Watts Water Technologies Reports Record Second Quarter Results

August 1, 2018

NORTH ANDOVER, Mass.--(BUSINESS WIRE)--Aug 1, 2018--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:

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.

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