- Reported sales of $379 million, up
2% year-over-year driven by PVI acquisition; organic sales
flat
- GAAP EPS of $0.79, down 5%; adjusted
EPS of $0.83, up 11%
- GAAP operating margin of 11.8%, down
50 bps year-over-year; adjusted operating margin of 12.5%, up 60
bps year-over-year
- Reaffirming full year 2017
outlook
Watts Water Technologies, Inc. (NYSE: WTS) today announced
second quarter 2017 results. Sales of $379 million increased 2%
compared to the same period in 2016. Second quarter GAAP EPS was
$0.79 as compared to $0.83 for the same period last year. Last
year’s GAAP EPS included an $8.3 million after-tax gain from the
sale of a China subsidiary. Adjusted for special items, second
quarter EPS was $0.83 as compared to $0.75 for the same period last
year. Adjusted earnings improved primarily from operational
improvement driven by productivity and restructuring initiatives. A
summary of second quarter financial results is as follows:
(In millions, except per share information)
Second quarter ended
July 2,2017
July 3,2016
% Change Sales $ 378.5 $ 371.1 2 % Net income
$
27.2
$ 28.6 (5 %) Diluted earnings per share $ 0.79 $ 0.83
(5 %) Special items 0.04 (0.08 ) Adjusted earnings
per share $ 0.83 $ 0.75 11 %
Commenting on operating results, Chief Executive Officer Robert
J. Pagano Jr., said, “We are pleased with our second quarter
results, which were in line with our expectations. We had another
solid quarter operationally, driven by ongoing benefits from our
transformation initiatives. This enabled us to deliver record
adjusted operating margin and adjusted EPS for the second
consecutive quarter. For the first half of 2017, we delivered
double digit adjusted earnings growth and strong adjusted operating
margin, and we are reaffirming our full year outlook.”
Financial Highlights
- Organic sales were flat compared to the
second quarter last year; adjusted operating margin expanded 60
basis points. From a regional perspective:
- Americas’ organic sales were down 1%
with growth in plumbing and drains products offset by anticipated
lower heating and hot water product sales and headwinds in the
retail and specialty sectors. Adjusted operating margin was flat as
benefits from productivity and transformation efforts were offset
by anticipated dilution from the PVI acquisition and
investments.
- Europe’s organic sales were flat with
growth in drains and electronics products offset by a decline in
water and plumbing products. Adjusted operating margin expanded 60
basis points driven by sales mix, productivity and restructuring
savings.
- APMEA’s organic sales were up 2% with
growth in China offset by anticipated product rationalization.
Adjusted operating margin increased 380 basis points, benefiting
from incremental affiliate sales and productivity initiatives.
- PVI delivered sales of approximately
$14 million during the quarter, up double digits year-over-year and
in line with our expectations.
- For the first six months of 2017,
operating cash flow was $9 million, net capital expenditures were
$11 million and free cash outflow was approximately $2 million. In
the comparable period last year, operating cash flow was $8
million, net capital expenditures were approximately $19 million
and free cash outflow was approximately $11 million. Free cash flow
increased due to the lower capital spending in 2017, which is
mostly timing related. We expect continued improvement in free cash
flow during the second half of 2017, due to normal
seasonality.
- The Company repurchased approximately
73,000 shares of Class A common stock at a cost of approximately
$4.5 million during the second quarter. Year-to-date, we have
purchased approximately 142,000 shares at a cost of approximately
$9 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 2017 on
Thursday, August 3, 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 August 3, 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.
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
2, July 3,
July 2, July 3,
2017 2016
2017 2016 Net sales $
378.5 $ 371.1
$
725.7 $ 715.3 Cost of goods sold
221.8 220.4
425.2 429.4 GROSS PROFIT
156.7 150.7
300.5
285.9 Selling, general and administrative expenses
110.2
110.5
217.8 213.1 Restructuring
1.7 3.2
2.2
4.6 Gain on disposition
- (8.7)
- (8.7) OPERATING
INCOME
44.8 45.7
80.5 76.9 Other expense (income):
Interest income
(0.2) (0.3)
(0.4) (0.5) Interest
expense
5.0 5.5
9.8 12.2 Other expense (income), net
0.2 (0.9)
0.5 (3.1) Total other expense
5.0
4.3
9.9 8.6 INCOME BEFORE INCOME TAXES
39.8 41.4
70.6 68.3 Provision for income taxes
12.6 12.8
21.7 23.5 NET INCOME $
27.2 $ 28.6 $
48.9 $
44.8 BASIC EPS NET INCOME PER SHARE $
0.79 $ 0.83 $
1.42 $ 1.30 Weighted average number of shares
34.5
34.5
34.5 34.4 DILUTED EPS NET INCOME PER SHARE $
0.79 $ 0.83 $
1.42 $ 1.30 Weighted average number of
shares
34.5 34.5
34.5 34.5 Dividends declared per
share $
0.19 $ 0.18 $
0.37 $ 0.35
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Amounts in millions, except
share information) (Unaudited)
July 2, December 31, ASSETS
2017
2016 CURRENT ASSETS: Cash and cash equivalents $
217.5 $
338.4 Trade accounts receivable, less allowance for doubtful
accounts of $15.1 million at July 2, 2017 and $14.2 million at
December 31, 2016
245.5 198.0 Inventories, net: Raw
materials
81.5 81.5 Work in process
16.6 13.7
Finished goods
160.7 144.2 Total Inventories
258.8
239.4 Prepaid expenses and other assets
37.0 40.5 Assets
held for sale
2.9 3.1 Total Current Assets
761.7
819.4 PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment,
at cost
521.3 498.1 Accumulated depreciation
(329.7)
(308.4) Property, plant and equipment, net
191.6 189.7 OTHER
ASSETS: Goodwill
544.7 532.7 Intangible assets, net
194.6 202.5 Deferred income taxes
2.7 3.0 Other, net
16.6 15.9 TOTAL ASSETS $
1,711.9 $ 1,763.2
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES:
Accounts payable $
110.1 $ 101.1 Accrued expenses and other
liabilities
122.3 136.8 Accrued compensation and benefits
45.8 48.5 Current portion of long-term debt
37.9
139.1 Total Current Liabilities
316.1 425.5 LONG-TERM DEBT,
NET OF CURRENT PORTION
510.4 511.3 DEFERRED INCOME TAXES
51.2 48.6 OTHER NONCURRENT LIABILITIES
37.0 41.5
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: 27,840,962 shares at July
2, 2017 and 27,831,013 shares at December 31, 2016
2.8 2.8
Class B common stock, $0.10 par value; 25,000,000 shares
authorized; 10 votes per share; issued and outstanding: 6,379,290
shares at July 2, 2017 and December 31, 2016
0.6 0.6
Additional paid-in capital
543.7 535.2 Retained earnings
372.1 348.5 Accumulated other comprehensive loss
(122.0) (150.8) Total Stockholders' Equity
797.2
736.3 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $
1,711.9 $
1,763.2
WATTS WATER TECHNOLOGIES, INC. AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions) (Unaudited)
Six Months Ended July 2, July 3,
2017 2016 OPERATING ACTIVITIES Net income $
48.9 $
44.8 Adjustments to reconcile net income to net cash provided by
operating activities: Depreciation
14.6 14.7 Amortization of
intangibles
11.1 10.2 Loss on disposal and impairment of
property, plant and equipment and other
0.6 1.9 Gain on
disposition
- (8.3) Gain on acquisition
- (1.7)
Stock-based compensation
6.9 7.3 Deferred income tax
2.3 (0.4) Changes in operating assets and liabilities, net
of effects from business acquisitions and divestitures: Accounts
receivable
(41.5) (30.6) Inventories
(13.1) (5.5)
Prepaid expenses and other assets
2.6 1.8 Accounts payable,
accrued expenses and other liabilities
(23.4) (26.4) Net
cash provided by operating activities
9.0 7.8
INVESTING ACTIVITIES Additions to property, plant and equipment
(11.0) (19.2) Proceeds from the sale of property, plant and
equipment
0.1 - Net proceeds from the sale of assets, and
other
1.9 - Business acquisitions, net of cash acquired
0.1 (2.1) Net cash used in investing activities
(8.9)
(21.3) FINANCING ACTIVITIES Proceeds from long-term
borrowings
20.0 530.0 Payments of long-term debt
(126.3) (500.7) Payment of capital leases and other
(4.3) (1.1) Proceeds from share transactions under employee
stock plans
0.5 2.7 Tax benefit of stock awards exercised -
0.2 Payments to repurchase common stock
(9.0) (17.6) Debt
issuance costs
- (2.1) Dividends
(12.8) (12.0) Net
cash used in financing activities
(131.9) (0.6) Effect of
exchange rate changes on cash and cash equivalents
10.9 4.6
DECREASE IN CASH AND CASH EQUIVALENTS
(120.9) (9.5) Cash and
cash equivalents at beginning of year
338.4 296.2 CASH AND
CASH EQUIVALENTS AT END OF PERIOD $
217.5 $ 286.7
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
SEGMENT INFORMATION (Amounts in millions)
(Unaudited)
Net Sales
Second Quarter Ended Six Months Ended July
2, 2017 July 3, 2016
July 2, 2017 July 3, 2016
Americas
$ 250.5 $ 239.5
$ 479.2 $
461.8 Europe*
110.7 114.3
215.6 222.6 APMEA*
17.3 17.3
30.9
30.9 Total
$ 378.5 $ 371.1
$ 725.7 $ 715.3
Operating Income (Loss) Second Quarter Ended
Six Months Ended July 2, 2017 July 3, 2016
July 2, 2017 July 3, 2016 Americas
$ 39.6 $ 35.4
$ 70.7 $ 63.5 Europe*
12.7 10.2
25.1 20.0 APMEA*
1.8 9.8
2.8
11.5 Corporate
(9.3 ) (9.7 )
(18.1 ) (18.1 ) Total
$ 44.8
$ 45.7
$ 80.5 $ 76.9
Intersegment Sales Second
Quarter Ended Six Months Ended July 2, 2017
July 3, 2016
July 2, 2017 July 3, 2016
Americas
$ 3.6 $ 3.4
$ 6.4 $ 6.2
Europe*
4.0 3.0
7.9 5.8 APMEA*
20.4
16.0
40.0 41.1
Total
$ 28.0 $ 22.4
$
54.3 $ 53.1
* 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.
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 2, July 3,
July 2, July
3,
2017 2016
2017 2016
Net sales
$ 378.5 $ 371.1
$ 725.7 $ 715.3
Operating income - as reported $ 44.8 $ 45.7
$ 80.5 $ 76.9 Operating margin %
11.8% 12.3%
11.1% 10.8%
Adjustments for special items:
Acquisition related
costs
- Acquisition costs
- -
0.2 0.1 - Purchase accounting
adjustment
- 0.5
- 0.5
- 0.5
0.2 0.6
Restructuring
1.7 3.2
2.2 4.6 Gain on
disposition
- (8.7)
- (8.7)
Deployment costs
related to transformation activities
- Europe transformation
0.2 0.1
0.4 0.1 - Americas
& APMEA transformation
0.6 3.3
2.4 7.9
0.8
3.4 2.8 8.0
Total adjustments for special items $ 2.5
$ (1.6)
$ 5.2 $ 4.5
Operating
income - as adjusted $ 47.3 $ 44.1
$
85.7 $ 81.4 Adjusted operating margin %
12.5% 11.9%
11.8% 11.4%
Net income - as reported $
27.2 $ 28.6
$ 48.9 $ 44.8
Adjustments for special items - tax affected:
Acquisition related
costs
- Acquisition costs
- -
0.1 0.1 - Gain on acquisition
- -
- (1.0) - Purchase accounting adjustment
-
0.4
- 0.4
- 0.4
0.1 (0.5) Restructuring
1.1 2.2
1.5 3.0 Gain on disposition
-
(8.3)
- (8.3)
Deployment costs
related to transformation activities
- Europe transformation
0.1 0.1
0.3 0.1 - Americas
& APMEA transformation
0.4 2.0
1.5 4.9
0.5
2.1
1.8 5.0
Other
Items
- Tax adjustments
(0.1) 1.0
(1.3) 1.6
Total Adjustments for special items - tax
affected: $ 1.5 $ (2.6)
$
2.1 $ 0.8
Net income - as adjusted
$ 28.7 $ 26.0
$ 51.0 $ 45.6
Diluted earnings per share - as reported $
0.79 $ 0.83
$ 1.42 $ 1.30 Adjustments for
special items
0.04 (0.08)
0.06 0.02
Diluted
earnings per share - as adjusted $ 0.83 $ 0.75
$ 1.48 $ 1.32
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 Second Quarter Ended July 2, 2017 July
3, 2016 Americas Europe* APMEA*
Corporate Total Americas Europe*
APMEA* Corporate Total Net sales
$ 250.5 110.7 17.3 - 378.5
$ 239.5 114.3 17.3 - 371.1
Operating income (loss) - as reported $ 39.6
12.7 1.8 (9.3) 44.8
$ 35.4 10.2 9.8 (9.7) 45.7 Operating
margin % 15.8% 11.5% 10.4% 11.8% 14.8% 8.9% 56.6% 12.3%
Adjustments for special items $ 1.8 0.3 0.4 - 2.5
$ 4.1 2.6 (8.2) (0.1) (1.6)
Operating income
(loss) - as adjusted $ 41.4 13.0 2.2 (9.3) 47.3
$
39.5 12.8 1.6 (9.8) 44.1 Adjusted operating margin % 16.5%
11.8% 13.0% 12.5% 16.5% 11.2% 9.2%
11.9%
Six Months Ended Six Months Ended
July 2, 2017 July 3, 2016 Americas
Europe* APMEA* Corporate Total
Americas Europe* APMEA* Corporate
Total Net sales $ 479.2 215.6 30.9 -
725.7
$ 461.8 222.6 30.9 - 715.3
Operating income
(loss) - as reported $ 70.7 25.1 2.8 (18.1) 80.5
$ 63.5 20.0 11.5 (18.1) 76.9 Operating margin % 14.8% 11.6%
9.1% 11.1% 13.8% 9.0% 37.2% 10.8%
Adjustments for special
items $ 4.3 0.5 0.4 - 5.2
$ 9.0 3.0 (7.5) - 4.5
Operating income (loss) - as adjusted $ 75.0
25.6 3.2 (18.1) 85.7
$ 72.5 23.0 4.0 (18.1) 81.4
Adjusted operating margin % 15.7% 11.9% 10.4% 11.8% 15.7% 10.3%
12.9% 11.4%
* 2016 results retrospectively adjusted to
reflect the change in composition of reportable segments moving
Watts Middle East out of Europe and into APMEA.
TABLE 3 SEGMENT INFORMATION - RECONCILIATION OF REPORTED
NET SALES TO ORGANIC SALES (Unaudited)
Second Quarter Ended Americas Europe*
APMEA* Total Reported net sales July 2, 2017 $
250.5 $ 110.7 $ 17.3 $ 378.5 Reported net sales July 3, 2016 239.5
114.3 17.3 371.1 Dollar change $ 11.0 $ (3.6) $ - $ 7.4
Net
Sales % increase (decrease) 4.6% -3.1%
0.0% 2.0% Decrease due to foreign exchange 0.3% 3.1%
1.7% 1.2% (Increase) due to acquisition -5.6% - - -3.6% subtotal
-5.3% 3.1% 1.7% -2.4%
Organic sales (decrease) increase
-0.7% 0.0% 1.7% -0.4%
Six Months Ended Americas Europe*
APMEA* Total Reported net sales July 2, 2017 $
479.2 $ 215.6 $ 30.9 $ 725.7 Reported net sales July 3, 2016 461.8
222.6 30.9 715.3 Dollar change $ 17.4 $ (7.0) $ - $ 10.4
Net
Sales % increase (decrease) 3.8% -3.1%
0.0% 1.5% Decrease due to foreign exchange - 3.6%
0.8% 1.2% Decrease due to divestitures 0.8% 0.0% 0.2% 0.5%
(Increase) due to acquisition -6.0% - -4.4% -4.0% subtotal -5.2%
3.6% -3.4% -2.3%
Organic sales (decrease) increase
-1.4% 0.5% -3.4% -0.8% * 2016
results retrospectively adjusted to reflect the change in
composition of reportable segments moving Watts Middle East out of
Europe and into APMEA.
TABLE
4 RECONCILIATION OF NET CASH PROVIDED BY OPERATIONS TO FREE
CASH OUTFLOW (Amounts in millions) (Unaudited)
Six Months Ended July 2, July 3,
2017
2016 Net cash provided by operations - as reported $
9.0 $ 7.8 Less: additions to property, plant, and equipment
(11.0) (19.2) Plus: proceeds from the sale of property,
plant, and equipment
0.1 - Free cash outflow $
(1.9)
$ (11.4) Net income - as reported $
48.9 $ 44.8
Cash conversion rate of free cash outflow to net income
-3.9% -25.4%
TABLE 5 RECONCILIATION
OF LONG-TERM DEBT (INCLUDING CURRENT PORTION) TO NET DEBT AND NET
DEBT TO CAPITALIZATION RATIO (Amounts in millions)
(Unaudited) July 2, December 31,
2017 2016 Current portion of long-term debt $
37.9 $ 139.1 Plus: Long-term debt, net of current portion
510.4 511.3 Less: Cash and cash equivalents
(217.5)
(338.4) Net debt $
330.8 $ 312.0 Net debt $
330.8 $ 312.0 Plus: Total stockholders' equity
797.2
736.3 Capitalization $
1,128.0 $ 1,048.3 Net
debt to capitalization ratio
29.3% 29.8%
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Contact:Timothy M. MacPheeTreasurer, VP – Investor
RelationsTelephone: (978) 689-6201Fax: (978) 794-0353
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