Watts Water Tops Q3 Earnings on Volume Gain in North America - Analyst Blog

Watts Water Technologies, Inc. (WTS) reported third-quarter 2014 adjusted earnings of 70 cents, a 21% year-over-year improvement, driven by increased volumes in America, cost savings realized in the EMEA as part of its restructuring and transformation efforts and more stable manufacturing in its lead free foundry. Earnings beat the Zacks Consensus Estimate by a penny. Shares of the company went up 3.6% on upbeat results.
    
On a reported basis, including special items, earnings in the quarter were 64 cents per share against 49 cents in the year-ago quarter.
 

Total revenue edged up 1% year over year to $376 million but failed to match the Zacks Consensus Estimate of $387 million. The company reported organic sales growth of 1.2% in the quarter driven by improvement in the Americas (4.1%) and Asia-Pacific (27.9%), countered by decline of 5.1% in organic sales in Europe, Middle East and Africa (EMEA).

Cost and Margins

Cost of sales remained flat with the year-ago quarter at $238 million. Gross profit increased 3% to $138 million. Gross margin expanded 70 basis points (bps) to 36.7% in the quarter. Selling, general and administrative expenses declined 6% year over year to $95 million. Adjusted operating profit increased 26% to $43.8 million from $34.9 million in the year-ago quarter. Adjusted operating margin expanded 220 basis points to 11.6%

Segment Performance

North America: Net sales grew 4% to $229 million, aided by organic sales growth of 4.1%. Adjusted operating profit increased 47% to $33.4 million.

EMEA: Net sales decreased 4% year over year to $136 million. Adjusted operating profit declined 1% to $16.2 million from the year-ago operating income of $16.4 million, benefitting from cost control efforts and restructuring efforts despite lower sales volume.

Asia: Net sales increased 28% to $11 million from $9 million in the prior-year quarter. The segment continues to expand its presence in specific regions within China, which led to the sales expansion of valves and heating product offerings. Adjusted operating profit declined 15% to $1.7 million from $2 million in the year-earlier quarter.
 
Financial Performance

Watts Water ended the quarter with cash and cash equivalents of $272 million, down from $268 million as of 2013 end. Cash provided from operating activities was $74 million in the first nine-month period of fiscal 2014 compared with $68 million in the prior-year period.

Long-term debt, excluding current portion of the company, was at $304 million as of Sep 30, 2014 compared with $306 million as of Dec 31, 2012. Debt-to-capitalization ratio increased to 24% as of Sep 30, 2014 from 23.5% as of Dec 31, 2013. Watts Water repurchased 149,000 of its shares during the third quarter, at a cost of $9.1 million, as part of the previously announced $90 million share repurchase program. So far in the current fiscal, Watts Water has purchased $29.1 million worth of its common stock.

Our View

The company will benefit from growth in new residential construction, repair and replace activity, along with commercial recovery in North America and expansion into the Chinese markets. Even though the transformation program and restructuring actions in Europe will lead to cost savings, volumes will remain weak.

Watts Water, which operates through its subsidiaries, is a leading manufacturer of innovative products that control the efficiency, safety and quality of water within applications (residential, commercial, and institutional).

At present, Watts Water carries a Zacks Rank #4 (Sell). Some better-ranked stocks to consider in the same industry include Roper Industries Inc. (ROP) and Thermon Group Holdings, Inc. (THR), both of which hold a Zacks Rank #2 (Buy).

Peer Performance

Badger Meter Inc. (BMI) reported record third-quarter 2014 earnings per share of 71 cents, up 12.7% year over year and ahead of the the Zacks Consensus Estimate of 68 cents, driven by higher sales of municipal water products and flow instrumentation products.