Watts Water Technologies Reports Third Quarter 2017 Results

Watts Water Technologies, Inc. (NYSE: WTS) today announced third quarter 2017 results. Sales of $365 million increased 7% compared to the same period in 2016. Third quarter GAAP EPS was $0.77 as compared to $0.63 for the same period last year. The increase was driven by higher volume, strong operating performance, benefits from the PVI acquisition and lower transformation costs. Adjusted for special items, third quarter EPS was $0.80 as compared to $0.71 for the same period last year. Adjusted earnings benefited from higher volume, operating improvements and the PVI acquisition. A summary of third quarter financial results is as follows:

Remarking on operating results, Chief Executive Officer, Robert J. Pagano Jr., noted, “I am very pleased with our results for the third quarter. As anticipated, we saw improvement in our top-line growth rate led by a strong performance in the Americas. We sustained our first half earnings momentum, delivering an all-time record adjusted operating margin and a Q3 record for adjusted EPS. Margins continued to benefit from our transformation and productivity initiatives. We also delivered strong free cash flow in the quarter, and we expect that trend to continue through the balance of the year. We remain focused on the execution and deployment of our key initiatives, which we expect will continue to drive results this year and over the long-term.”

Financial Highlights

• Organic sales were up 1% compared to the third quarter last year; adjusted operating margin expanded 50 basis points. Regionally:
  • Americas’ organic sales increased 4% with growth in plumbing, drains and heating and hot water products. Adjusted operating margin increased 10 basis points as benefits from increased volume, productivity and transformation savings were partially offset by anticipated PVI margin dilution and growth investments.
  • Europe’s organic sales were down 3% as water and plumbing products were affected by planned product rationalization and lower demand for HVAC products, partially offset by continued growth in our drains business. Our product rationalization efforts across the regions represent the exit of low-margin, non-core products. Adjusted operating margin expanded 90 basis points driven by favorable sales mix, bad debt recovery, productivity and benefits from our restructuring programs.
  • APMEA’s organic sales declined 10%, driven by planned product rationalization, which negatively impacted sales by 11%. Adjusted operating margin decreased 720 basis points, due to a significant decline in affiliate volume, sales mix and higher growth investments.
• PVI delivered sales of approximately $14 million during the quarter, up mid-single digits year-over-year.
• The Company repurchased approximately 73,000 shares of Class A common stock at a cost of approximately $4.7 million during the third quarter. Year-to-date, we have purchased approximately 214,000 shares at a cost of approximately $14 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 third quarter results for 2017 on Thursday, November 2, 2017, 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 November 1, 2018.

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. Its 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 expected improvement in free cash flow during the year, our long-term growth strategy, our transformation and restructuring initiatives and the timing and expected costs and savings associated with those initiatives. 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 effectiveness, the timing and the expected costs and savings associated with our ongoing restructuring and transformation programs and initiatives; the current economic and financial condition, 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 14 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016 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.

* 2016 results retrospectively adjusted to reflect the change in composition of reportable segments moving Watts Middle East out of Europe and into APMEA.

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 flow, net debt to capitalization ratio and the cash conversion rate of free cash flow to net income) 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 are appropriate to enhance an overall understanding of our historical financial performance and 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, deployment costs, acquisition related costs, gains on acquisition and disposition, 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, which allows for a more complete understanding of underlying sales trends by providing sales growth on a consistent basis. Free cash flow 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. The cash conversion rate of free cash flow to net income is also a measure of our performance in cash flow generation. 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.

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