Watts Water Technologies Reports Solid Start to 2019

  • Reported 1Q sales of $389 million, up 3%
  • Organic sales growth +6%, foreign exchange -3%
  • GAAP operating margin of 12%, up 40 bps; adjusted operating margin
    of 12.4%, up 80 bps
  • 1Q GAAP and adjusted EPS of $0.91 and $0.94 respectively, up 11% on
    GAAP basis and up 15% on adjusted basis

NORTH ANDOVER, Mass.–(BUSINESS WIRE)–Watts Water Technologies, Inc. (NYSE: WTS) today announced results for
the first quarter of 2019.

Chief Executive Officer Robert J. Pagano Jr. commented, “Solid top-line
growth drove record first quarter results. As anticipated, we continued
to benefit from previously enacted pricing actions and organic volume in
both the Americas and Europe. Our start puts us in a good position to
realize the full year outlook we provided in February 2019.”

Sales for the first quarter were $389 million, up 3% as compared to the
same period last year. First quarter net income per diluted share (EPS)
on a GAAP basis was $0.91, and on an adjusted basis was $0.94, as
compared to $0.82 on both a GAAP and an adjusted basis for the
prior-year period. Both GAAP and adjusted EPS for the first quarter
improved due to price, volume, productivity, a lower effective tax rate
and reduced interest costs, which were partially offset by inflation,
higher tariff costs, growth investments and a negative impact in foreign
exchange quarter over quarter. GAAP EPS was also affected by a European
restructuring charge taken in the first quarter of 2019. A summary of
first quarter results is as follows:

   
First Quarter Earnings Summary
       
(In millions, except per share information) 2019 2018 % Change
 
Sales $ 388.7 $ 378.5 3 %
 
Net income 31.0 28.2 10 %
 
Diluted earnings per share $ 0.91 $ 0.82 11 %
 
Special items (1) 0.03
 
Adjusted earnings per share (1) $ 0.94 $ 0.82 15 %
 

(1)

   

Special items and adjusted earnings per share represent non-GAAP
financial measures. For a reconciliation of GAAP to non-GAAP items
please see the tables attached to this press release.

 

First Quarter Highlights

  • Sales increased 3% and 6% on a reported and organic basis,
    respectively, as compared to the first quarter last year; reported
    operating margin increased 40 basis points and adjusted operating
    margin increased 80 basis points. Regionally:

    • Americas: Sales increased 7% on a
      reported basis and increased 8% on an organic basis with broad
      growth in plumbing, heating and hot water, drains and water
      quality products; partially offset by negative foreign exchange.
      Operating margin increased by 150 basis points on both a GAAP and
      adjusted basis, as benefits from pricing and volume were partially
      offset by inflation including higher tariffs costs and growth
      investments.
    • Europe: Reported sales were down 5%,
      affected by negative foreign exchange movements, and up 3%
      organically, driven by continued strength in our drains business
      and one additional shipping day in the first quarter as compared
      to last year. Operating margin decreased 80 basis points and
      increased 50 basis points, on a GAAP and adjusted basis,
      respectively. Both margins were driven by increased volume, price
      and productivity, offset in part by unfavorable product mix and
      incremental investments. In addition, the 2019 GAAP margin was
      negatively affected by a restructuring charge of $1.4 million or
      approximately 120 basis points. The restructuring charge
      represents additional costs related to the program we announced in
      2018.
    • APMEA: Reported and organic sales
      decreased 6% and 3%, respectively. Reported sales includes a 3%
      negative impact from foreign exchange. Organically, stronger sales
      in the Middle East, Australia and in China’s commercial valves
      market were more than offset by continued softness in Korea and
      China’s residential heating market. Operating margin increased 30
      basis points on both a GAAP and adjusted basis, as higher
      intercompany volume and favorable foreign exchange driven by
      affiliate activity more than offset reduced third party sales
      volume and incremental investments.

Cash Flow and Capital Allocation

  • For the first quarter of 2019, operating cash outflow was $24 million
    and net capital expenditures were $7 million, resulting in free cash
    outflow of $31 million. In the comparable period last year, operating
    cash outflow was $26 million, net capital expenditures were $7 million
    and free cash outflow was $33 million. Free cash outflow improved
    primarily due to incremental profit. The first quarter is a seasonally
    slow cash flow period and we expect continued improvement in free cash
    flow as the year progresses.
  • The Company repatriated $11 million in cash during the first quarter
    and used it to pay down revolving debt.
  • The Company repurchased approximately 74,000 shares of Class A common
    stock at a cost of $5.6 million during the first quarter.

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 webcast of its
conference call to discuss first quarter 2019 results on Friday, May 3,
2019, at 9:00 a.m. EDT. This press release and the live webcast can be
accessed by visiting the Investor Relations section of the Company’s
website at www.wattswater.com.
Following the webcast, an archived version of the call will be available
at the same address until May 3, 2020.

The Company’s 2019 Annual Meeting of Stockholders will be held at 9:00
a.m. EDT on Friday, May 17, 2019 at the Company’s executive offices
located at 815 Chestnut Street, North Andover, Massachusetts.

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 2019 outlook, and anticipated free cash flow
improvements. 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
effects of the 2017 Tax Act; the timing and expected impact of 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 16 of
the Notes to the Consolidated Financial Statements in our Annual Report
on Form 10-K for the year ended December 31, 2018 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)
 
First Quarter Ended
March 31, April 1,
2019 2018
Net sales $ 388.7 378.5
Cost of goods sold 224.5   221.8  
GROSS PROFIT 164.2 156.7
Selling, general and administrative expenses 116.1 112.8
Restructuring 1.4    
OPERATING INCOME 46.7   43.9  
Other (income) expense:
Interest income (0.1 ) (0.4 )
Interest expense 3.6 4.3
Other expense, net 0.5   0.7  
Total other expense 4.0   4.6  
INCOME BEFORE INCOME TAXES 42.7 39.3
Provision for income taxes 11.7   11.1  
NET INCOME $ 31.0   $ 28.2  
 
BASIC EPS
NET INCOME PER SHARE $ 0.91   0.82  
Weighted average number of shares 34.2   34.3  
DILUTED EPS
NET INCOME PER SHARE $ 0.91   0.82  
Weighted average number of shares 34.2   34.4  
Dividends declared per share $ 0.21   0.19  
 
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except share information)
(Unaudited)
           
 
March 31, December 31,
ASSETS 2019 2018
CURRENT ASSETS:
Cash and cash equivalents $ 170.2 $ 204.1
Trade accounts receivable, less allowance for doubtful accounts of
$15.3 million at March 31, 2019 and $15.0 million at December 31,
2018
240.6 205.5
Inventories, net:
Raw materials 95.2 87.4
Work in process 17.4 17.3
Finished goods 181.3   182.1  
Total Inventories 293.9 286.8
Prepaid expenses and other current assets 25.2   24.9  
Total Current Assets 729.9   721.3  
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 539.2 537.4
Accumulated depreciation (339.6 ) (335.5 )
Property, plant and equipment, net 199.6   201.9  
OTHER ASSETS:
Goodwill 543.0 544.8

Intangible assets, net

161.0

165.2

Deferred income taxes

2.2

1.6

Other, net 47.7   18.9  
TOTAL ASSETS $ 1,683.4   $ 1,653.7  
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 111.5 $ 127.2

Accrued expenses and other liabilities

137.1

130.6

Accrued compensation and benefits 43.2 60.9
Current portion of long-term debt 30.0   30.0  
Total Current Liabilities 321.8   348.7  
LONG-TERM DEBT, NET OF CURRENT PORTION 341.1 323.4
DEFERRED INCOME TAXES 42.6 38.5
OTHER NONCURRENT LIABILITIES 72.8 51.8
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: 27,710,297 shares at March
31, 2019
and 27,646,465 shares at December 31, 2018 2.8 2.8
Class B common stock, $0.10 par value; 25,000,000 shares authorized;
10 votes per share; issued and outstanding: 6,279,290 shares at
March 31, 2019
and 6,329,290 at December 31, 2018 0.6 0.6
Additional paid-in capital 576.6 568.3
Retained earnings 452.1 440.7
Accumulated other comprehensive loss (127.0 ) (121.1 )
Total Stockholders’ Equity 905.1   891.3  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,683.4   $ 1,653.7  
 
         
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
First Quarter Ended
March 31, April 1,
2019 2018
OPERATING ACTIVITIES
Net income $ 31.0 $ 28.2
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation 7.5 7.1
Amortization of intangibles 3.9 5.6
Loss on disposal, impairment of intangibles, property, plant and
equipment, and other
0.5
Stock-based compensation 4.6 2.7
Deferred income tax 4.5 (4.4 )
Changes in operating assets and liabilities, net of effects
from business acquisitions and divestitures:
Accounts receivable (36.3 ) (13.9 )
Inventories (7.8 ) (19.7 )
Prepaid expenses and other assets 0.2 (1.6 )
Accounts payable, accrued expenses and other liabilities (32.3 ) (30.1 )
Net cash used in operating activities (24.2 ) (26.1 )
INVESTING ACTIVITIES
Additions to property, plant and equipment (6.9 ) (7.3 )

Business acquisitions, net of cash acquired and other

 

(1.5

)

Net cash used in investing activities

(6.9

)

(8.8

)

FINANCING ACTIVITIES

Proceeds from long-term borrowings

30.0

20.0

Payments of long-term debt (12.5 ) (70.6 )

Payment of finance leases and other

(7.2

)

(0.4

)

Proceeds from share transactions under employee stock plans

0.6

Payments to repurchase common stock

(5.6

)

(6.2

)

Dividends (7.3 ) (6.7 )
Net cash used in financing activities (2.0 ) (63.9 )

Effect of exchange rate changes on cash and cash equivalents

(0.8

)

3.3

DECREASE IN CASH AND CASH EQUIVALENTS

(33.9

)

(95.5

)

Cash and cash equivalents at beginning of year 204.1   280.2  
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 170.2   $ 184.7  
 
 
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
SEGMENT INFORMATION
(Amounts in millions)
(Unaudited)
         
 
Net Sales
 
First Quarter Ended
March 31, 2019 April 1, 2018
   
 
Americas $ 258.9 $ 241.1
Europe 116.3 123.0
APMEA   13.5     14.4  
Total $ 388.7   $ 378.5  
 
 
 
Operating Income
 
First Quarter Ended
March 31, 2019 April 1, 2018
   
 
Americas $ 43.1 $ 36.4
Europe 13.2 14.9
APMEA 1.3 1.4
Corporate   (10.9 )   (8.8 )
Total $ 46.7   $ 43.9  
 
 
 
 
Intersegment Sales
 
First Quarter Ended
March 31, 2019 April 1, 2018
   
 
Americas $ 2.9 $ 2.6
Europe 3.6 3.4
APMEA   16.9     16.7  
Total $ 23.4   $ 22.7  
 

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, cash conversion rate of free cash outflow to net income
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 in the periods presented
that relate primarily to our global restructuring programs. 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, cash conversion rate of free cash outflow to net
income, 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 flow 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
 
First Quarter Ended
March 31, April 1,
2019 2018
 
Net sales $ 388.7 $ 378.5
 
Operating income – as reported $ 46.7 $ 43.9
Operating margin % 12.0 % 11.6 %
 
Adjustments for special items:
Restructuring 1.4
   
Total adjustments for special items $ 1.4   $  
 
Operating income – as adjusted $ 48.1 $ 43.9
Adjusted operating margin % 12.4 % 11.6 %
 
Net income – as reported $ 31.0 $ 28.2
 

Adjustments for special items – tax affected:

Restructuring 1.0
   
Total Adjustments for special items – tax affected $ 1.0   $  
 
Net income – as adjusted $ 32.0 $ 28.2
 
Diluted earnings per share – as reported $ 0.91 0.82
Adjustments for special items 0.03    
Diluted earnings per share – as adjusted $ 0.94   $ 0.82  
 
                                     
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)
 
                                                               
 
First Quarter Ended First Quarter Ended
March 31, 2019 April 1, 2018
Americas     Europe     APMEA     Corporate     Total Americas     Europe     APMEA     Corporate     Total
 
Net sales $ 258.9       116.3       13.5             388.7   $ 241.1       123.0       14.4             378.5  
 
Operating income (loss) – as reported $ 43.1 13.2 1.3 (10.9 ) 46.7 $ 36.4 14.9 1.4 (8.8 ) 43.9
Operating margin % 16.6 % 11.3 % 9.7 % 12.0 % 15.1 % 12.1 % 9.4 % 11.6 %
 
Adjustments for special items $       1.4                   1.4   $                          
 
Operating income (loss) – as adjusted $ 43.1 14.6 1.3 (10.9 ) 48.1 $ 36.4 14.9 1.4 (8.8 ) 43.9

Adjusted operating margin %

16.6

%

12.6

%

9.7

%

12.4

%

15.1

%

12.1

%

9.4

%

11.6

%

                                                         
               
TABLE 3
SEGMENT INFORMATION – RECONCILIATION OF REPORTED NET SALES TO
ORGANIC SALES
(Unaudited)
                                 
 
 
First Quarter
Americas       Europe       APMEA       Total
 
Reported net sales March 31, 2019 $ 258.9 $ 116.3 $ 13.5 $ 388.7
Reported net sales April 1, 2018 241.1   123.0   14.4   378.5  

Dollar change

$ 17.8   $ (6.7 ) $ (0.9 ) $ 10.2  
Net sales % increase (decrease) 7.4 % -5.4 % -6.3 % 2.7 %
Decrease due to foreign exchange 0.3 % 7.9 % 3.2 % 2.9 %
Organic sales increase (decrease) 7.7 % 2.5 % -3.1 % 5.6 %
                                         
       
TABLE 4
RECONCILIATION OF NET CASH USED IN OPERATIONS TO FREE CASH OUTFLOW
(Amounts in millions)
(Unaudited)
 
First Quarter Ended
March 31, April 1,
2019 2018
 
Net cash used in operations – as reported $ (24.2 ) $ (26.1 )
Less: additions to property, plant, and equipment (6.9 ) (7.3 )
Free cash outflow $ (31.1 ) $ (33.4 )
 
Net income – as reported $ 31.0   $ 28.2  
 
Cash conversion rate of free cash outflow to net income -100.3 % -118.4 %
 
 
TABLE 5
RECONCILIATION OF LONG-TERM DEBT (INCLUDING CURRENT PORTION) TO
NET DEBT AND NET DEBT TO CAPITALIZATION RATIO
(Amounts in millions)
(Unaudited)
 
 
March 31, December 31
2019 2018
 
Current portion of long-term debt $ 30.0 $ 30.0
Plus: Long-term debt, net of current portion 341.1 323.4
Less: Cash and cash equivalents (170.2 ) (204.1 )
Net debt $ 200.9   $ 149.3  
 
Net debt $ 200.9 $ 149.3
Plus: Total stockholders’ equity 905.1   891.3  
Capitalization $ 1,106.0   $ 1,040.6  
 
 
Net debt to capitalization ratio 18.2 % 14.3 %
 

Contacts

Timothy M. MacPhee
Treasurer, VP – Investor Relations
Telephone:
(978) 689-6201
Fax: (978) 794-0353

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