Watts Water Technologies Reports Record First Quarter 2022 Results

Chief Executive Officer Robert J. Pagano Jr. commented, “All three regions delivered double-digit organic sales growth and strong operating margin expansion in the quarter versus the prior year. Challenges from market demand and supply chain disruptions continued, and our sourcing and operations teams rose to these challenges to support our customers’ needs. I want to thank our employees around the world, who continue to navigate the challenging macro landscape. Their efforts resulted in another record quarter, with both consolidated sales and operating margin higher than anticipated. Given our strong start, we are increasing our full year 2022 outlook for adjusted operating margin expansion to 20 to 60 basis points from our previous outlook of zero to 40 basis points. We are maintaining organic sales growth of 3% to 8%, compared to last year, due to the uncertainty caused by the war in Ukraine.”

irst Quarter Financial Highlights
First quarter 2022 performance relative to first quarter 2021

• Sales of $463 million increased 12% on a reported basis and 14% organically due to double-digit organic growth in all regions. Sales from acquisitions totaled approximately $2 million and were more than offset by unfavorable foreign exchange movements, which reduced sales by $10 million.
• Operating margin increased 100 basis points on a reported basis and 120 basis points on an adjusted basis, benefiting from price, volume, productivity and cost savings, which more than offset inflation, incremental investments and business normalization costs. GAAP operating margin was reduced by incremental restructuring charges year-over-year.

Regional Performance

Americas

• Sales of $314 million increased 15% on a reported basis and 14% on an organic basis. Sales from acquisitions contributed growth of 1%. The majority of product lines grew by double-digits.
• Operating margin increased 60 basis pointson a GAAP basis and 70 basis points on an adjusted basis as benefits from price realization and productivity more than offset inflation, incremental growth investments and business normalization costs. GAAP operating margin in 2022 was negatively impacted by restructuring charges.

Europe

• Sales of $130 million increased 6% on a reported basis and 14% on an organic basis, with growth in both Fluid Solutions and Drains platforms. Unfavorable foreign exchange movements totaled 8%.
• Operating margin increased 30 basis points on a GAAP basis and 120 basis points on an adjusted basis benefiting from increased price, volume and productivity, partially offset by inflation and growth investments. GAAP operating margin in 2022 was negatively impacted by restructuring charges.

Asia-Pacific, Middle East and Africa (“APMEA”)

• Sales of $19 million increased 10% on a reported basis and 13% on an organic basis, driven by growth in all major regions. Unfavorable foreign exchange movements totaled 3%.
• Operating margin increased 250 basis points on a GAAP basis and 30 basis points on an adjusted basis. GAAP and adjusted margins both benefited from increased volume, price and productivity, which offset inflation and reduced affiliate volume. GAAP operating margin in 2022 was positively impacted by lower restructuring costs year-over-year.

Cash Flow and Capital Allocation

• For the first quarter of 2022, operating cash flow was negative $2 million and net capital expenditures were $6 million, resulting in free cash flow of negative $8 million. In the comparable period last year, operating cash flow was $34 million and net capital expenditures were $2 million, resulting in free cash flow of $32 million. Operating cash flow and free cash flow decreased primarily due to a proactive decision to increase inventories in response to strong market demand and continued supply chain disruptions, in addition to increased payments related to restructuring and employee and customer incentives. We expect improvement in free cash flow throughout 2022 due to normal seasonality.

• The Company repurchased approximately 293,000 shares of Class A common stock at a cost of $42.9 million during the first quarter.