Watts Water (WTS) Beats Earnings, Revenue Estimates In Q3

Watts Water Technologies, Inc. (NYSE:WTS) reported healthy third-quarter 2018 results mainly driven by strong operating performance in the Americas, resulting in year-over-year growth in sales and profitability. Both the top line and the bottom line surpassed the respective Zacks Consensus Estimates in the quarter.

Net Income

On a reported basis, net income increased 18.9% year over year to $31.5 million or 92 cents per share, driven by higher price, volume, productivity, lower effective tax rate and reduced non-operating expenses.

Adjusted net income came in at $34 million or 99 cents per share compared with $27.5 million or 80 cents per share a year ago. The bottom line beat the Zacks Consensus Estimate by 4 cents.

Watts Water Technologies, Inc. Price, Consensus and EPS Surprise

Revenues

On a reported basis, quarterly net sales increased 7.2% year over year to $390.9 million primarily driven by strong performance in the Americas. The top line surpassed the Zacks Consensus Estimate of $380 million.

Organic sales jumped 8% year over year. Regionally, organic sales in the Americas increased 10%, driven by higher demand in plumbing, drains and heating and hot water products, leading to incremental price and higher volume. Organic sales improved 4% in Europe owing to volume growth in drains and electronics products. Organic sales in Asia-Pacific, Middle East, and Africa (APMEA) grew 3% driven by higher volume in the Middle East and Africa, Australia and Korea.

Cost and Margins

Cost of goods sold went up 6.8% year over year to $226.4 million. Gross profit increased 7.7% to $164.5 million. Operating income was $46.9 million, up 5.9%. Operating margin was down 10 basis points (bps) to 12%. Adjusted operating margin was 12.9%, up 30 bps.

Segmental Performance

Americas: Net sales increased 9.9% to $262.7 million in the reported quarter. Adjusted operating income increased 11.1% to $45 million.

Europe: Net sales were up 2.4% year over year to $111.6 million. The segment’s adjusted operating income was $12.8 million compared with $14 million in the year-ago quarter.

APMEA: Net sales remained flat at $16.6 million. Adjusted operating income came in at $2.5 million compared with $0.7 million in the prior-year quarter.

Cash Flow and Liquidity

In the first nine months of 2018, Watts Water generated $66.6 million of cash from operating activities compared with $73.4 million in the year-ago period. As of Sep 30, 2018, the company had $156.8 million as cash and cash equivalents with $350.7 million as long-term debt, net of current portion. Net debt-to-capitalization ratio was 20.1%.

The company repurchased nearly 57,000 shares of Class A common stock for approximately $4.7 million during the third quarter.

Zacks Rank and Stocks to Consider

Watts Water currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the broader industry include Badger Meter, Inc. (NYSE:BMI) , Corning Incorporated (NYSE:GLW) and Harmonic Inc. (NASDAQ:HLIT) . While Badger Meter sports a Zacks Rank #1 (Strong Buy), Corning and Harmonic carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Badger Meter has a long-term earnings growth expectation of 9%.

Corning has a long-term earnings growth expectation of 8.8%. It beat earnings estimates in each of the trailing four quarters, the average positive surprise being 4.1%.

Harmonic has a long-term earnings growth expectation of 8.8%. It surpassed earnings estimates twice in the trailing four quarters, the average positive surprise being 94.4%.

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