Market Overview

Watts Water Technologies Reports Record Second Quarter Results

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  • Reported record sales of $408 million, up 8%
  • Organic sales growth +5%, foreign exchange +3%
  • 2Q operating margin of 12.8%; up 100 bps on GAAP basis, up 30 bps
    on adjusted basis
  • Record EPS of $1.05, up 33% on GAAP basis, up 27% on adjusted basis
  • Raising full year 2018 organic sales growth outlook

Watts Water Technologies, Inc. (NYSE:WTS) today announced second
quarter 2018 results.

Commenting on operating results, Chief Executive Officer Robert J.
Pagano Jr., said, "We continued to drive strong top-line growth and
productivity during the quarter, especially in the Americas. This
enabled us to deliver record sales, adjusted operating margin and EPS.
For the first half of 2018, we delivered 5% organic growth, double digit
earnings growth and strong operating margin. We are raising our full
year organic sales growth outlook given results to date and our
prospects for the second half of 2018."

Sales during the second quarter of $408 million increased 8% compared to
the same period in 2017. Second quarter net income per diluted share
(EPS) on both a GAAP and adjusted basis was $1.05, as compared to $0.79
on a GAAP basis and $0.83 on an adjusted basis for the prior-year
period. EPS improved due to volume and productivity, a lower effective
tax rate, lower non-operating expense and favorable foreign exchange. A
summary of second quarter financial results is as follows:

                   
           
(In millions, except per share information) Second quarter ended

July 1,
2018

July 2,
2017

% Change
 
Sales $ 407.9 $ 378.5 8 %
 
Net income $ 36.0 $ 27.2 32 %
 
Diluted earnings per share $ 1.05 $ 0.79 33 %
 
Special items - 0.04
 
Adjusted earnings per share $ 1.05 $ 0.83 27 %
                         
 

Financial Highlights

  • Organic sales increased 5% compared to the second quarter last year;
    adjusted operating margin expanded 30 basis points. From a regional
    perspective:
    • Americas' organic sales increased 8% with wide-ranging growth in
      plumbing, water quality and heating and hot water products. Sales
      growth benefited from strong end-market demand and from customers
      pre-buying products due to the announced July price increases.
      Adjusted operating margin increased 70 basis points as benefits
      from volume and productivity were partially offset by growth
      investments and increased commodity and transportation costs.
    • Europe's organic sales declined 2% with growth in drains more than
      offset by a decline in water, plumbing and HVAC products. Adjusted
      operating margin decreased 80 basis points driven by the volume
      reduction, sales mix, commodity cost increases and incremental
      investments.
    • APMEA's organic sales increased 5%, which included a 6% headwind
      for planned product rationalization. Our product rationalization
      efforts represent the exit of low-margin, non-core products.
      Stronger sales in the Middle East, New Zealand and commercial
      valves in China offset continued softness in China's residential
      heating market. Adjusted operating margin decreased 470 basis
      points, driven by FX headwinds and incremental growth investments.
  • For the first six months of 2018, operating cash flow was $1 million,
    net capital expenditures were $15 million and free cash outflow was
    approximately $14 million. In the comparable period last year,
    operating cash flow was $9 million, net capital expenditures were
    approximately $11 million and free cash outflow was approximately $2
    million. Free cash outflow increased due to increased inventory, tax
    payments and capital expenditure outlays. We expect continued
    improvement in free cash flow during the second half of 2018, due to
    normal seasonality.
  • The Company repatriated $39 million in cash during the second quarter.
    For the first six months of 2018, $110 million has been repatriated, a
    majority of which was used to pay down revolving debt.
  • The Company repurchased approximately 59,000 shares of Class A common
    stock at a cost of approximately $4.5 million during the second
    quarter. For the first six months of 2018, we have purchased
    approximately 139,000 shares at a cost of approximately $11 million,
    which offset dilution from our stock compensation programs.

For a reconciliation of GAAP to non-GAAP items and a statement regarding
the usefulness of these measures to investors and management in
evaluating our operating performance, please see the tables attached to
this press release.

Watts Water Technologies, Inc. will hold a live web cast of its
conference call to discuss second quarter results for 2018 on Thursday,
August 2, 2018, at 9:00 a.m. Eastern Time. This press release and the
live web cast can be accessed by visiting the Investors section of the
Company's website at www.wattswater.com. Following the web cast, an
archived version of the call will be available at the same address until
August 2, 2019.

Watts Water Technologies, Inc., through its subsidiaries, is a world
leader in the manufacture of innovative products to control the
efficiency, safety, and quality of water within residential, commercial,
and institutional applications. Watts's expertise in a wide variety of
water technologies enables it to be a comprehensive supplier to the
water industry.

This Press Release includes "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995, including
statements relating to our long-term growth strategy and our 2018
outlook, including full year organic sales growth and free cash flow
improvements during the second half of 2018. These forward-looking
statements reflect our current views about future events. You should not
rely on forward-looking statements because our actual results may differ
materially from those predicted as a result of a number of potential
risks and uncertainties. These potential risks and uncertainties
include, but are not limited to: the final impact of the 2017 Tax Cuts
and Jobs Act; the timing and expected impact of proposed tariffs, the
effectiveness, the timing and the expected savings associated with our
restructuring and transformation programs and initiatives; current
economic and financial conditions, which can affect the housing and
construction markets where our products are sold, manufactured and
marketed; shortages in and pricing of raw materials and supplies; our
ability to compete effectively; changes in variable interest rates on
our borrowings; failure to expand our markets through acquisitions;
failure to successfully develop and introduce new product offerings or
enhancements to existing products; failure to manufacture products that
meet required performance and safety standards; foreign exchange rate
fluctuations; cyclicality of industries where we market our products,
such as plumbing and heating wholesalers and home improvement retailers;
environmental compliance costs; product liability risks; changes in the
status of current litigation; and other risks and uncertainties
discussed under the heading "Item 1A. Risk Factors" and in Note 15 of
the Notes to the Consolidated Financial Statements in our Annual Report
on Form 10-K for the year ended December 31, 2017 filed with the SEC and
our subsequent filings with the SEC. We undertake no duty to update the
information contained in this Press Release, except as required by law.

               
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS

(Amounts in millions, except
per share information)

(Unaudited)
 
Second Quarter Ended Six Months Ended
July 1,
2018
July 2,
2017
July 1,
2018
July 2,
2017
Net sales $ 407.9 378.5 786.4 725.7
Cost of goods sold   238.5     221.8   460.3   425.2  
GROSS PROFIT 169.4 156.7 326.1 300.5
Selling, general and administrative expenses 117.2 110.2 230.0 217.8
Restructuring   -     1.7   -   2.2  
OPERATING INCOME   52.2     44.8   96.1   80.5  
Other (income) expense:
Interest income (0.1 ) (0.2 ) (0.5 ) (0.4 )
Interest expense 4.4 5.0 8.7 9.8
Other (income) expense, net   (1.8 )   0.2   (1.1 ) 0.5  
Total other expense   2.5     5.0   7.1   9.9  
INCOME BEFORE INCOME TAXES 49.7 39.8 89.0 70.6
Provision for income taxes   13.7     12.6   24.8   21.7  
NET INCOME $ 36.0   $ 27.2   64.2   48.9  
 
BASIC EPS
NET INCOME PER SHARE $ 1.05     0.79   1.87   1.42  
Weighted average number of shares   34.4     34.5   34.4   34.5  
DILUTED EPS
NET INCOME PER SHARE $ 1.05     0.79   1.87   1.42  
Weighted average number of shares   34.4     34.5   34.4   34.5  
Dividends declared per share $ 0.21   $ 0.19   0.40   0.37  
 
       
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS

(Amounts in millions, except share
information)

(Unaudited)
 
 
ASSETS July 1,
2018
December 31,
2017
CURRENT ASSETS:
Cash and cash equivalents $ 142.6 $ 280.2
Trade accounts receivable, less allowance for doubtful accounts of
$15.7
million at July 1, 2018 and $14.3 million at December 31, 2017
248.2 216.1
Inventories, net:
Raw materials 88.5 81.8
Work in process 19.8 17.5
Finished goods   173.9     159.8  
Total Inventories 282.2 259.1
Prepaid expenses and other current assets 34.7 26.7
Assets held for sale   1.4     1.5  
Total Current Assets   709.1     783.6  
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 529.0 525.8
Accumulated depreciation   (332.8 )   (327.3 )
Property, plant and equipment, net   196.2     198.5  
OTHER ASSETS:
Goodwill 546.5 550.5

Intangible assets, net

174.3

185.2

Deferred income taxes

2.0

1.6
Other, net   19.2     17.1  
TOTAL ASSETS $ 1,647.3   $ 1,736.5  
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 120.1 $ 123.8

Accrued expenses and other liabilities

116.5

125.8
Accrued compensation and benefits 46.4 55.3

Current portion of long-term debt

  26.2     22.5  

Total Current Liabilities

  309.2     327.4  
LONG-TERM DEBT, NET OF CURRENT PORTION 383.0 474.6
DEFERRED INCOME TAXES 49.5 55.2
OTHER NONCURRENT LIABILITIES 47.4 50.3
 
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.10 par value; 5,000,000 shares authorized;
no
shares issued or outstanding
- -
Class A common stock, $0.10 par value; 80,000,000 shares authorized;
1
vote per share; issued and outstanding: 27,803,429 shares at July 1,
2018
and 27,724,192 shares at December 31, 2017
2.8 2.8
Class B common stock, $0.10 par value; 25,000,000 shares authorized;
10
votes per share; issued and outstanding: 6,329,290 shares at July 1,
2018
and 6,379,290 at December 31, 2017
0.6 0.6
Additional paid-in capital 559.6 551.8
Retained earnings 407.4 372.9
Accumulated other comprehensive loss   (112.2 )   (99.1 )

Total Stockholders' Equity

  858.2     829.0  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,647.3   $ 1,736.5  
 
       
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS

(Amounts in millions)
(Unaudited)
Six Months Ended
July 1,
2018
July 2,
2017
OPERATING ACTIVITIES
Net income $ 64.2 $ 48.9
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 14.3 14.6
Amortization of intangibles 10.7 11.1
Loss on disposal, impairment of intangibles, property, plant and
equipment, and other
- 0.6
Stock-based compensation 6.3 6.9
Deferred income tax (5.3 ) 2.3
Changes in operating assets and liabilities, net of effects
from
business acquisitions and divestitures:
Accounts receivable (35.2 ) (41.5 )
Inventories (27.4 ) (13.1 )
Prepaid expenses and other assets (7.0 ) 2.6
Accounts payable, accrued expenses and other liabilities   (19.1 )   (23.4 )
Net cash provided by operating activities   1.5     9.0  
INVESTING ACTIVITIES
Additions to property, plant and equipment (15.2 ) (11.0 )
Proceeds from the sale of property, plant and equipment - 0.1
Net proceeds from the sale of assets, and other 0.2 1.9
Business acquisitions, net of cash acquired and other   (1.8 )   0.1  
Net cash used in investing activities   (16.8 )   (8.9 )
FINANCING ACTIVITIES
Proceeds from long-term borrowings 45.0 20.0
Payments of long-term debt (133.2 ) (126.3 )
Payment of capital leases and other (5.2 ) (4.3 )
Proceeds from share transactions under employee stock plans - 0.5
Payments to repurchase common stock (10.8 ) (9.0 )
Dividends   (13.9 )   (12.8 )
Net cash used in financing activities   (118.1 )   (131.9 )
Effect of exchange rate changes on cash and cash equivalents   (4.2 )   10.9  
DECREASE IN CASH AND CASH EQUIVALENTS   (137.6 )   (120.9 )
Cash and cash equivalents at beginning of year   280.2     338.4  
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 142.6   $ 217.5  
 
   
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
SEGMENT
INFORMATION

(Amounts in millions)
(Unaudited)
           
 
Net Sales
 
Second Quarter Ended Six Months Ended
July 1, 2018 July 2, 2017 July 1, 2018 July 2, 2017
 
Americas $ 272.0 $ 250.5 $ 513.1 $ 479.2
Europe 117.1 110.7 240.1 215.6
APMEA   18.8     17.3     33.2     30.9  
Total $ 407.9   $ 378.5   $ 786.4   $ 725.7  
 
 
Operating Income (Loss)
 
Second Quarter Ended Six Months Ended
July 1, 2018 July 2, 2017 July 1, 2018 July 2, 2017
 
Americas $ 46.7 $ 39.6 $ 83.1 $ 70.7
Europe 12.9 12.7 27.8 25.1
APMEA 1.6 1.8 3.0 2.8
Corporate   (9.0 )   (9.3 )   (17.8 )   (18.1 )
Total $ 52.2   $ 44.8   $ 96.1   $ 80.5  
 
 
 
Intersegment Sales
 
Second Quarter Ended Six Months Ended
July 1, 2018 July 2, 2017 July 1, 2018 July 2, 2017
 
Americas $ 3.4 $ 3.6 $ 6.0 $ 6.4
Europe 3.5 4.0 6.9 7.9
APMEA   24.7     20.4     41.4     40.0  
Total $ 31.6   $ 28.0   $ 54.3   $ 54.3  
 

Key Performance Indicators and Non-GAAP Measures

In this press release, we refer to non-GAAP financial measures
(including adjusted operating income, adjusted operating margins,
adjusted net income, adjusted earnings per share, organic sales, free
cash outflow and net debt to capitalization ratio) and provide a
reconciliation of those non-GAAP financial measures to the corresponding
financial measures contained in our consolidated financial statements
prepared in accordance with GAAP. We believe that these financial
measures enhance the overall understanding of our historical financial
performance and give insight into our future prospects. Adjusted
operating income, adjusted operating margins, adjusted net income and
adjusted earnings per share eliminate certain expenses incurred and
gains recognized in the periods presented that relate primarily to our
global restructuring programs, deployment costs, acquisition related
costs, and the related income tax impacts on these items, and other tax
adjustments. Management then utilizes these adjusted financial measures
to assess the run-rate of the Company's operations against those of
comparable periods. Organic sales growth is a non-GAAP measure of sales
growth excluding the impacts of foreign exchange, acquisitions and
divestitures from period-over-period comparisons. Management believes
reporting organic sales growth provides useful information to investors,
potential investors and others, and allows for a more complete
understanding of underlying sales trends by providing sales growth on a
consistent basis. Free cash outflow and the net debt to capitalization
ratio, which are adjusted to exclude certain cash inflows and outlays,
and include only certain balance sheet accounts from the comparable GAAP
measures, are an indication of our performance in cash flow generation
and also provide an indication of the Company's relative balance sheet
leverage to other industrial manufacturing companies. These non-GAAP
financial measures are among the primary indicators management uses as a
basis for evaluating our cash flow generation and our capitalization
structure. In addition, free cash outflow is used as a criterion to
measure and pay certain compensation-based incentives. For these
reasons, management believes these non-GAAP financial measures can be
useful to investors, potential investors and others. The Company's
non-GAAP financial measures may not be comparable to similarly titled
measures reported by other companies. The presentation of this
additional information is not meant to be considered in isolation or as
a substitute for financial measures prepared in accordance with GAAP.

               

TABLE 1
RECONCILIATION OF GAAP "AS REPORTED" TO THE
"ADJUSTED" NON-GAAP

EXCLUDING THE EFFECT OF
ADJUSTMENTS FOR SPECIAL ITEMS

(Amounts in millions,
except per share information)

(Unaudited)
CONSOLIDATED
RESULTS

 
Second Quarter Ended Six Months Ended
July 1,
2018
July 2,
2017
July 1,
2018
July 2,
2017
 
Net sales $ 407.9 $ 378.5 $ 786.4 $ 725.7
 
Operating income - as reported $ 52.2 $ 44.8 $ 96.1 $ 80.5
Operating margin % 12.8 % 11.8 % 12.2 % 11.1 %
 
Adjustments for special items:
Acquisition costs - - - 0.2
 
Restructuring 1.7 - 2.2
 
Americas, APMEA & Europe transformation costs - 0.8 - 2.8
       
Total adjustments for special items $ -   $ 2.5   $ -   $ 5.2  
 
Operating income - as adjusted $ 52.2 $ 47.3 $ 96.1 $ 85.7
Adjusted operating margin % 12.8 % 12.5 % 12.2 % 11.8 %
 
Net income - as reported $ 36.0 $ 27.2 $ 64.2 $ 48.9
 
Adjustments for special items - tax affected:
Acquisition costs - - - 0.1
 
Restructuring - 1.1 - 1.5
 
Americas, APMEA & Europe transformation costs - 0.5 - 1.8
 
Tax adjustments - (0.1 ) - (1.3 )
       
Total Adjustments for special items - tax affected $ -   $ 1.5   $ -   $ 2.1  
 
Net income - as adjusted $ 36.0 $ 28.7 $ 64.2 $ 51.0
 
Diluted earnings per share - as reported $ 1.05 0.79 $ 1.87 1.42
Adjustments for special items   -     0.04     -     0.06  
Diluted earnings per share - as adjusted $ 1.05   $ 0.83   $ 1.87   $ 1.48  
 
                                       
 
TABLE 2
SEGMENT INFORMATION - RECONCILIATION OF GAAP
"AS REPORTED" TO THE "ADJUSTED" NON-GAAP

EXCLUDING
THE EFFECT OF ADJUSTMENTS FOR SPECIAL ITEMS

(Amounts in
millions)

(Unaudited)
 
                                                             
 
Second Quarter Ended
July 1, 2018
Second Quarter Ended
July 2, 2017
Americas     Europe     APMEA     Corporate     Total Americas     Europe     APMEA     Corporate     Total
 
Net sales $ 272.0       117.1       18.8       -       407.9   $ 250.5       110.7       17.3       -       378.5  
 
Operating income (loss) - as reported $ 46.7 12.9 1.6 (9.0 ) 52.2 $ 39.6 12.7 1.8 (9.3 ) 44.8
Operating margin % 17.2 % 11.0 % 8.3 % 12.8 % 15.8 % 11.5 % 10.4 % 11.8 %
 
Adjustments for special items $ -       -       -       -       -   $ 1.8       0.3       0.4       -       2.5  
 
Operating income (loss) - as adjusted $ 46.7 12.9 1.6 (9.0 ) 52.2 $ 41.4 13.0 2.2 (9.3 ) 47.3

Adjusted operating margin %

17.2

%

11.0 % 8.3 % 12.8 % 16.5 % 11.8 % 13.0 % 12.5 %
                                                             
 
Six Months Ended
July 1, 2018
Six Months Ended
July 2, 2017
Americas     Europe     APMEA     Corporate     Total Americas     Europe     APMEA     Corporate     Total
 
Net sales $ 513.1       240.1       33.2       -       786.4   $ 479.2       215.6       30.9       -       725.7  
 
Operating income (loss) - as reported $ 83.1 27.8 3.0 (17.8 ) 96.1 $ 70.7 25.1 2.8 (18.1 ) 80.5
Operating margin % 16.2 % 11.6 % 8.8 % 12.2 % 14.8 % 11.6 % 9.1 % 11.1 %
 
Adjustments for special items $ -       -       -       -       -   $ 4.3       0.5       0.4       -       5.2  
 
Operating income (loss) - as adjusted $ 83.1 27.8 3.0 (17.8 ) 96.1 $ 75.0 25.6 3.2 (18.1 ) 85.7

Adjusted operating margin %

16.2

%

11.6 % 8.8 % 12.2 % 15.7 % 11.9 % 10.4 % 11.8 %
                                                             
 
               
TABLE 3
SEGMENT INFORMATION - RECONCILIATION OF
REPORTED NET SALES TO ORGANIC SALES

(Unaudited)
                         
 
 
Second Quarter Ended
Americas Europe APMEA Total
 
Reported net sales July 1, 2018 $ 272.0 $ 117.1 $ 18.8 $ 407.9
Reported net sales July 2, 2017   250.5     110.7     17.3     378.5  
Dollar change $ 21.5   $ 6.4   $ 1.5   $ 29.4  
Net sales % increase   8.6 %   5.8 %   8.3 %   7.8 %
Increase due to foreign exchange   -0.3 %   -7.9 %   -3.0 %   -2.6 %
Organic sales increase (decrease)   8.3 %   -2.1 %   5.3 %   5.2 %
         
 
 
Six Months Ended
Americas Europe APMEA Total
 
Reported net sales July 1, 2018 $ 513.1 $ 240.1 $ 33.2 $ 786.4
Reported net sales July 2, 2017   479.2     215.6     30.9     725.7  
Dollar change $ 33.9   $ 24.5   $ 2.3   $ 60.7  
Net sales % increase   7.1 %   11.4 %   7.4 %   8.4 %
Increase due to foreign exchange   -0.3 %   -11.4 %   -3.3 %   -3.7 %
Organic sales increase   6.8 %   0.0 %   4.1 %   4.6 %
                                         
 
       
TABLE 4
RECONCILIATION OF NET CASH PROVIDED BY
OPERATIONS TO FREE CASH OUTFLOW

(Amounts in millions)
(Unaudited)
 
Six Months Ended
July 1,
2018
July 2,
2017
 
Net cash provided by operations - as reported $ 1.5 $ 9.0
Less: additions to property, plant, and equipment (15.2 ) (11.0 )
Plus: proceeds from the sale of property, plant, and equipment   -     0.1  
Free cash outflow $ (13.7 ) $ (1.9 )
 
 

TABLE 5
RECONCILIATION OF LONG-TERM DEBT (INCLUDING
CURRENT PORTION) TO NET DEBT AND NET DEBT TO CAPITALIZATION RATIO

(Amounts
in millions)

(Unaudited)

       
 
July 1,
2018
December 31,
2017
 
Current portion of long-term debt $ 26.2 $ 22.5
Plus: Long-term debt, net of current portion 383.0 474.6
Less: Cash and cash equivalents   (142.6 )   (280.2 )
Net debt $ 266.6   $ 216.9  
 
Net debt $ 266.6 $ 216.9
Plus: Total stockholders' equity   858.2     829.0  
Capitalization $ 1,124.8   $ 1,045.9  
 
 
Net debt to capitalization ratio   23.7 %   20.7 %

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