Watts Water Technologies Reports Fourth Quarter and Full Year Results for 2016

Watts Water Technologies Reports Fourth Quarter and Full Year Results for 2016

• 4Q16 sales totaled $342 million, down 5% driven by fewer shipping days; organic growth flat on a days adjusted basis
• 4Q16 GAAP operating margin of 9.2%; adjusted operating margin of 10.9%, up 100 bps
• Solid 4Q16 and full year GAAP EPS of $0.51 and $2.44, respectively
• Adjusted 4Q16 and full year EPS of $0.64 and $2.67, respectively, both record performances
• 2016 operating cash flow of $138 million; 2016 free cash flow of $102 million, up 25% year-over-year

Watts Water Technologies, Inc. (NYSE: WTS) today announced results for the fourth quarter and year ended December 31, 2016. Sales for the fourth quarter and the full year were $342 million and $1.4 billion, respectively, both down 5%, as compared to the similar periods of 2015. Net income (loss) per diluted share (EPS) for the fourth quarter and year ended December 31, 2016 was $0.51 and $2.44, respectively, as compared to ($3.41) and ($3.24) for the fourth quarter and year ended December 31, 2015, respectively. The significant increase in GAAP EPS in the fourth quarter was primarily due to a 2015 goodwill impairment charge. The full year increase in GAAP EPS was primarily due to the 2015 goodwill impairment charge and the settlement of the Company’s pension plan and other benefit obligations. Adjusted for special items, fourth quarter and year ended December 31, 2016 EPS was $0.64 and $2.67, respectively, as compared to $0.59 and $2.41 for the fourth quarter and year ended December 31, 2015, respectively. Adjusted results improved due to strong operating performances in the quarter and during the year. A summary of fourth quarter and full year financial results is as follows:

Remarking on operating results, Chief Executive Officer, Robert J. Pagano Jr., said, “Our fourth quarter results were in line with our expectations. We continued to expand operating margins and EPS despite flat organic growth. Our transformation initiatives and on-going productivity focus drove the strong margin increase. We had another strong year of free cash flow, once again exceeding net income.”

Commenting on the full year 2016, Mr. Pagano noted, “We made substantial progress in 2016, building on the foundation we previously established. We continued to transform the Company by realigning our business teams and product platforms, getting closer to our customers, executing on restructuring initiatives and re-investing for future growth. We also expanded our solutions offering for commercial boiler room applications with the acquisition of PVI Industries. We achieved these results while significantly expanding our full year adjusted operating margin by 130 basis points through continued portfolio enhancement, productivity and other transformation initiatives. We expect our efforts in 2016 will drive growth and further margin expansion in 2017 and beyond.”

Fourth Quarter Financial Highlights:

• Excluding the effect of fewer shipping days, organic sales were flat with the fourth quarter last year. Regionally, organic sales adjusted for shipping days were flat in the Americas, down 1% in Europe, Middle East and Africa (EMEA), and up 18% in Asia-Pacific. The Americas sales performance was impacted by anticipated headwinds in the retail channel which offset growth in our core plumbing and valves product lines. EMEA sales were impacted by lower demand in our larger geographical markets, while Asia-Pacific grew substantially due to continued growth in the residential markets in China and in the commercial markets outside of China.
• Operating margin on a GAAP basis increased to 9.2%, compared to a negative margin of 32.9% in the fourth quarter of 2015. Included in 2015 operating margin were a $130 million goodwill impairment charge related to EMEA and a $6 million charge to settle legacy product liability claims. Adjusted operating margin increased 1.0 percentage point to 10.9% in the fourth quarter of 2016 compared to 2015, driven primarily by strong productivity resulting from our transformation initiatives.
• GAAP EPS of $0.51 was higher than the prior year quarter EPS of ($3.41) primarily driven by the 2015 charges for goodwill and product liability costs previously mentioned. Adjusted EPS of $0.64 was 8% higher than 2015 as a result of improved operational performance, which more than offset a headwind from the exit of undifferentiated products.
• For 2016, operating cash flow was $138 million and net capital expenditures were $36 million, resulting in free cash flow of $102 million. In 2015, operating cash flow was $109 million, net capital expenditures were $28 million and free cash flow was $82 million. Operating cash flow in 2015 included a $49 million outflow for the settlement of the Company’s pension plan and other benefit obligations.
• The Company repurchased approximately 68,000 shares of Class A common stock at a cost of approximately $4 million during the fourth quarter of 2016. For 2016, approximately 501,000 shares were purchased at a cost of approximately $27 million. Approximately $56 million remains available for stock repurchases under the current stock repurchase program, which has no expiration date.

For a reconciliation of GAAP to non-GAAP items and a statement regarding the usefulness of these measures to investors and management in evaluating our operating performance, please see the tables attached to this press release.

Watts Water Technologies, Inc. will hold a live web cast of its conference call to discuss fourth quarter and year end results for 2016 on Friday, February 10, 2017, at 9:00 a.m. EST. 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 webcast, an archived version of the call will be available at the same address until February 10, 2018.

The Company's 2017 Annual Meeting of Stockholders will be held at 9:00 a.m. EST on Wednesday, May 17, 2017 at the Company’s executive offices located at 815 Chestnut Street, North Andover, Massachusetts.

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’s expertise in a wide variety of water technologies enables it 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, including statements relating to our transformation and restructuring initiatives and the timing and expected costs and savings associated with those initiatives, as well as statements about expected synergies, and growth and margin expansion in 2017 and beyond. 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, the timing and the expected costs and savings associated with our ongoing restructuring and transformation programs and initiatives; 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; failure of the settlements in Ponzo v. Watts and Klug v. Watts to receive final court approval; changes in the status of current litigation; and other risks and uncertainties discussed under the heading “Item 1A. Risk Factors” and in Note 15 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2015 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.

Watts Water Technologies, Inc.
Timothy M. MacPhee, 978-689-6201
Vice President, Investor Relations
Fax: 978-688-2976

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