Watts Water Technologies Reports Record Fourth Quarter and Full Year 2022 Results

Chief Executive Officer Robert J. Pagano Jr. noted, “We successfully closed out 2022 and delivered record results for the quarter and the full year. I commend all our colleagues at Watts, as our teams remained focused on customers’ needs while concurrently managing unprecedented inflationary pressures and supply chain disruptions. Our goals for 2022 were to serve our customers, continue to execute on new product development including products to support our smart and connected strategy, drive productivity and fund long-term investments. We successfully executed on our goals and also delivered record sales, operating margin and earnings per share for the year.”

Mr. Pagano continued, “As we enter 2023, we are monitoring the weakening global economic indicators. We currently expect to see softer market conditions as 2023 progresses and have incorporated these expectations into our outlook and are taking actions as needed to adjust our cost structure. Our balance sheet and cash flow remain strong. We are confident that our experienced team is well positioned to navigate these challenging macro-economic conditions.”

A summary of fourth quarter and full year financial results is as follows:

Fourth Quarter Financial Highlights
Fourth quarter 2022 performance relative to fourth quarter 2021
Sales of $502 million increased 6% on a reported basis and 11% organically, primarily due to double-digit organic growth in the Americas. Unfavorable foreign exchange reduced sales by $22 million.

Operating margin increased 20 basis points on a reported basis and 90 basis points on an adjusted basis, largely due to price, productivity and cost savings, which more than offset inflation and incremental investments.

EPS increased 74% on a reported basis and 13% on an adjusted basis largely due to price, productivity and cost savings, which more than offset inflation and incremental investments. Reported EPS also benefited from $18.2 million of tax benefits, primarily related to a modification of the structure of our Mexican supply chain operations, partially offset by higher restructuring costs primarily related to the closure of a facility in France and other cost saving actions.

Regional Performance
Americas
Sales of $350 million increased 10% on a reported basis and 11% on an organic basis. Unfavorable foreign exchange reduced sales by 1%. The growth was primarily driven by price across the majority of our product categories.

Operating margin increased 220 basis pointson a GAAP basis and 240 basis points on an adjusted basis as benefits from price realization and productivity more than offset inflation and incremental investments.

Europe
Sales of $128 million decreased by 4% on a reported basis, which included unfavorable foreign exchange movements of 13%. Organic sales increased by 9%, with growth across all platforms, primarily driven by price. Sales growth in the quarter was negatively impacted by approximately 2% due to our decision to exit all direct sales into Russia effective April 1, 2022.

Operating margin decreased 470 basis points on a GAAP basis and 290 basis points on an adjusted basis as benefits from increased price and productivity were more than offset by significantly higher inflation and lower volume and investments. GAAP operating margin in 2022 was negatively impacted by higher restructuring charges.

Asia-Pacific, Middle East and Africa (“APMEA”)
Sales of $23 million increased 5% on a reported basis, which included unfavorable foreign exchange movements of 12%. Organic sales increased by 17%, primarily driven by higher volume and price, resulting in solid growth in China, the Middle East and Australia.

Operating margin decreased 220 basis points on a GAAP basis and 260 basis points on an adjusted basis. GAAP and adjusted margins both benefited from increased price and productivity, which were more than offset by inflation and reduced affiliate volume.

Cash Flow and Capital Allocation
For 2022, operating cash flow approximated $224 million and net capital expenditures approximated $23 million, resulting in free cash flow of approximately $201 million. In 2021, operating cash flow was $181 million, net capital expenditures were $22 million and free cash flow was $159 million. The year-over-year cash from operations and free cash flow increase was primarily due to higher net income and lower investment in inventory, partially offset by lower accounts payable balances associated with the reduction in inventory purchases.

During the fourth quarter, the Company repurchased approximately $4.3 million of Class A common stock, or approximately 31,000 shares and for the full year 2022, the Company repurchased approximately $69 million of Class A common stock, or approximately 494,000 shares. Approximately $28 million remains available for stock repurchases under the stock repurchase program authorized in 2019, which has no expiration date.

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.