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Watts Water (WTS) Tops Q1 Earnings & Sales, Keeps View

Watts Water Technologies, Inc. WTS reported first-quarter 2016 adjusted earnings of 57 cents per share, which surged 26.7% year over year. Earnings also surpassed the Zacks Consensus Estimate of 50 cents.

On a reported basis, including special items, Watts Water’s earnings increased to 47 cents per share in the first quarter from 33 cents in the year-ago quarter.

Total revenue dropped 3.4% year over year to $344 million in the quarter due to the 2015 exit of non-core product. Revenues, however, beat the Zacks Consensus Estimate of $337 million. The company’s organic sales increased 6% in the quarter, driven by growth across all regions and additional shipping days.

Cost and Margins

Cost of sales declined 7.4% year over year to $209 million. Gross profit improved 3.6% to $135 million. Gross margin in the reported quarter expanded 270 basis points to 39.3%. Selling, general and administrative expenses decreased to $102.6 million from $105.7 million in the prior-year quarter.

Adjusted operating profit increased 27% to $37.3 million in the reported quarter. Adjusted operating margin grew 260 basis points to 10.8%.

Segment Performance

North America: Net sales dropped 6.4% to $222.3 million in the reported quarter. Adjusted operating profit increased 18.3% to $33 million.

EMEA: Net sales went up 1.8% year over year to $111 million. Adjusted operating profit rose 30.9% to $10.6 million from the year-ago quarter figure of $8.1 million.

Asia: Net sales increased 11% to $10.9 million from $9.8 million in the prior-year quarter. The segment reported adjusted operating profit of $2 million compared to $1.5 million in the year-ago quarter.

Financial Performance

Watts Water had cash and cash equivalents of $259.4 million at the end of first-quarter 2016 compared with $296 million at 2015 end. The company used $21.9 million of cash in operating activities in the reported quarter compared with cash inflow of $0.8 million in the year-ago quarter.

As of quarter end, Watts Water’s net debt increased to $338.8 million from $279 million as of Dec 31, 2015. Net debt-to-capitalization ratio increased to 31.7% as of Apr 3, 2016, from 28.4% as of Dec 31, 2015.

On Apr 28, 2016, the company borrowed $230 million from its line of credit and used the funds to pay off an outstanding private placement loan of $225 million, plus accrued interest, which was due Apr 30, 2016.

Watts Water repurchased approximately 268,000 shares during the first quarter of 2016 for $12.5 million.

Outlook

Watts Water maintained its full-year 2016 outlook. The company expects inventories to normalize along with an increase in cash flow as the year progresses.

Watts Water, which operates through its subsidiaries, is a leading manufacturer of innovative products that control the efficiency, safety and quality of water within applications (residential, commercial, and institutional).

Zacks Rank

At present, Watts Water carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the same sector include Nanometrics Incorporated NANO, Badger Meter Inc. BMI and M/A-Com Technology Solutions Holdings, Inc. MTSI. All these stocks sport a Zacks Rank #1 (Strong Buy).

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