Watts Water (WTS) Beats on Q1 Earnings Despite Lower Revenues
Despite coronavirus-induced adversities, Watts Water Technologies, Inc. WTS reported relatively healthy first-quarter 2020 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. However, it reported lower revenues year over year due to muted demand owing to the adverse impact of the coronavirus pandemic.
Net Income
On a reported basis, quarterly net income was $32 million or 94 cents per share compared with $31 million or 91 cents in the year-ago quarter. Better operating performances in all regions and lower operating costs despite top-line contraction drove the year-over-year growth.
First-quarter adjusted net income was $32.3 million or 95 cents per share compared with $32 million or 94 cents in the year-earlier quarter. The bottom line surpassed the Zacks Consensus Estimate by 9 cents.
Watts Water Technologies Inc Price, Consensus and EPS Surprise
Watts Water Technologies Inc price-consensus-eps-surprise-chart | Watts Water Technologies Inc Quote
Revenues
On a reported basis, quarterly net sales decreased 1.6% year over year to $382.6 million, driven by lower demand due to the virus outbreak. The top line, however, surpassed the Zacks Consensus Estimate of $371 million. Organic sales declined 1% year over year.
Quarterly Segment Results
Americas: Net sales increased 1.3% year over year to $262.4 million. Organic sales remained relatively flat as growth in drains, water quality, heating and hot water products was offset by lower sales of fluid solution products. Adjusted operating income grew 1.6% to $43.8 million owing to benefits from price and productivity savings. However, these were offset by lower volumes, higher investments and inflation.
Europe: Net sales decreased 5.2% to $110.2 million, affected by foreign exchange movements. Organic sales were down 2% in Europe as strength in the company’s drains platform was more than offset by lower fluid solution product sales. The segment’s adjusted operating income was $13.7 million compared with $14.6 million in the year-ago quarter. This was mostly led by lower volumes, higher investments and inflation.
Asia-Pacific, Middle East and Africa (APMEA): Net sales decreased 25.5% to $10 million. It witnessed a contraction with lower organic sales across all regions, except for Korea and New Zealand. Adjusted operating loss came in at $0.1 million against adjusted operating income of $1.3 million in the prior-year quarter. This was mostly driven by lower volumes triggered by the virus outbreak, higher investments and inflation.
Other Details
Cost of goods sold in the first quarter decreased 2.1% year over year to $219.8 million, while gross profit was down to $162.8 million from $164.2 million in the prior-year quarter. Operating income was $47.8 million, up 2.4%. GAAP operating margin was up 50 basis points (bps) to 12.5%, while adjusted operating margin was 12.6%, up 20 bps.
Cash Flow & Liquidity
Watts Water utilized $0.9 million of net cash for operating activities in first-quarter 2020 compared with net cash utilization of $24.2 million in the year-ago quarter. The improvement was primarily attributable to better working capital management and incremental profit. As of Mar 31, the company had $245.4 million in cash and equivalents and $296.9 million of long-term debt (net of current portion).
Subsequent to the end of the quarter, Watts Water enhanced its financial flexibility by extending the existing credit facility. It has a low net debt leverage ratio of 0.5x. The company repurchased about 175,000 shares for $14.7 million during the quarter. The company has temporarily suspended the stock buyback program to preserve cash.
Guidance Withdrawn
The company expects near-term volatility to continue due to the coronavirus-led pandemonium despite the underlying strength of the resilient business model and the diligent execution of operational plans. With uncertainty over the impact of coronavirus on long-term revenues and visibility, management decided to withdraw guidance for 2020. Watts Water is undertaking various cost management initiatives to tide over the storm. These include cost actions through headcount reductions, furloughs and reduced discretionary spending, along with cash preservation efforts through suspension of share repurchase program and reduced planned capital spending.
Zacks Rank & Key Picks
Watts Water currently carries a Zacks Rank #4 (Sell).
Better-ranked stocks in the broader industry include Acacia Communications, Inc. ACIA, Turtle Beach Corporation HEAR and Plantronics Inc PLT, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Acacia has a long-term earnings growth expectation of 30%. It delivered a positive earnings surprise of 17.7%, on average, in the trailing four quarters.
Turtle Beach surpassed earnings estimates in the trailing four quarters, the average positive surprise being 112.5%.
Plantronics delivered a positive earnings surprise of 27.7%, on average, in the trailing four quarters.
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