Watts Water Technologies Reports First Quarter 2021 Results

• Reported sales of $413 million increased 8%; organic sales increased 4%

• GAAP operating margin of 14.4% and adjusted operating margin of 14.5%; both up 190 bps

• GAAP EPS of $1.23 and adjusted EPS of $1.24; both up 31%

• Amended and extended existing credit facility in the second quarter; enhanced financial flexibility

• Increasing 2021 full year outlook  

*Performance relative to comparable first quarter in 2020

Watts Water Technologies, Inc. (NYSE: WTS) today announced results for the first quarter of 2021.

Chief Executive Officer Robert J. Pagano Jr. commented, “I want to thank all our employees and especially those involved in manufacturing, supply chain and logistics for their efforts in delivering a strong first quarter. The team overcame notable challenges in striving to meet our customer needs. Sales in all three regions exceeded our expectations. Drivers included an unexpected positive impact from this year’s freezing weather in the South-Central U.S. as well as higher sales in APMEA in the current quarter due to COVID-19’s impact last year. The higher sales, coupled with continued cost actions, drove solid operating margin expansion. Given our first quarter performance and current expectations for the second quarter, we are revising upward our outlook for the full year 2021.”

A summary of first quarter results is as follows:

First Quarter Financial Highlights

Sales of $413 million increased 8% on a reported basis and 4% organically. The sales increase was primarily related to the positive impact from the severe freezing weather in the South-Central United States, estimated to be 3% of incremental sales in the first quarter of 2021, and higher sales in Asia-Pacific, Middle East and Africa (“APMEA”) in the first quarter of 2021 compared to the first quarter of 2020, which was negatively impacted by COVID-19. Acquired sales totaled approximately $4 million in the quarter and foreign exchange contributed approximately $13 million year over year. Both reported and adjusted operating margin increased 190 basis points.

Regional Performance:

Americas

• Sales of $273 million increased 4% on a reported basis and were up 3% organically as growth in plumbing and electronics was partially offset by lower heating and hot water and water quality product sales. Acquisitions and foreign exchange contributed 1% to sales. The sales attributable to the freezing weather in the South-Central United States added approximately 4% to sales in the quarter.
• Operating margin increased by 130 basis points on a reported basis and 110 basis points on an adjusted basis, as benefits from volume, pricing, productivity and cost actions were partially offset by inflation and incremental growth investments.

Europe

• Sales of $123 million increased 12% on a reported basis, including a 10% positive foreign exchange impact, and a 2% organic increase. Strength in the plumbing and HVAC product platforms was partially offset by continued softness in drains.
• Operating margin increased 350 basis points on both a reported and adjusted basis driven by volume, price productivity and cost actions that were partially offset by inflation.

APMEA

• Sales of $18 million increased 76% on a reported basis, including net acquired sales of 23% and a positive foreign exchange impact of 10%. Organically sales increased 43% relative to the first quarter of 2020 as sales during the first quarter of 2020 declined by 23% due to COVID-19, providing an easier comparison. In addition, commercial valve sales into China continued to be strong during the first quarter of 2021.
• Operating margin increased by approximately 1,400 basis points on a reported basis and 1,550 basis points on an adjusted basis. Reported and adjusted operating margin expanded from increased volume, both third party and intercompany, as well as from cost actions and productivity, which were partially offset by inflation and incremental investments.

Cash Flow and Capital Allocation

• For the first quarter of 2021, operating cash flow was $34 million and net capital expenditures were $2 million, resulting in free cash flow of $32 million. In the comparable period last year, operating cash flow was negative $1 million and net capital expenditures were $7 million, resulting in free cash flow of negative $8 million. Free cash flow improved primarily due to better working capital management, incremental profit and reduced net capital spending.

• Effective March 30, 2021, the Company successfully extended its credit facility for an additional four years through March 2026. The Company’s balance sheet remains strong, with a net debt to EBITDA ratio of (0.1x) as of March 28, 2021.

• The Company repurchased approximately 31,000 shares of Class A common stock at a cost of $3.8 million during the first quarter.

Mr. Pagano concluded, “Given the strong performance in the first quarter and better second quarter expectations, we have updated our full year outlook, and now anticipate that consolidated organic revenues may increase by 2% to 7% and consolidated adjusted operating margin may expand by 30 to 70 basis points, compared to last year. While encouraging, market uncertainties, including supply chain disruptions concerns, inflation and vaccine implementation outside of the United States require continued monitoring and could impact our second half performance. We maintain ample liquidity and continue to invest for the future. We have navigated the pandemic well and are a stronger, more agile company.”

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 first quarter 2021 results on Wednesday, May 5, 2021, 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, an archived version of the call will be available at the same address until May 5, 2022.

The Company's 2021 Annual Meeting of Stockholders will be held at 9:00 a.m. EDT on Wednesday, May 12, 2021 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 the impact of COVID-19 on our 2021 results; our expected revenue, organic revenue, operating margin and adjusted operating margin for full-year 2021; and our expected liquidity position for 2021. 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 effects of the 2017 Tax Act; the effectiveness, the timing and the 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; 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; changes in the status of current litigation; the risks and uncertainties relating to the COVID-19 pandemic; 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, 2020, 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, EBITDA, and net debt to EBITDA 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, footprint optimization 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, the net debt to capitalization ratio, and net debt to EBITDA ratio which are adjusted to exclude certain cash inflows and outlays, or expenses (to arrive at EBITDA), 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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