses if our warranty provision does not reflect the actual cost of resolving issues related to defects in our products. If these additional expenses are significant, it could adversely affect our business, financial condition and results of operations.

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We face risks from product liability and other lawsuits, which may adversely affect our business.

We have been and expect to continue to be subject to various product liability claims or other lawsuits, including, among others, that our products include inadequate or improper instructions for use or installation, inadequate warnings concerning the effects of the failure of our products, alleged manufacturing or design defects, or allegations that our products contain asbestos. If we do not have adequate insurance or contractual indemnification, damages from these claims would have to be paid from our assets and could have a material adverse effect on our results of operations, liquidity and financial condition. Like other manufacturers and distributors of products designed to control and regulate fluids and gases, we face an inherent risk of exposure to product liability claims and other lawsuits in the event that the use of our products results in personal injury, property damage or business interruption to our customers. We cannot be certain that our products will be completely free from defect. In addition, in certain cases, we rely on third-party manufacturers for our products or components of our products. We cannot be certain that our insurance coverage will continue to be available to us at a reasonable cost, or, if available, will be adequate to cover any such liabilities. For more information, see Item 1. “Business—Product Liability, Environmental and Other Litigation Matters” and Note 15 of the Notes to the Consolidated Financial Statements, both of which are incorporated herein by reference.

We face risks from costs for environmental compliance and/or to address potential liabilities under environmental laws and regulations.

Our operations and facilities worldwide are subject to laws and regulations related to pollution and the protection of the environment, health and safety, including, but not limited to those governing air emissions, discharges to water, the generation, handling, storage, treatment and disposal of hazardous wastes and other materials, and the remediation of contaminated sites. A failure by us to comply with applicable requirements or maintain the permits required for our operations could result in civil or criminal fines, penalties, enforcement actions, third-party claims for property damage and personal injury, requirements to clean up property or to pay for the costs of cleanup or regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, including the installation of pollution control equipment or remedial actions.

Certain environmental laws and regulations impose on present and former owners and operators of facilities and sites, and on potentially responsible parties (“PRPs”) for sites to which such parties may have sent waste for disposal, requirements to investigate and remediate contamination. Such liability can be imposed without regard to fault and, under certain circumstances, may be joint and several, resulting in one PRP being held responsible for the entire obligation. Liability may also include damages to natural resources. On occasion we are involved in such investigations and/or cleanup, and also have been and could continue to be named as a PRP in environmental matters.

The discovery of additional contamination, including at acquired facilities, the imposition of more stringent environmental, health and safety laws and regulations, including cleanup requirements, or the insolvency, or other grounds for refusing to participate, of other responsible parties could require us to incur capital expenditures or operating costs materially in excess of our accruals. Future investigations we undertake may lead to discoveries of contamination that must be remediated, and decisions to close facilities may trigger remediation requirements that are not currently applicable. We may also face liability for alleged personal injury or property damage due to exposure to hazardous substances used or disposed of by us, contained within our current or former products, or present in the soil or groundwater at our current or former facilities. We could incur significant costs in connection with such liabilities. See Item 1. “Business—Product Liability, Environmental and Other Litigation Matters” and Note 15 of the Notes to the Consolidated Financial Statements, both of which are incorporated herein by reference.

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Climate change, and legislation or regulations addressing climate change, may have an adverse impact on our business and results of operations.

The impacts of climate change are highly unpredictable and vary depending on geographical location, but could include changing temperatures, droughts, water shortages, wildfires, changes in weather and rainfall patterns, changes in sea levels, and changing storm patterns and intensities. These impacts present several potential challenges to water and energy related products, such as potential degradation of water quality and changes in water conservation or energy efficiency requirements, particularly during periods of increased precipitation, flooding, or water shortages. Inclement weather and extreme weather events may have varying impacts on our business. Certain events may disrupt the operations of our customers, creating customer shutdowns that prevent or defer sales of our product, while other events may drive increased demand for our products, which may create volatility in our financial results. Additionally, these events may disrupt our own operations and the operations of our suppliers, including the operation of manufacturing plants, the transportation of raw materials from our suppliers, and the transportation of products to our customers, any of which may increase our costs, reduce our productivity and adversely affect our business, financial condition, results of operations and prospects. Additionally, concern over climate change may result in new or increased legal and regulatory requirements to reduce or mitigate the effects of climate change, including limitations on greenhouse gas emissions, which could increase our costs or require additional investments in our facilities and equipment. New legislation and regulatory requirements may also impact our customers and suppliers, which could affect demand for our products or our ability to source key materials. In addition, our customers and suppliers may impose their own requirements with respect to climate change and greenhouse gas emissions. Any failure to comply with those requirements may also affect demand for our products or our ability to source key materials. Any failure to achieve our own goals with respect to reducing our impact on the environment, or any perception of a failure to act responsibly with respect to the environment or to effectively respond to regulatory requirements concerning climate change can lead to adverse publicity, resulting in an adverse effect on our business or damage to our reputation.

Our ability to achieve savings through our restructuring and business transformation activities may be adversely affected by management’s ability to fully execute the plans as a result of local regulations, geo-political risk or other factors within or beyond the control of management.

We have implemented a number of restructuring and business transformation activities, which include steps that we believe are necessary to enhance the value and performance of the Company, including reducing operating costs and increasing efficiencies throughout our manufacturing, sales and distribution footprint. Factors within the control of management, or factors beyond management’s control such as local labor regulations or legal or political intervention, may change the total estimated costs or the timing of when the savings will be achieved under the plans. Further, if we are not successful in completing the restructuring or business transformation activities timely or if additional or unanticipated issues such as labor disruptions, inability to retain key personnel during and after the transformation or higher exit costs arise, our expected cost savings may not be met and our operating results could be negatively affected. In addition, our restructuring and transformation activities may place substantial demands on our management, which could lead to diversion of management’s attention from other business priorities and result in a reduced customer focus.

The requirements to evaluate goodwill, indefinite-lived intangible assets and long-lived assets for impairment may result in a write-off of all or a portion of our recorded amounts, which would negatively affect our operating results and financial condition.

As of December 31, 2021, our balance sheet included goodwill, indefinite-lived intangible assets, amortizable intangible assets and property, plant and equipment of $600.7 million, $35.9 million, $92.7 million and $200.7 million, respectively. In lieu of amortization, we are required to perform an annual impairment review of both goodwill and indefinite-lived intangible assets. In 2021, 2020 and 2019, none of our goodwill reporting units or our indefinite lived tradenames were impaired. We are also required to perform an impairment review of our long-lived assets if indicators of impairment exist. In 2020, we recognized a pre-tax non-cash impairment charge of $1.4 million related to a long-lived asset and a technology intangible asset in which market value expectations indicated the carrying amounts of these assets were in excess of the fair value. In 2021 and 2019, none of our long-lived assets were impaired.

There can be no assurances that future goodwill, indefinite-lived intangible assets or other long-lived asset impairments will not occur. We perform our annual test for indications of goodwill and indefinite-lived intangible assets impairment in the fourth quarter of our fiscal year or sooner if indicators of impairment exist.

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The loss or financial instability of major customers could have an adverse effect on our results of operations.

In 2021, our top ten customers accounted for approximately 21% of our total net sales with no one customer accounting for more than 10% of our total net sales. Our customers generally are not obligated to purchase any minimum volume of products from us and are able to terminate their relationships with us at any time. In addition, increases in the prices of our products could result in a reduction in orders from our customers. A significant reduction in orders from, or change in terms of contracts with, any significant customers could have a material adverse effect on our future results of operations.

Our credit facility may limit our ability to pay dividends, incur additional debt and make acquisitions and other investments.

Our revolving credit facility contains operational and financial covenants that restrict our ability to make distributions to stockholders, incur additional debt and make acquisitions and other investments unless we satisfy certain financial tests and comply with various financial ratios. If we do not maintain compliance with these covenants, our creditors could declare a default under our revolving credit facility, and our indebtedness could be declared immediately due and payable. Our ability to comply with the provisions of our indebtedness may be affected by changes in economic or business conditions beyond our control. Further, one of our strategies is to increase our revenues and profitability and expand our business through acquisitions. We may require capital in excess of our available cash and the unused portion of our revolving credit facility to make large acquisitions, which we would generally obtain from access to the credit markets. There can be no assurance that if a large acquisition is identified that we would have access to sufficient capital to complete such acquisition. Should we require additional debt financing above our existing credit limit, we cannot be assured such financing would be available to us or available to us on reasonable economic terms

Our inability to attract and retain key personnel may adversely affect our business.

Our success depends on our ability to recruit, retain and develop highly-skilled management and key personnel. Competition for these individuals in our industry is intense and we may not be able to successfully recruit, train or retain qualified personnel, or to effectively implement successions to existing personnel. If we fail to retain and recruit the necessary personnel or arrange for successors to key personnel, our business could materially suffer.

Investment Risk Factors

One of our stockholders can exercise substantial influence over our Company.

As of December 31, 2021, Timothy P. Horne beneficially owned 6,004,290 shares of Class B common stock. Our Class B common stock entitles its holders to ten votes for each share, and our Class A common stock entitles its holders to one vote per share. As of December 31, 2021, Timothy P. Horne beneficially owned approximately 17.9% of our outstanding shares of Class A common stock (assuming conversion of all shares of Class B common stock beneficially owned by Mr. Horne into Class A common stock) and approximately 99.7% of our outstanding shares of Class B common stock, which represents approximately 68.4% of the total outstanding voting power. As long as Mr. Horne controls shares representing at least a majority of the total voting power of our outstanding stock, Mr. Horne will be able to unilaterally determine the outcome of most stockholder votes, and other stockholders will not be able to affect the outcome of any such votes.

Conversion and subsequent sale of a significant number of shares of our Class B common stock could adversely affect the market price of our Class A common stock.

As of December 31, 2021, there were outstanding 27,584,525 shares of our Class A common stock and 6,024,290 shares of our Class B common stock. Shares of our Class B common stock may be converted into Class A common stock at any time on a one for one basis. Under the terms of a registration rights agreement with respect to outstanding shares of our Class B common stock, the holders of our Class B common stock have rights with respect to the registration of the underlying Class A common stock. Under these registration rights, the holders of Class B common stock may require, on up to two occasions that we register their shares for public resale. If we are eligible to use Form S-3 or a similar short-form registration statement, the holders of Class B common stock may require that we register their shares for public resale up to two times per year. If we elect to register any shares of Class A common stock for any public offering, the holders of Class B common stock are entitled to include shares of Class A common stock into which such

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shares of Class B common stock may be converted in such registration. However, we may reduce the number of shares proposed to be registered in view of market conditions. We will pay all expenses in connection with any registration, other than underwriting discounts and commissions. If all of the available registered shares are sold into the public market the trading price of our Class A common stock could decline.

General Risk Factors

Changes in regulations or standards could adversely affect our business.

Our products and business are subject to a wide variety of statutory, regulatory and industry standards and requirements. A significant change to regulatory requirements, whether federal, foreign, state or local, or to industry standards, could substantially increase manufacturing costs, impact the size and timing of demand for our products, or put us at a competitive disadvantage, any of which could harm our business and have a material adverse effect on our financial condition, results of operations and cash flow.

Our operating results could be negatively affected by changes in tax rates, the adoption of new tax legislation, or exposure to additional tax liabilities.

As a global company, we are subject to taxation in numerous countries, states and other jurisdictions. As a result, our effective rate is derived from a combination of applicable tax rates in the various places that we operate. Our future taxes could be affected by numerous factors, including changes in the mix of our profitability from country to country, the results of examinations and audits of our tax filings, adjustments to our uncertain tax positions, changes in accounting for income taxes and changes in tax laws.

In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Significant judgment is required in determining our global provision for income taxes, deferred tax assets or liabilities, and in evaluating our tax positions. Our tax filings are regularly under audit by tax authorities and the ultimate tax outcome may differ from the amounts recorded and may materially affect our financial results in the period or periods for which such determination is made.

Item 1B. UNRESOLVED STAFF COMMENTS.

None.

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Item 2. PROPERTIES.

We maintain 32 principal manufacturing, warehouse and distribution centers worldwide, including our corporate headquarters located in North Andover, Massachusetts. Additionally, we maintain numerous sales offices and other smaller manufacturing facilities and warehouses. The principal properties in each of our three geographic segments and their location, principal use and ownership status are set forth below:

Americas:

Location Principal Use Owned/Leased

North Andover, MA Corporate Headquarters Owned

Burlington, ON, Canada Distribution Center Owned

Export, PA Manufacturing Owned

Franklin, NH Manufacturing/Distribution Owned

St. Pauls, NC Manufacturing Owned

San Antonio, TX Warehouse/Distribution Owned

Spindale, NC Distribution Center Owned

Fort Worth, TX Manufacturing/Distribution Leased

Fort Myers, FL Manufacturing/Distribution Leased

Blauvelt, NY Manufacturing/Distribution Leased

Sparks, NV Distribution Center Leased

Vernon, BC, Canada Manufacturing/Distribution Leased

Woodland, CA Manufacturing Leased

Groveport, OH Distribution Center Leased

Europe:

Location Principal Use Owned/Leased

Biassono, Italy Manufacturing/Distribution Owned

Hautvillers, France Manufacturing Owned

Landau, Germany Manufacturing/Distribution Owned

Plovdiv, Bulgaria Manufacturing Owned

Sorgues, France Distribution Center Owned

Vildbjerg, Denmark Manufacturing/Distribution Owned

Virey-le-Grand, France Manufacturing/Distribution Owned

Rosières, France Manufacturing/Distribution Owned

Gardolo, Italy Manufacturing Owned

Monastir, Tunisia Manufacturing Leased

St. Neots, United Kingdom Distribution Leased

Asia-Pacific, Middle East, and Africa:

Location Principal Use Owned/Leased

Ningbo, Beilun, China Manufacturing Owned

Shanghai, China APMEA Headquarters Leased

Ningbo, Beilun District, China Distribution Center Leased

Auckland, New Zealand Manufacturing/Distribution Leased

Dubai, United Arab Emirates Distribution Leased

Perth, Australia Distribution Leased

Melbourne, Australia Distribution Leased

We believe that our properties, including machinery, tools and equipment, are in good condition, well maintained and adequate and suitable for their intended uses.

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Item 3. LEGAL PROCEEDINGS.

We are from time to time involved in various legal and administrative proceedings. See Item 1. “Business—Product Liability, Environmental and Other Litigation Matters,” and Note 15 of the Notes to Consolidated Financial Statements, both of which are incorporated herein by reference.

Item 4. MINE SAFETY DISCLOSURES.

Not applicable.

PART II

Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our Class A common stock is traded on the New York Stock Exchange under the trading symbol “WTS.”

There is no established public trading market for our Class B common stock, which is held by members of the Horne family. The principal holders of such stock are subject to restrictions on transfer with respect to their shares. Each share of our Class B common stock (10 votes per share) is convertible into one share of Class A common stock (1 vote per share).

The number of record holders of our Class A common stock as of January 23, 2022 was 63. The number of record holders of our Class B common stock as of January 23, 2022 was 10.

Aggregate common stock dividend payments in 2021 were $34.3 million, which consisted of $28.2 million and $6.1 million for Class A shares and Class B shares, respectively. Aggregate common stock dividend payments in 2020 were $31.4 million, which consisted of $25.7 million and $5.7 million for Class A shares and Class B shares, respectively. While we presently intend to continue to pay comparable cash dividends, the payment of future cash dividends depends upon the Board of Directors’ assessment of our earnings, financial condition, capital requirements and other factors.

We satisfy the minimum withholding tax obligation due upon the vesting of shares of restricted stock and the conversion of restricted stock units into shares of Class A common stock by automatically withholding from the shares being issued a number of shares with an aggregate fair market value on the date of such vesting or conversion that would satisfy the withholding amount due.

The following table includes information with respect to shares of our Class A common stock withheld to satisfy withholding tax obligations during the quarter ended December 31, 2021.

Issuer Purchases of Equity Securities

(d) Maximum Number (or

(a) Total (c) Total Number of Approximate Dollar

Number of Shares (or Units) Value) of Shares (or

Shares (or (b) Average Purchased as Part of Units) that May Yet Be

Units) Price Paid per Publicly Announced Purchased Under the

Period Purchased Share (or Unit) Plans or Programs Plans or Programs

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The following table includes information with respect to repurchases of our Class A common stock during the three-month period ended December 31, 2021 under our stock repurchase program.

Issuer Purchases of Equity Securities (1)

(d) Maximum Number (or

(a) Total (c) Total Number of Approximate Dollar

Number of (b) Average Shares (or Units) Value) of Shares (or

Shares (or Price Paid Purchased as Part of Units) that May Yet Be

Units) per Share Publicly Announced Purchased Under the

Period Purchased(1) (or Unit) Plans or Programs Plans or Programs

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Performance Graph

Set forth below is a line graph comparing the cumulative total shareholder return on our Class A common stock for the last five years with the cumulative return of companies on the Standard & Poor’s 500 Stock Index and the Russell 2000 Index. We chose the Russell 2000 Index because it represents companies with a market capitalization similar to that of Watts Water. The graph assumes that the value of the investment in our Class A common stock and each index was $100 at December 31, 2016 and that all dividends were reinvested.

Cumulative Total Return

The above Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

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Item 6. [Reserved]

Not applicable.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

We are a leading supplier of products, solutions and systems that manage and conserve the flow of fluids and energy into, through and out of buildings in the commercial and residential markets in the Americas, Europe and Asia-Pacific, Middle East and Africa (“APMEA”). For over 140 years, we have designed and produced valve systems that safeguard and regulate water systems, energy efficient heating and hydronic systems, drainage systems and water filtration technology that helps purify and conserve water. We earn revenue and income almost exclusively from the sale of our products. Our principal product lines include:

Our business is reported in three geographic segments: Americas, Europe, and APMEA. We distribute our products through four primary distribution channels: wholesale, original equipment manufacturers (OEMs), specialty, and do-it-yourself (DIY).

We believe that the factors relating to our future growth include continued product innovation that meets the needs of our customers and our end markets; our ability to continue to make selective acquisitions, both in our core markets as well as in complementary markets; regulatory requirements relating to the quality and conservation of water and the safe use of water; increased demand for clean water; and continued enforcement of plumbing and building codes. We have completed 12 acquisitions since 2012. Our acquisition strategy focuses on businesses that promote our key macro themes around safety and regulation, energy efficiency and water conservation. We target businesses that will provide us with one or more of the following: an entry into new markets and/or new geographies, improved channel access, unique and/or proprietary technologies, advanced production capabilities or complementary solution offerings.

Our innovation strategy is focused on differentiated products and solutions that will provide greater opportunity to distinguish ourselves in the marketplace. Conversely, we continue to migrate away from commoditized products where we cannot add value. Our goal is to be a solutions provider, not merely a components supplier. We continually look for strategic opportunities to invest in new products and markets or divest existing product lines where necessary in order to meet those objectives.

The Internet of Things has allowed companies to transform components into smart and connected devices. Over the past several years we have been building our smart and connected foundation by expanding our internal capabilities and making strategic acquisitions. Our strategy is to deliver superior customer value through smart and connected products and solutions. This strategy focuses on three dimensions: Connect, Control and Conserve. We intend to introduce

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products that will connect our customers with smart systems, control systems for optimal performance, and conserve critical resources by increasing operability, efficiency and safety.

Products representing a majority of our sales are subject to regulatory standards and code enforcement, which typically require that these products meet stringent performance criteria. We have consistently advocated for the development and enforcement of such plumbing codes. We are focused on maintaining stringent quality control and testing procedures at each of our manufacturing facilities in order to manufacture products in compliance with code requirements and take advantage of the resulting demand for compliant products. We believe that product development, product testing capability and investment in plant and equipment needed to manufacture products in compliance with code requirements, represent a competitive advantage for us.

COVID-19 Pandemic and Supply Chain Disruptions

The COVID-19 pandemic materially impacted our operating results in 2020. The impact was most pronounced during the second quarter of 2020, which was shortly after the World Health Organization declared COVID-19 a global pandemic and government authorities around the world imposed lockdowns and restrictions. However, as the second half of 2020 progressed and government-imposed restrictions subsided, we noted market activity levels increasing with sales and profits improving sequentially from the second to fourth quarters. Profits improved in part from better volumes and in part from the cost actions we executed in response to the pandemic. Results in 2021 continued that trend of improved top line growth and profit performance. However, there are still end markets we serve that may take time to recover, and potential regional COVID-19 outbreaks and associated restrictions may occur that could further impact our operating results.

We remain diligent as a Company to mitigate potential future outbreaks in our facilities by taking precautions to reduce the spread of COVID-19 while maintaining our production capabilities. We continue to focus on the health and safety of our employees by maintaining continuous adherence to social distancing guidelines, temperature monitoring, encouraging vaccinations, enabling remote work and hybrid work schedules where feasible, providing personal protective equipment and providing COVID-19 information, which includes the latest CDC and other government protocols and our Pandemic Plan.

Further, we believe the actions we have taken over the last several years to strengthen our portfolio and increase customer focus, along with aggressively paying down debt, have put us in a strong financial position. We maintain ample liquidity to work through these uncertain times, including the refinancing of our credit facility in the second quarter of 2021, and we continue to invest for the future. Our experienced management team is proactively managing this situation and we are well positioned to respond to challenges presented by the COVID-19 pandemic as they arise.

Our revenues improved in all three geographic segments for 2021 as compared to 2020, primarily driven by the global economic recovery, as well as from incremental price increases. Although, we continue to see recovery in certain markets, future sales expansion or contraction is dependent on the duration and severity of the evolving COVID-19 pandemic. Factors affecting our results include supply chain disruptions, the construction lending markets, investments and capital spending in building services construction markets, labor shortages, additional governmental actions that may or may not be taken, and numerous other uncertainties, including COVID-19 vaccination rates, the impact of virus variants and vaccination efficacy.

As worldwide economies recover from the pandemic, increased market demand is straining suppliers’ ability to fill orders. This has been compounded by logistical issues with respect to container capacity on ships, port congestion and in-road trucking. The global shortage of electronic components like semiconductors and other raw materials continues to challenge our supply chain. We are also experiencing higher transportation costs, including expedited freight cost, as well as rising prices for commodities and other raw materials. Labor shortages and other workforce disruptions have primarily affected our supply chain, manufacturing and distribution processes, as well as our suppliers, including higher absenteeism caused by illness from virus variants or quarantine measures. While we were able to effectively manage these issues during 2021, we cannot predict how supply chain disruptions and related costs may impact our ability to service our customers or the potential impact on our profit margins.

Due to the above circumstances and as described generally in this Form 10-K, our results of operations for the year ended December 31, 2021 are not necessarily indicative of future results. Management cannot predict the full impact of the COVID-19 pandemic on our sales, supply chain disruptions, manufacturing and distribution or on economic conditions generally, including effects on customer spending. The extent of the effects of the COVID-19 pandemic on us

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remains uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic ends. For further information regarding the impact of COVID-19 pandemic and supply chain disruptions on us, see Item 1A, “Risk Factors.”

Financial Overview

Net sales for 2021 increased 19.9%, or $300.6 million, on a reported basis and 17.3%, or $260.1 million, on an organic basis, compared to 2020, primarily driven by the global economic recovery across all of our operating segments, as well as incremental price increases. The reported sales increase included the impact of foreign exchange movements of 2.0%, or $29.9 million, primarily driven by a stronger euro, and a net increase in acquired/divested sales of $10.6 million. Organic sales is a non-GAAP financial measure that excludes the impacts of acquisitions, divestitures and foreign exchange from year-over-year comparisons. Management believes reporting organic sales growth provides useful information to investors, potential investors and others, because it allows for additional insight into underlying sales trends by providing sales growth on a consistent basis. We reconcile the change in organic sales to our reported sales for each region within our results below. Operating income of $239.6 million increased by $58.5 million, or 32.3%, in 2021 compared to 2020. This increase was primarily driven by higher sales volume, price, savings from productivity and restructuring actions, partially offset by higher inflation including logistic and freight costs, investments, incentives and the return of expenses related to business normalization.

Despite the challenges presented by the COVID-19 pandemic and supply chain disruptions in 2021, we continued to drive commercial and operational excellence, invest in our business through capital expenditures, the acquisition discussed in the section below, and invest in product innovation, technology, including our smart and connected products and solutions, and commercial excellence, as we strove to meet the needs of our customers.

Management’s discussion and analysis of our financial condition, results of operations and cash flows as of and for the year ended December 31, 2019 can be found in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Acquisitions

On September 30, 2021, we acquired Sentinel Hydrosolutions, LLC (“Sentinel”) in an all-cash merger transaction. Sentinel is based in Escondido, California, and specializes in the design, marketing and assembly of leak detection products, primarily sold into high-end residential settings. The acquisition of Sentinel expands our product offering in the leak detection market.The acquisition of Sentinel was deemed not to be material.

Recent Developments

On February 4, 2022, Munish Nanda, President of Americas and Europe, provided notice of his intention to retire from the Company. Mr. Nanda has agreed to remain in his current role as President of Americas and Europe until a successor is in place. Mr. Nanda has further agreed that after he has transferred his responsibilities as President of Americas and Europe to a successor, he will remain employed in a different role until May 2023 to assist with the transition and provide advisory services. We expect to enter into a transition and retention agreement with Mr. Nanda to document these arrangements.

On February 7, 2022, the Board of Directors voted unanimously to name Robert J. Pagano, Jr., the Company’s Chief Executive Officer, as the new Chairperson of the Board effective immediately. The Board also voted unanimously to name the former Chairperson of the Board, W. Craig Kissel, as Lead Independent Director. The Company’s Corporate Governance Guidelines prevent any Board member from being renominated for election to the Board after their 72nd birthday, and as such Mr. Kissel will not be eligible to stand for reelection at the 2023 Annual Meeting of Stockholders. The Board decided to make this change now in order to have an orderly transition of responsibilities.

On February 7, 2022, we declared a quarterly dividend of twenty-six cents ($0.26) per share on each outstanding share of Class A common stock and Class B common stock payable on March 15, 2022 to stockholders of record on March 1, 2022.

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Results of Operations

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Net Sales. Our business is reported in three geographic segments: Americas, Europe and APMEA. Our net sales in each of these segments for the years ended December 31, 2021 and December 31, 2020 were as follows:

Year Ended Year Ended % Change to

December 31, 2021 December 31, 2020 Consolidated

Net Sales % Sales Net Sales % Sales Change Net Sales

(dollars in millions)

The change in net sales was attributable to the following:

Change As a % Change As a %

of Consolidated Net Sales of Segment Net Sales

(dollars in millions)

Our products are sold to wholesalers, OEMs, DIY chains, and through various specialty channels. The change in organic net sales by channel was attributable to the following:

Change As a %

of Prior Year Sales

Wholesale OEMs DIY Specialty Total Wholesale OEMs DIY Specialty

(dollars in millions)

Organic net sales in the Americas increased primarily due to higher volume and price in all of our channels. The higher volume in 2021 was primarily supported by the global economic recovery, as well as strong repair and replacement activity and the positive impact on our wholesale and DIY channels from the February 2021 severe weather freeze in the South-Central U.S. We estimate the impact of the severe weather freeze drove approximately 3% of incremental sales for the region in 2021.

Organic net sales in Europe increased primarily due to higher volume and price, with volume growth in most regions in 2021 driven by the global economic recovery. More specifically, net sales increased due to higher demand in our plumbing products within the French wholesale market, in our HVAC products within the Italy and Germany OEM markets driven by government energy incentives, and due to the recovery in our marine-based drains products in the second half of 2021.

Organic net sales in APMEA increased primarily due to higher volumes in China, Australia, New Zealand and the Middle East, primarily from the global economic recovery. The sales growth in China was primarily driven by higher demand for commercial valves within data centers.

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The net increase in sales due to foreign exchange was primarily due to the appreciation of the euro against the U.S. dollar in 2021. We cannot predict whether foreign currencies will appreciate or depreciate against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our net sales.

The change in net sales due to acquisitions/divestitures relates to three immaterial acquisitions, one in the APMEA segment in the third quarter of 2020, one in the Americas segment in the fourth quarter of 2020 and one in the Americas segment in the fourth quarter of 2021, partially offset by an immaterial divestiture in our APMEA segment during the third quarter of 2020.

Gross Profit. Gross profit and gross profit as a percent of net sales (gross margin) for 2021 and 2020 were as follows:

Year Ended December 31,

(dollars in millions)

Gross profit and gross margin increased primarily from higher sales volume, price and productivity savings, partially offset by material and labor costs inflation, higher logistic and freight costs to expedite components and product, and the return of expenses related to business normalization.

Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses increased $75.8 million, or 17.5%, in 2021 compared to 2020. The increase in SG&A expenses was attributable to the following:

(in millions) % Change

Foreign exchange 7.3 1.7

Acquired/divested, net 6.5 1.5

The organic increase was primarily due to higher variable costs from the higher sales volume of $21.3 million, an increase in short-term and long-term compensation costs of $20.1 million based on expected attainment levels, an increase in investments of $17.8 million, including new products, commercial excellence, and technology, the return of expenses related to business normalization of $10.8 million, increased general inflation of $5.5 million, as well as product liability and insurance costs of $3.1 million compared to 2020. These increases were partially offset by $18.2 million due to productivity and restructuring savings. The increase in foreign exchange was mainly due to the appreciation of the euro against the U.S. dollar. The acquired/divested, net SG&A costs related to three immaterial acquisitions, partially offset by SG&A costs related to an immaterial divestiture. Total SG&A expenses, as a percentage of sales, were 28.1% in 2021 compared to 28.7% in 2020.

Restructuring.In 2021, we recorded a net restructuring charge of $19.3 million, primarily for costs related to a 2021 French restructuring program that was approved in the second quarter of 2021. For a more detailed description of our current restructuring plans, see Note 3 of Notes to Consolidated Financial Statements in this Annual Report Form 10-K.

Other long-lived asset impairment charges.In 2020, we recorded impairment charges of $1.4 million in our Americas segment, primarily relating to $1.0 million for a long-lived asset impairment charge and $0.4 million related to a technology intangible asset in which market value expectations indicated the carrying amounts of these assets were in excess of the fair value.

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Operating Income (Loss). Operating income (loss) by geographic segment for 2021 and 2020 was as follows:

% Change to

Consolidated

Year Ended December 31, Operating

(dollars in millions)

The increase (decrease) in operating income (loss) is attributable to the following:

Change As a % of Change As a % of

(dollars in millions)

The increase in organic operating income was due to higher sales volume, price, savings from productivity initiatives and restructuring actions in response to the COVID-19 pandemic. These increases were partially offset by material and labor costs inflation, higher logistics and freight costs, the return of expenses related to business normalization, compensation costs and investments.

Interest Expense.Interest expense decreased $7.0 million, or 52.6%, in 2021 as compared to 2020 primarily due to a decline in interest rates as well as a reduction in the principal balance of debt outstanding. Refer to Note 11 of Notes to

Consolidated Financial Statements in this Annual Report on Form10-K for further details.

Other (income) expense, net. Other (income) expense increased $1.8 million to an income balance of $0.8 million compared to 2020. The increase was primarily due to more favorable net foreign currency transaction gains.

Income Taxes.Our effective income tax rate decreased to 29.2% in 2021, from 31.6% in 2020. The tax rate decreased primarily because the inclusion of an increase in the valuation allowance in the prior year income tax rate as a result of 2020 final tax regulations, which was partially offset by the net tax adjustment related to the restructuring of our Mexican manufacturing supply chain operations.

Net Income.Net income for 2021 was $165.7 million, or $4.88 per common share on a diluted basis, compared to $114.3 million, or $3.36 per common share on a diluted basis, for 2020. Results for 2021 include an after-tax charge of $14.1 million, or $0.42 per common share, for restructuring and $7.2 million, or $0.22 per common share, for an income tax adjustment related to the restructuring of our Mexican manufacturing supply chain operations.

Results for 2020 include an after-tax charge of $7.4 million, or $0.22 per common share, for restructuring; $9.7 million, or $0.28 per common share, for changes in tax regulations; $1.0 million, or $0.03 per common share, for other long-lived asset impairment charges; $1.0 million, or $0.03 per common share, for acquisition related costs; $0.8 million, or $0.02 per common share, for footprint optimization; partially offset by a $1.5 million benefit, or $0.04 per share for the elimination of an earnout from a prior immaterial acquisition in our Americas segment, and $0.7 million, or $0.02 per common share of a net gain on disposal.

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Liquidity and Capital Resources

2021 Cash Flows

We generated $180.8 million of net cash from operating activities in 2021 as compared to $228.8 million in 2020. The decrease in cash generated was primarily due to a proactive decision to increase inventory in response to a combination of strong market demand and disrupted supply chains, partially offset by higher net income.

We used $30.7 million of net cash for investing activities in 2021 compared to $54.8 million used in 2020. We spent $17.1 million less on capital expenditures and $6.1 million less for acquisitions in 2021 compared to 2020. We received $5.1 million in cash proceeds from the sale of property, plant and equipment in 2021.

We used $118.6 million of net cash from financing activities in 2021 primarily due to long-term debt repayments of $95.0 million, dividend payments of $34.3 million, tax withholding payments on vested stock awards of $9.6 million and payments of $16.0 million to repurchase approximately 110,000 shares of Class A common stock. These payments were partially offset by proceeds from drawdowns on our line of credit totaling $40.0 million.

On March 30, 2021, we and certain of our subsidiaries entered into a Second Amended and Restated Credit Agreement (the “Second Amended Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent. The Second Amended Credit Agreement amends and restates the Amended Credit Agreement (defined below) to extend the maturity date of the $800 million senior unsecured revolving credit facility from February 12, 2022 to March 30, 2026. Among other changes, the Second Amended Credit Agreement increases our maximum consolidated leverage ratio (including both the base ratio and the ratio permitted during temporary step-ups following certain acquisitions), adjusts certain fees to reflect market conditions and reduces the 1.00% floor on the adjusted LIBOR rate to 0.00%.The senior unsecured revolving credit facility under the Second Amended Credit Agreement (the " New Revolving Credit Facility") also includes sublimits of $100 million for letters of credit and $15 million for swing line loans. As of December 31, 2021, we had drawn down $145.0 million on this line of credit and had $14.0 million in letters of credit outstanding, which resulted in $641.0 million of unused and available credit under the New Revolving Credit Facility. Borrowings outstanding under the New Revolving Credit Facility bear interest at a fluctuating rate per annum equal to an applicable percentage defined as (i) in the case of Eurocurrency rate loans, the adjusted British Bankers Association LIBOR rate plus an applicable percentage, ranging from 1.075% to 1.325%, determined by reference to our consolidated leverage ratio, or (ii) in the case of alternate base rate loans and swing line loans, interest (which at all times will not be less than 1.00%) at the greatest of (a) the Prime Rate in effect on such day, (b) the FRBNY Rate in effect on such day plus 0.50% and (c) the adjusted LIBOR rate plus 1.00% for a one month interest period in dollars. The weighted average interest rate on debt outstanding under the New Revolving Credit Facility as of December 31, 2021 was 1.17%. The weighted average interest rate on debt outstanding inclusive of the interest rate swap discussed in Note 5 of the Notes to Consolidated Financial Statements and interest rates under the New Revolving Credit Facility as of December 31, 2021 was 1.82%. In addition to paying interest under the Second Amended Credit Agreement, we are also required to pay certain fees in connection with the New Revolving Credit Facility, including, but not limited to, an unused facility fee and letter of credit fees. The Second Amended Credit Agreement matures on March 30, 2026, subject to extension under certain circumstances and subject to the terms of the Second Amended Credit Agreement. We may repay loans outstanding under the Second Amended Credit Agreement from time to time without premium or penalty, other than customary breakage costs, if any, and subject to the terms of the Second Amended Credit Agreement. As of December 31, 2021, we were in compliance with all covenants related to the Second Amended Credit Agreement.

On April 24, 2020, we and certain of our subsidiaries entered into the Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender and Letter of Credit Issuer, and the other lenders referred to therein (the “Amended Credit Agreement”). The Amended Credit Agreement amended and restated the previous Credit Agreement (the “Prior Credit Agreement”) in its entirety while increasing the amount of revolving credit available from $500 million to $800 million and extending the maturity by one additional year to February 2022. The senior unsecured revolving credit facility (the “Revolving Credit Facility”) also included sublimits of $100 million for letters of credit and $15 million for swing line loans. The term loan facility under the Prior Credit Agreement was terminated and paid off effective April 24, 2020. Borrowings outstanding under the Revolving Credit Facility bore interest at a fluctuating rate per annum equal to an applicable percentage defined as (i) in the case of Eurocurrency rate loans, the adjusted British Bankers Association LIBOR rate (which at all times was not less than 1.00%) plus an applicable percentage, ranging from 1.50% to 2.10%, determined by reference to our consolidated leverage ratio, or (ii) in the case of alternate base rate loans and swing line loans, interest (which at all times was not less than 2.00%) at the

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greatest of (a) the Prime Rate in effect on such day, (b) the FRBNY Rate in effect on such day plus 0.50% and (c) the adjusted LIBOR rate plus 1.00% for a one month interest period in dollars.

As of December 31, 2021, we held $242.0 million in cash and cash equivalents. Of this amount, $195.9 million was held by foreign subsidiaries.Our U.S. operations typically generate sufficient cash flows to meet our domestic obligations. However, if we did have to borrow to fund some or all of our expected cash outlays, we can do so at reasonable interest rates by utilizing the undrawn borrowings under our New Revolving Credit Facility. We believe that our financial resources allow us to manage the anticipated impacts of the COVID-19 pandemic on our business operations for the foreseeable future. We anticipate the impacts of COVID-19 will continue to evolve, and, as a result we will continue to evaluate our financial position as additional information becomes available, particularly relating to COVID-19. Subsequent to recording the Toll Tax as part of the Tax Cuts and Jobs Act of 2017, our intent is to permanently reinvest undistributed earnings of foreign subsidiaries, and we do not have any current plans to repatriate post-Toll Tax foreign earnings to fund operations in the United States. However, if amounts held by foreign subsidiaries were needed to fund operations in the United States, we could be required to accrue and pay taxes to repatriate these funds. Such charges may include potential state income taxes and other tax charges.

Covenant Compliance

Under the Second Amended Credit Agreement, we are required to satisfy and maintain specified financial ratios and other financial condition tests as of December 31, 2021. 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 Second Amended Credit Agreement. The Second Amended Credit Agreement defines Consolidated EBITDA to exclude unusual or non-recurring charges and gains. We are also required to maintain a consolidated leverage ratio of consolidated funded debt to Consolidated EBITDA. Consolidated funded debt, as defined in the Second Amended Credit Agreement, includes all long and short-term debt, finance lease obligations and any trade letters of credit that are outstanding, less cash and cash equivalents on the balance sheet.

As of December 31, 2021, our actual financial ratios calculated in accordance with the Second Amended Credit Agreement compared to the required levels under the Second Amended Credit Agreement were as follows:

Actual Ratio Required Level

Minimum level

Maximum level

As of December 31, 2021, we were in compliance with all covenants related to the Second Amended Credit Agreement.

In addition to financial ratios, the Second Amended Credit Agreement contains affirmative and negative covenants that include limitations on disposition or sale of assets, prohibitions on assuming or incurring any liens on assets with limited exceptions and limitations on making investments other than those permitted by the agreement.

Working capital (defined as current assets less current liabilities) as of December 31, 2021 was $453.0 million compared to $396.7 million as of December 31, 2020. The ratio of current assets to current liabilities was 2.1 to 1 as of December 31, 2021 compared to 2.3 to 1 as of December 31, 2020. The increase in working capital is primarily related to the increase in inventory as a result of the supply chain disruptions.

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Material Cash Requirements

We expect existing cash and cash equivalents and cash flows from operations and financing activities to be sufficient to meet our cash needs for the next 12 months and thereafter for the foreseeable future.

We anticipate investing between $40 million to $50 million in capital expenditures in the next 12 months to improve our manufacturing capabilities and invest in technology and other commercial and operational excellence initiatives.

We anticipate spending approximately $15 million in the next 12 months related to the French restructuring program that was approved in 2021. For a more detailed description of our current restructuring plans, see Note 3 of Notes to Consolidated Financial Statements in this Annual Report Form 10-K.

We intend to continue to repurchase shares of Class A common stock consistent with prior years. The repurchases are executed from time to time on the open market or in privately negotiated transactions. The timing and number of shares repurchased will be determined based on our evaluation of market conditions and other factors, see Note 12 of Notes to Consolidated Financial Statements in this Annual Report Form 10-K.

While we presently intend to continue to pay comparable quarterly cash dividends on both Class A and B common stock, the payment of future cash dividends depends upon the Board of Directors’ assessment of our earnings, financial condition, capital requirements and other factors.

We maintain letters of credit that guarantee our performance or payment to third parties in accordance with specified terms and conditions. Amounts outstanding were approximately $14.0 million as of December 31, 2021 and $16.2 million as of December 31, 2020. Our letters of credit are primarily associated with insurance coverage and, to a lesser extent, foreign purchases and generally expire within one year of issuance. These instruments may exist or expire without being drawn down; therefore, they do not necessarily represent future cash flow obligations.

Our contractual obligations as of December 31, 2021 are presented in the following table:

Next Beyond

Contractual Obligations Total 12 Months 12 Months

(in millions)

Operating lease obligations(b) 60.0 10.4 49.6

Finance lease obligations(c) 3.6 1.4 2.2

Pension contributions(d) 9.2 0.5 8.7

2017 Tax Act Toll Tax payable(f) 18.7 — 18.7

Capital expenditures(g) 6.8 6.8 —

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We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Non-GAAP Financial Measures

In accordance with the SEC's Regulation G and Item 10(e) of Regulation S-K, the following provides definitions of the non-GAAP measures used by management. We believe that these measures enhance the overall understanding of underlying business results and trends. These non-GAAP measures are not intended to be considered by the user in place of the related GAAP measure, but rather as supplemental information to more fully understand our business results. These non-GAAP measures may not be the same as similar measures used by other companies due to possible differences in method and in the items or events being adjusted.

Organic net sales growth is a non-GAAP measure of net sales growth that excludes the impacts of acquisitions, divestitures and foreign exchange from period-over-period comparisons. A reconciliation to the most closely related U.S. GAAP measure, net sales, has been included in our discussion within “Results of Operations” above. Organic net sales should be considered in addition to, and not as a replacement for or as a superior measure to net sales. Management believes reporting organic sales growth provides useful information to investors, potential investors and others, by facilitating easier comparisons of our revenue performance with prior and future periods.

Adjusted operating income, adjusted operating margins, adjusted net income, and adjusted earnings per share are non-GAAP measures that exclude certain expenses incurred and benefits recognized in the periods presented that relate primarily to our global restructuring programs, other long-lived asset impairment charges, professional fees, acquisition related costs, footprint optimization costs, an earnout adjustment, loss on disposal, and the related income tax impacts on these items and other tax adjustments. Management believes reporting these financial measures provides useful information to investors, potential investors and others, by facilitating easier comparisons of our performance with prior and future periods.

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A reconciliation of U.S. GAAP results to these adjusted non-GAAP measures is provided below (dollars in millions, except per share amounts):

Year Ended

December 31, December 31,

Operating income - as reported 239.6 181.1

Operating margin % 13.2% 12.0%

Adjustments for special items:

Restructuring 19.3 9.9

Footprint optimization — 1.1

Acquisitions / divesture costs / adjustments:

- Other long-lived asset impairment charge — 1.4

- Acquisition related costs — 1.3

- Loss on disposal — 0.6

- Earnout adjustment — (1.5)

Total acquisitions / divesture costs / adjustments — 1.8

Total adjustments for special items $ 19.3 $ 12.8

Operating income - as adjusted $ 258.9 $ 193.9

Adjusted operating margin % 14.3% 12.9%

Net income - as reported $ 165.7 $ 114.3

Adjustments for special items - tax effected:

Restructuring 14.1 7.4

Footprint optimization — 0.8

Tax adjustments 7.2 9.7

Acquisitions / divesture costs / adjustments:

- Other long-lived asset impairment charge — 1.0

- Acquisition related costs — 1.0

- Net gain on disposal — (0.7)

- Earnout adjustment — (1.5)

Total acquisitions / divesture costs / adjustments — (0.2)

Total adjustments for special items - tax effected: $ 21.3 $ 17.7

Net income as adjusted $ 187.0 $ 132.0

Diluted earnings per share - as reported $ 4.88 $ 3.36

Adjustments for special items 0.64 0.52

Diluted earnings per share - as adjusted $ 5.52 $ 3.88

Free cash flow is a non-GAAP measure that does not represent cash generated from operating activities in accordance with U.S. GAAP. Therefore, it should not be considered an alternative to net cash provided by operating activities as an indication of our performance. The cash conversion rate of free cash flow to net income is also a measure of our performance in cash flow generation. We believe free cash flow to be an appropriate supplemental measure of our operating performance because it provides investors with a measure of our ability to generate cash, repay debt, pay dividends, repurchase stock and fund acquisitions.

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A reconciliation of net cash provided by operating activities to free cash flow and calculation of our cash conversion rate is provided below:

Year Ended December 31,

(in millions)

Net cash provided by operating activities $ 180.8 $ 228.8

Less: additions to property, plant, and equipment (26.7) (43.8)

Plus: proceeds from the sale of property, plant, and equipment 5.1 2.2

Net income —as reported $ 165.7 $ 114.3

Cash conversion rate of free cash flow to net income 96.1 % 163.8 %

Our free cash flow declined in 2021 when compared to 2020 primarily driven by a proactive decision to increase inventory in response to a combination of strong market demand and disrupted supply chains, partially offset by higher net income and lower net capital expenditures.

Our net debt to capitalization ratio, a non-GAAP financial measure used by management, at December 31, 2021 was (9.3)% for 2021 compared to (2.0)% in 2020. The decrease was driven by an increase in net cash outstanding of $23.1 million and a reduction of debt outstanding of $56.3 million at December 31, 2021 compared to December 31, 2020. Management believes the net debt to capitalization ratio is an appropriate supplemental measure because it helps investors understand our ability to meet our financing needs and serves as a basis to evaluate our financial structure. Our computation may not be comparable to other companies that may define their net debt to capitalization ratios differently.

A reconciliation of long-term debt (including current portion) to net debt and our net debt to capitalization ratio is provided below:

December 31,

(in millions)

Current portion of long‐term debt $ — $ —

Plus: long-term debt, net of current portion 141.9 198.2

Less: cash and cash equivalents (242.0) (218.9)

A reconciliation of capitalization is provided below:

December 31,

(in millions)

Net debt to capitalization ratio (9.3) % (2.0) %

Application of Critical Accounting Policies and Key Estimates

The preparation of our consolidated financial statements in accordance with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported. A critical accounting estimate is an assumption about highly uncertain matters and could have a material effect on the consolidated financial statements if another, also reasonable, amount were used, or, a change in the estimate is reasonably likely from period to period. We base our assumptions on historical experience and on other estimates that we believe are reasonable under the circumstances. Actual results could differ significantly from these estimates. There were no significant changes in our accounting policies or significant changes in our accounting estimates during 2021.

We periodically discuss the development, selection and disclosure of the estimates with our Audit Committee. Management believes the following critical accounting policies reflect our more significant estimates and assumptions.

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Revenue recognition

We recognize revenue under the core principle to depict the transfer of control to our customers in an amount reflecting the consideration to which we expect to be entitled. In order to achieve that core principle, we apply the following 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. When determining the transaction price of each contract, we consider contractual consideration payable by the customer and variable consideration that may affect the total transaction price. Variable consideration, consisting of early payment discounts, rebates and other sources of price variability, are included in the estimated transaction price based on both customer-specific information as well as historical experience. We regularly review our estimates of variable consideration on the transaction price and recognize changes in estimates on a cumulative catch-up basis as if the most current estimate of the transaction price adjusted for variable consideration had been known as of the inception of the contract.

Our 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 of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for further disclosures and detail regarding revenue recognition.

Inventory valuation

WTS US Equity

WTS · 10-K · period ended 2021-12-31

Item 1A. RISK FACTORS.

Item 1B. UNRESOLVED STAFF COMMENTS.

Item 2. PROPERTIES.

Item 3. LEGAL PROCEEDINGS.

Item 4. MINE SAFETY DISCLOSURES.

Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Item 6. [Reserved]

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

WTS US Equity☆

WTS · 10-K · period ended 2021-12-31

Item 1A. RISK FACTORS.

Item 1B. UNRESOLVED STAFF COMMENTS.

Item 2. PROPERTIES.

Item 3. LEGAL PROCEEDINGS.

Item 4. MINE SAFETY DISCLOSURES.

Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Item 6. [Reserved]

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

WTS US Equity