Watts Water Technologies Reports Third Quarter Results for 2014

Watts Water Technologies, Inc. (NYSE: WTS) today announced results for the third quarter and nine months ended September 28, 2014. Sales for the third quarter of 2014 increased 1.1%, 1.2% organically, as compared to the third quarter of 2013. Sales for the first nine months of 2014 increased 3.6%, 2.8% organically, as compared to the similar period in 2013. Net income from continuing operations per diluted share (EPS) for the third quarter and nine months ended September 28, 2014 was $0.64 and $1.64, respectively, as compared to $0.49 and $1.48 for the third quarter and nine months ended September 29, 2013, respectively. Adjusted EPS for the third quarter and nine months ended September 28, 2014 was $0.70 and $1.94, respectively, as compared to $0.58 and $1.65 for the third quarter and nine months ended September 29, 2013, respectively. Refer to Table 1 for a reconciliation of adjustments for special items to arrive at adjusted results and EPS. A summary of third quarter and nine months financial results is as follows:

All financial information and period-to-period references are on a continuing operations basis unless otherwise noted. Organic sales growth excludes the impacts of acquisitions, divestitures and foreign exchange from year-over-year comparisons. Reconciliations to generally accepted accounting principles (GAAP) and non-GAAP reconciliations are provided in the attached financial tables. 2013 third quarter and year-to-date segment results have been retrospectively revised for allocated corporate costs as discussed in more detail in our Current Report on Form 8-K dated April 15, 2014.

Third Quarter Highlights:

• Third quarter 2014 organic sales growth in the Americas of 4.1% and in Asia- Pacific of 27.9% was mostly offset by an organic sales reduction in Europe, Middle East and Africa (EMEA) of 5.1%.
• Adjusted operating margins increased by 2.2 percentage points to 11.6% for the third quarter of 2014 as compared to the third quarter of 2013. In 2013, adjusted operating margins included a $3.5 million increase in the Company’s product liability cost, $2.4 million in manufacturing inefficiencies and logistics costs related to the lead free conversion, and excluded $2.0 million of rebate costs that were subsequently recorded in the fourth quarter of 2013. These items had an impact to EPS of $0.06 in the third quarter of 2013.
• Regionally, adjusted operating margins expanded in the Americas by 4.3 percentage points to 14.6% and by 0.4 percentage points in EMEA to 11.9%, due primarily to production efficiencies, the restructuring efforts in EMEA and general cost controls.
• Operating margins on a GAAP basis increased 3.3 percentage points to 11.4%, as compared to the third quarter of 2013.
• The Company repurchased approximately 149 thousand shares of Company stock during the third quarter, at a cost of $9.1 million, as part of the previously announced share repurchase program. Year-to-date, the Company has spent approximately $29.1 million to repurchase its common stock.
• Free cash flow was $57.8 million for the nine months ended September 28, 2014, as compared to $46.5 million for the nine months ended September 29, 2013; the increase was primarily driven by increased income and a reduction in capital spending related to the Company’s 2013 investment in the lead free initiative.

Robert J. Pagano, Jr., Chief Executive Officer, commented, “We were pleased with our operating margin expansion in the third quarter, driven by increased volumes in the Americas, more stable manufacturing in our lead free foundry and our restructuring and transformation efforts in EMEA, where our margins grew despite a sales reduction caused by the general market softness in Europe. Our Asia-Pacific team continued to expand its reach in specific regions within China, which in turn drove the sales expansion with our valves and heating product offerings.”

In this press release we refer to non-GAAP financial measures (including adjusted operating income, adjusted operating margins, adjusted net income, adjusted earnings per share, free cash flow, net debt to capitalization ratio and the cash conversion rate of free cash flow to net income) and provide a reconciliation of those non-GAAP financial measures to the corresponding financial measures contained in our consolidated financial statements prepared in accordance with GAAP. We believe that these financial measures are appropriate to enhance an overall understanding of our historical financial performance and future prospects. Adjusted operating income, adjusted operating margins, adjusted net income and adjusted earnings per share eliminate certain expenses incurred in the periods presented that relate primarily to our global restructuring programs, deployment costs, asset impairment charges, income tax adjustments, significant legal and customs settlements, and other costs and related tax benefits. Management then utilizes these adjusted financial measures to assess the run-rate of the Company’s continuing operations against those of comparable periods without the distortion of those factors. Free cash flow and the net debt to capitalization ratio, which are adjusted to exclude certain cash inflows and outlays, and include only certain balance sheet accounts from the comparable GAAP measures, are an indication of our performance in cash flow generation and also provide an indication of the Company's relative balance sheet leverage to other industrial manufacturing companies. The cash conversion rate of free cash flow to net income is also a measure of our performance in cash flow generation. These non-GAAP financial measures are among the primary indicators management uses as a basis for evaluating our cash flow generation and our capitalization structure. In addition, free cash flow is used as a criterion to measure and pay certain compensation-based incentives. For these reasons, management believes these non-GAAP financial measures can be useful to investors, potential investors and others. The Company’s non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies. The presentation of this additional information is not meant to be considered in isolation or as a substitute for financial measures prepared in accordance with GAAP.

Watts Water Technologies, Inc. will hold a live web cast of its conference call to discuss third quarter results for 2014 on Wednesday, October 29, 2014, at 9:00 a.m. Eastern Time. This press release and the live web cast can be accessed by visiting the Investor Relations section of the Company's website at www.wattswater.com. Following the web cast, an archived version of the call will be available at the same address until October 29, 2015.

Watts Water Technologies, Inc., through its subsidiaries, is a world leader in the manufacture of innovative products to control the efficiency, safety, and quality of water within residential, commercial, and institutional applications. Watts’ expertise in a wide variety of water technologies enables Watts to be a comprehensive supplier to the water industry.

This Press Release includes “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views about future events. You should not rely on forward-looking statements because our actual results may differ materially from those predicted as a result of a number of potential risks and uncertainties. These potential risks and uncertainties include, but are not limited to: the effectiveness of our ongoing restructuring and transformation projects; the current economic and financial condition, which can affect the housing and construction markets where our products are sold, manufactured and marketed; shortages in and pricing of raw materials and supplies; our ability to compete effectively; changes in variable interest rates on our borrowings; failure to expand our markets through acquisitions; failure to successfully develop and introduce new product offerings or enhancements to existing products; failure to manufacture products that meet required performance and safety standards; foreign exchange rate fluctuations; cyclicality of industries where we market our products, such as plumbing and heating wholesalers and home improvement retailers; environmental compliance costs; product liability risks; changes in the status of current litigation; and other risks and uncertainties discussed under the heading “Item 1A. Risk Factors” and in Note 14 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC and our subsequent filings with the SEC. We undertake no duty to update the information contained in this Press Release, except as required by law.