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Watts Water (WTS) Q2 Earnings Miss Estimates, Revenues Match

Zacks Equity Research

Watts Water Technologies, Inc. WTS reported healthy second-quarter 2019 financial results, wherein both the top line and bottom line increased on a year-over-year basis. The performance was primarily driven by strong operating performance in the Americas, resulting in year-over-year growth in sales and profitability.

Net Income

On a reported basis, quarterly net income was $36.4 million or $1.06 per share compared with $36 million or $1.05 per share in the year-ago quarter. The improvement was mainly driven by growth in price, volume and productivity. However, the momentum was partly offset by inflation, higher tariff costs, growth investments and negative impact of foreign exchange.

Adjusted net income came in at $37.3 million or $1.09 per share compared with $36 million or $1.05 per share a year ago. The bottom line missed the Zacks Consensus Estimate by a penny.

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

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 increased 2.2% year over year to $416.8 million, driven by pricing actions and organic volume in the Americas and Europe. The top line matched the Zacks Consensus Estimate.

Organic sales jumped 4% year over year. Regionally, organic sales in the Americas increased 6%, driven by broad growth in plumbing, heating and water quality products. Organic sales improved 3% in Europe owing to strength in drains business. Asia Pacific Middle East and Africa (APMEA) saw a decline of 8% as stronger sales in China were more than offset by continued softness in Korea and project timing in the Middle East.

Segmental Performance

Americas: Net sales increased 5.5% to $287 million in the second quarter. Adjusted operating income increased 8.6% to $50.7 million.

Europe: Net sales decreased 3.3% to $113.2 million, affected by negative foreign exchange movements. The segment’s adjusted operating income was $14.1 million compared with $12.9 million in the year-ago quarter.

APMEA: Net sales decreased 11.7% to $16.6 million. Adjusted operating income came in at $1.2 million compared with $1.6 million in the prior-year quarter.

Other Details

Cost of goods sold went up 1.6% year over year to $242.2 million. Gross profit increased 3.1% to $174.6 million driven by top-line growth. Operating income was $54.3million, up 4%. GAAP operating margin was up 20 basis points (bps) to 13%. Adjusted operating margin came in at 13.3%, up 50 bps.

Cash Flow & Liquidity

During the first six months of 2019, Watts Water generated $19.7 million of net cash from operating activities compared with $1.5 million in the year-ago period. As of Jun 30, 2019, the company had $166.8 million in cash and equivalents with $238.8 million of long-term debt (net of current portion).

Watts Water repurchased about 56,000 shares for $4.7 million during the reported quarter. It repatriated $19 million in cash during the quarter and used it to pay down revolving debt.

Going Forward

Watts Water is focused on accelerating organic growth, drive margin expansion and reinvest in future growth and productivity initiatives. The company intends to launch smart and connected product strategy through 2019 and beyond, which is likely to provide it with further differentiation in the marketplace.

Also, it is committed to enhancing shareholder value and executing its balanced cash allocation strategy. The company is following its long-term growth strategy of driving the business organically and through acquisitions.

Zacks Rank & Other Stocks to Consider

Watts Water currently carries a Zacks Rank #2 (Buy). A few other top-ranked stocks in the broader industry are Harmonic Inc. HLIT, Comtech Telecommunications Corp. CMTL and Nokia Corp. NOK. While Harmonic and Comtech sport a Zacks Rank #1 (Strong Buy), Nokia carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Harmonic surpassed earnings estimates in each of the trailing four quarters, the average positive surprise being 119.9%.

Comtech surpassed earnings estimates in each of the trailing four quarters, the average positive surprise being 216.7%.

Nokia surpassed earnings estimates thrice in the trailing four quarters, the average positive surprise being 89.3%.

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