Watts Water (WTS) Beats Q3 Earnings, Lags On Revenues

Watts Water Technologies, Inc. (NYSE:WTS) reported third-quarter 2016 adjusted earnings of 71 cents per share, a 6% improvement year over year. Earnings surpassed the Zacks Consensus Estimate of 69 cents. Despite a lower top line, the company witnessed growth in earnings owing to its transformation and productivity initiatives as well as a lower interest expense and a lower effective tax rate.

On a reported basis, including special items, Watts Water’s earnings were 63 cents per share in the quarter, a reversal from a loss per share of 73 cents in the year-ago quarter.

Total revenue dropped 7% year over year to $341 million in the quarter, falling short of the Zacks Consensus Estimate of $354 million. Organic sales edged down 1% in the quarter.

Organic sales surged 26% in Asia-Pacific aided by a recovery in commercial valves demand within China and continued growth in Southeast Asia. Organic sales however fell 3% in the Americas mainly due to lower than expected sales of AERCO products, which in turn were due to project timing and certification delays. Further, the company witnessed headwinds in the Americas retail channel related to the exit of undifferentiated products, which negated the growth in core plumbing and valves product lines. Organic sales were flat in Europe, Middle East and Africa (EMEA).

Cost and Margins

Cost of sales declined 11% year over year to $199 million. Gross profit remained flat at $142 million. Gross margin in the reported quarter expanded 280 basis points (bps) to 41.6%. Selling, general and administrative expenses plunged 37% to $104.5 million from $166.6 million in the prior-year quarter.

Adjusted operating profit dipped 1% to $41.4 million in the reported quarter. Adjusted operating margin however grew 70 bps to 12.1% due to favorable sales mix, transformation initiatives and strong productivity.

Segment Performance

Americas: Net sales slumped 12% to $215.8 million in the reported quarter. Adjusted operating profit increased 1% to $36.3 million.

EMEA: Net sales slipped 1% year over year to $109.8 million. Adjusted operating profit rose 8% to $12.9 million from the year-ago quarter figure of $12 million.

Asia-Pacific: Net sales soared 49% to $15.5 million from $10.4 million in the prior-year quarter. The segment reported adjusted operating profit of $1.9 million compared to $1.7 million in the year-ago quarter.

Financial Performance

Watts Water had cash and cash equivalents of $338.6 million at the end of third-quarter 2016 compared with $296 million at 2015 end. The company delivered $69.6 million of cash in operations for the nine-month period ended Oct 2, 2016 compared with $41.9 million in the comparable year-ago period.

As of quarter end, Watts Water’s net debt was $264.3 million, down from $279 million as of Dec 31, 2015. Net debt-to-capitalization ratio decreased to 25.9% as of Oct 2, 2016, from 28.4% as of Dec 31, 2015.

Watts Water repurchased 74,000 shares of Class A common stock for $5.2 million during the quarter, bringing the year-to-date total to approximately 433,000 shares at a cost of approximately $22.2 million. Approximately $60 million remains available under the company’s current authorization, which has no expiration date.

Watts Water announced the acquisition of Fort Worth, TX-based PVI Industries, a leading manufacturer of commercial stainless steel water heating equipment focusing on the high capacity market. PVI is a market leader in high capacity commercial water heaters and complements AERCO’s position in high efficiency boilers. Similar to AERCO, PVI is focused on differentiated product design for project specific customer applications.