Watts Water Technologies Reports Record Second Quarter 2022 Results

Chief Executive Officer Robert J. Pagano Jr. commented, “We delivered another record quarter with both sales and operating margin higher than anticipated. Double-digit organic sales growth was driven primarily by strong execution in the Americas. I want to thank our employees around the world, who continue to deliver against a challenging macroeconomic backdrop, including record inflation, the effects of the Ukraine war on Europe’s economy, COVID-19 lockdowns in China, and continuing supply chain disruptions. Our success is a direct result of the dedication of our team to serving our customers. Given our strong first half, we are increasing our full-year 2022 outlook. We now expect organic revenue growth of 8% to 11% and adjusted operating margin expansion of 110 to 160 basis points, compared to last year. Our focus remains on our long-term strategic priorities. We are confident in our business model, which is largely driven by repair and replacement activity, and our ability to take proactive actions to ensure we continue to successfully navigate softening economic conditions.”

Second Quarter Financial Highlights

Second quarter 2022 performance relative to second quarter 2021

• Sales of $527 million increased 13% on a reported basis and 16% organically due primarily to double-digit organic growth in the Americas. Sales from acquisitions totaled approximately $2 million and were more than offset by unfavorable foreign exchange movements, which reduced sales by $18 million.

• Operating margin increased 690 basis points on a reported basis and 360 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 benefited from reduced restructuring charges year-over-year.

Regional Performance

Americas

• Sales of $376 million increased 22% on both a reported and an organic basis. Sales from acquisitions and unfavorable foreign exchange offset each other. The majority of product lines grew by double-digits.

• Operating margin increased 470 basis pointson a GAAP basis and 510 basis points on an adjusted basis as benefits from price realization, volume 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 $128 million decreased 7% on a reported basis and increased 5% on an organic basis, with growth in both Fluid Solutions and Drains platforms. Unfavorable foreign exchange movements totaled 12%. 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 increased 1140 basis points on a GAAP basis and decreased 80 basis points on an adjusted basis.  Adjusted operating margin benefited from increased price and productivity, but was more than offset by inflation and growth investments. GAAP operating margin in 2021 was negatively impacted by $18 million of restructuring charges related to exit activities in France.

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

• Sales of $23 million decreased 1% on a reported basis and increased 3% on an organic basis, driven by growth in China and Australia. Unfavorable foreign exchange movements totaled 4%.

• Operating margin decreased 330 basis points on a GAAP basis and 220 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 the first six months of 2022, operating cash flow was $45 million and net capital expenditures were $12 million, resulting in free cash flow of $33 million. In the comparable period last year, operating cash flow was $73 million and net capital expenditures were $8 million, resulting in free cash flow of $65 million. The year-over-year cash from operations and free cash flow decrease was 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 as well as employee and customer incentives. We expect improvement in free cash flow throughout 2022 due to normal seasonality.

• The Company repurchased approximately 140,000 shares of Class A common stock at a cost of $18.2 million during the second quarter. For the first six months of 2022, the Company repurchased approximately 434,000 shares at a cost of approximately $61 million.