Watts Water Technologies Reports Record Third Quarter 2022 Results

Chief Executive Officer Robert J. Pagano Jr. commented, “Our third quarter results exceeded our expectations and represent a third quarter record for sales, operating margin and EPS. Double-digit organic sales growth was due to strong execution in the Americas and a solid rebound in APMEA. Due to the strength of our third quarter, we are again increasing our full-year 2022 outlook. We now expect organic revenue growth of 11% to 12% and adjusted operating margin expansion of 190 to 210 basis points, compared to last year. Our performance is a direct result of our employees’ unwavering focus on serving our customers. I want to thank all of our dedicated employees for their outstanding efforts and commitment to Watts. I would also like to acknowledge our Southern Florida colleagues who have suffered tremendous losses in the wake of Hurricane Ian. Our Fort Myers facility did not sustain significant damage, however we are providing support to our employees who were impacted by this disaster.”

Mr. Pagano concluded, “We remain focused on our customers and delivering on our commitments for 2022, which include increasing our investments related to our Smart and Connected strategy and factory automation. We are monitoring the softening global economic indicators and are confident our experienced team is well positioned to handle these challenging macro-economic conditions.”

Third Quarter Financial Highlights
Third quarter 2022 performance relative to third quarter 2021

• Sales of $488 million increased 7% on a reported basis and 12% organically, primarily due 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 $21 million.
• Operating margin increased 230 basis points on a reported basis and 240 basis points on an adjusted basis, largely due to price, productivity and cost savings, which more than offset inflation and incremental investments.

Regional Performance

Americas

• Sales of $350 million increased 13% on both a reported and an organic basis. Sales from acquisitions totaled approximately $2 million and were partially offset by unfavorable foreign exchange of approximately $1 million. The growth was primarily driven by price across the majority of our product families.
• Operating margin increased 370 basis points on a GAAP basis and 380 basis points on an adjusted basis, as benefits from price realization and productivity more than offset inflation and incremental investments.

Europe

• Sales of $113 million decreased 9% on a reported basis and increased 6% on an organic basis, with growth across all platforms, primarily driven by price. Unfavorable foreign exchange totaled 15%. 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 350 basis points on a GAAP basis and 320 basis points on an adjusted basis, as benefits from increased price and productivity were more than offset by significantly higher inflation, volume deleverage and investments.

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

• Sales of $25 million increased 14% on a reported basis and 22% on an organic basis, primarily driven by demand in China, New Zealand and Australia. Unfavorable foreign exchange totaled 8%.
• Operating margin decreased 260 basis points on a GAAP and 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 nine months of 2022, operating cash flow was $86 million and net capital expenditures were $19 million, resulting in free cash flow of $67 million. In the comparable period last year, operating cash flow was $135 million and net capital expenditures were $15 million, resulting in free cash flow of $120 million. The year-over-year cash from operations and free cash flow decrease was primarily due to incremental cash outflows to fund our proactive decision to increase inventory as well as increased payments related to restructuring, employee and customer incentives. We expect improvement in operating cash flow and in free cash flow through the fourth quarter of 2022 due to normal seasonality.
• The Company repurchased approximately 29,000 shares of Class A common stock at a cost of $4 million during the third quarter. For the first nine months of 2022, the Company repurchased approximately 463,000 shares at a cost of approximately $65 million.