Watts Water Technologies Reports Second Quarter Results

Commenting on operating results, Chief Executive Officer Robert J. Pagano Jr., said, “We are pleased with our second quarter results as we continued to drive solid organic top-line growth and productivity in both the Americas and Europe. This enabled us to deliver record sales, operating margin and EPS in the quarter. We achieved this growth while continuing to invest in our business. We are also reaffirming our organic growth outlook for the full year of 3 percent - 4 percent.”

Sales during the second quarter of $417 million increased 2 percent compared to the same period in 2018. Second quarter net income per diluted share (EPS) on a GAAP and adjusted basis was $1.06 and $1.09, respectively, as compared to $1.05 on both a GAAP and adjusted basis for the prior-year period. EPS improved due to price and productivity, offset partially by higher inflation, including tariff costs and higher non-operating expenses. GAAP EPS was negatively impacted by higher European restructuring charges.

Financial Highlights
Sales increased 2 percent and 4 percent on a reported and organic basis, respectively, as compared to the second quarter last year; reported operating margin increased 20 basis points and adjusted operating margin expanded 50 basis points. From a regional perspective:

Americas - Sales increased 6 percent on both a reported and organic basis, with broad growth in plumbing, water quality and drains products. Operating margin increased 50 basis points on both a GAAP and adjusted basis as benefits from pricing, productivity and volume were partially offset by growth and productivity investments and inflation, including higher tariff costs.

Europe - Reported sales decreased 3 percent, impacted by negative foreign exchange movements. Sales were up 3 percent organically, with strong growth in drains. Operating margin increased 30 basis points and 140 basis points on a reported and adjusted basis, respectively. Both increases were driven by price, productivity savings and volume, partially offset by inflation, mix and incremental investments. GAAP operating margin was negatively impacted by incremental restructuring charges.

APMEA – Reported and organic sales decreased 12 percent and 8 percent, respectively. Stronger sales in China were more than offset by continued softness in Korea and project timing in the Middle East. Reported and adjusted operating margin both decreased 90 basis points as productivity initiatives were more than offset by lower third-party and affiliate volume and incremental growth investments.

Cash Flow and Capital Allocation
For the first six months of 2019, operating cash flow was $20 million, net capital expenditures were $15 million and free cash flow was $5 million. In the comparable period last year, operating cash flow was $1 million, net capital expenditures were approximately $15 million and free cash outflow was approximately $14 million. Free cash flow increased due to increased income, lower inventory, lower tax payments and lower capital expenditures. We expect continued improvement in free cash flow during the second half of 2019, due to normal seasonality.

We repatriated $19 million in cash during the second quarter. For the first six months of 2019, $30 million had been repatriated, a majority of which was used to pay down revolving debt.

We repurchased approximately 56,000 shares of Class A common stock at a cost of $4.7 million during the second quarter. For the first six months of 2019, we repurchased approximately 130,000 shares at a cost of approximately $10.3 million, which offset dilution from our stock compensation programs.