Watts Water Technologies Reports Record Second Quarter 2023 Results

• Reported sales of $533 million increased 1%; organic sales were flat
• Reported operating margin of 18.8%, up 60 bps; adjusted operating margin of 19.5%, up 100 bps
• Reported EPS of $2.26, up 9%; adjusted EPS of $2.34, up 11%
• Delivered strong year-to-date operating cash flow of $101 million and free cash flow of $89 million
• Announcing $150 million share repurchase program
• Increasing full-year 2023 outlook

*Performance relative to second quarter in 2022

Watts Water Technologies, Inc., (NYSE: WTS) – through its subsidiaries, one of the world’s leading manufacturers and providers of plumbing, heating and water quality products and solutions – today announced results for the second quarter of 2023.

“We achieved another quarter of record results that exceeded our expectations, driven by the continued operational excellence of the Watts team. I would like to thank the team for their contributions to our success and their unwavering support of our customers,” stated Chief Executive Officer Robert J. Pagano Jr. “We generated record sales, operating earnings, operating margin and EPS, despite the challenging comparison to a very strong second quarter in 2022. Given our first half performance and our third quarter expectations, we are increasing our full-year 2023 outlook. Organic revenue growth is now expected to range from negative 2% to positive 2%, raising the midpoint by 2%. Adjusted operating margin is now expected to range from 16.7% to 17.3%, raising the midpoint by 100 basis points. Our balance sheet and cash flow remain strong and provide ample flexibility to continue to invest in the business and support the execution of our long-term strategy.”

A summary of second quarter financial results is as follows:

Second Quarter Financial Highlights
Second quarter 2023 performance relative to second quarter 2022

• Sales of $533 million increased 1% on a reported basis and were flat organically, primarily due to a tough prior year comparison with 16% organic growth in the second quarter of 2022. Mid-single digit organic growth in Europe and Asia Pacific, Middle East and Africa (“APMEA”) was offset by a low-single digit organic decline in the Americas. Sales from acquisitions totaled approximately $8 million and are reported within APMEA. Unfavorable foreign exchange movements had an immaterial impact in the quarter.
• Operating margin increased 60 basis points on a reported basis and 100 basis points on an adjusted basis, driven by favorable price, product mix and productivity, which more than offset inflation, lower volume and incremental investments. Reported operating margin was unfavorably impacted by restructuring and non-recurring acquisition charges.

Regional Performance

Americas

• Sales of $367 million decreased 2% on both a reported basis and an organic basis, largely due to a tough prior year comparison with 22% organic growth in the second quarter of 2022. Growth in core valve products was more than offset by declines in gas connectors, marine instrumentation and radiant heating products.
• Operating margin increased 220 basis points on a reported basis and 210 basis points on an adjusted basis as benefits from price realization, favorable product mix and productivity more than offset inflation, lower volume and incremental investments.

Europe

• Sales of $136 million increased 6% on a reported basis, which included favorable foreign exchange movements of 1%. Organic sales increased 5%, primarily driven by price realization, with sales growth in fluid solutions products, partially offset by a decline in sales of drains products.
• Operating margin increased 50 basis points on a reported basis and decreased 10 basis points on an adjusted basis. Reported operating margin benefited from a decline in restructuring charges in 2023. Reported and adjusted operating margin both benefited from increased price and productivity, but these benefits were more than offset by inflation, lower volume and incremental investments.

APMEA

• Sales of $30 million increased 33% on a reported basis, which included unfavorable foreign exchange movements of 6%. Organic sales increased 6%, driven by growth in the Middle East and Australia. Sales from acquisitions totaled approximately $8 million.
• Operating margin decreased 720 basis points on a reported basis but increased 250 basis points on an adjusted basis. Reported and adjusted margins both benefited from increased trade and affiliate sales volume, price and productivity, which more than offset inflation. Reported operating margin was unfavorably impacted by restructuring and non-recurring acquisition charges.

Cash Flow and Capital Allocation

• For the first six months of 2023, operating cash flow was $101 million and net capital expenditures were $12 million, resulting in free cash flow of $89 million. In the comparable period last year, operating cash flow was $45 million and net capital expenditures were $12 million, resulting in free cash flow of $33 million. Operating and free cash flow increased due to higher net income and reduced working capital investment. Sequential improvement in operating and free cash flow is expected throughout 2023 due to normal seasonality.
• The Company repurchased approximately 24,000 shares of Class A common stock at a cost of $4.0 million during the second quarter. For the first six months of 2023, the Company repurchased approximately 47,000 shares at a cost of approximately $7.7 million. Approximately $20 million remains available for stock repurchases under the stock repurchase program authorized in 2019, which has no expiration date.
• On July 31, 2023, the Company’s Board of Directors authorized the repurchase of up to an additional $150 million of the Company’s Class A common stock from time to time on the open market or in privately negotiated transactions. The timing and number of any shares repurchased will be determined by the Company’s management based on its evaluation of market conditions. There is no expiration date for this program.

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 webcast of its conference call to discuss second quarter 2023 results on Thursday, August 3, 2023, at 9:00 a.m. EDT. This press release and the live webcast can be accessed by visiting the Investor Relations section of the Company's website at www.wattswater.com. Following the webcast, the call recording will be available at the same address until August 4, 2024.

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 us 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 expected 2023 financial results, including revenue, margins and cash flow, and our ability to manage challenging macro-economic and softer market conditions. 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, timing and expected savings associated with our cost-cutting actions, restructuring and transformation programs and initiatives; current economic and financial conditions, 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; inflation; 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 and costs; changes in the status of current litigation; the war in Ukraine; supply chain and logistical disruptions or labor shortages and workforce disruptions that could negatively affect our supply chain, manufacturing, distribution, or other business processes; 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, 2022, filed with the SEC, as well as risk factors disclosed in our subsequent filings with the SEC. We undertake no duty to update the information contained in this Press Release, except as required by law.

Key Performance Indicators and Non-GAAP Measures

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, organic sales, free cash flow, cash conversion rate of free cash flow to net income and net debt to capitalization ratio) 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 enhance the overall understanding of our historical financial performance and give insight into our future prospects. Adjusted operating income, adjusted operating margins, adjusted net income and adjusted earnings per share eliminate certain expenses incurred and benefits recognized in the periods presented that relate primarily to our global restructuring programs, acquisition related costs, and the related income tax impacts on these items. Management then utilizes these adjusted financial measures to assess the run rate of the Company’s operations against those of comparable periods. Organic sales growth is a non-GAAP measure of sales growth excluding the impacts of foreign exchange, acquisitions and divestitures from period-over-period comparisons. Management believes reporting organic sales growth provides useful information to investors, potential investors and others, and allows for a more complete understanding of underlying sales trends by providing sales growth on a consistent basis. Free cash flow, cash conversion rate of free cash flow to net income, 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. 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.

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