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Watts Water Technologies Reports Second Quarter Results for 2012

NORTH ANDOVER, Mass.--(BUSINESS WIRE)--Jul. 31, 2012-- Watts Water Technologies, Inc. (NYSE: WTS) today announced results for the second quarter ended July 1, 2012. Net income per diluted share (EPS) for the second quarter of 2012 was $0.51. Adjusting for special items, second quarter 2012 adjusted EPS was $0.53, compared to second quarter 2011 adjusted EPS of $0.50. A summary of second quarter financial results is as follows:

All financial information and period-to-period references are on a continuing operations basis unless otherwise noted. Reconciliations to generally accepted accounting principles (GAAP) and non-GAAP reconciliations are provided in the attached financial tables.

Second Quarter Highlights:

• Second quarter 2012 sales were down 1% from the second quarter of 2011, with approximately 3% growth from acquisitions being offset by approximately 4% from the weakening of foreign currencies against the U.S. dollar.
• Organic sales growth was essentially flat with increases in North America and Asia being offset by a reduction in Europe, Middle East and Africa (EMEA).
• Adjusted 2012 second quarter EPS of $0.53 was 6% higher than adjusted EPS for the second quarter of 2011. Acquisitions accounted for $0.01 of earnings in the second quarter of 2012.
• Net impact on second quarter 2012 EPS from share repurchase program offset by weaker foreign exchange was negative $0.01 when compared to the second quarter of 2011.
• Adjusted operating margins decreased by 0.1 percentage point to 9.4% for the second quarter of 2012 as compared to the second quarter of 2011.
• Adjusted operating margins increased by 1.5 percentage points as compared to the first quarter of 2012.
• The previously announced two million share repurchase program was completed during the first week of July; the total investment was $65.8 million with a second quarter cash impact of $63.2 million.
• Free cash flow increased by 65% to $15.3 million for the six months ended July 1, 2012 as compared to the same period in 2011.

The reduction in second quarter 2012 sales was primarily due to unfavorable foreign exchange movements of 4%, primarily associated with the weakening of the euro against the U.S. dollar. This was offset by contributions from acquisitions of 3%, with organic sales growth essentially flat because organic increases in North America and Asia were offset by a reduction in EMEA. Operating income for the second quarter of 2012 was $33.7 million, which yielded an operating margin of 9.1%, compared to operating income in the second quarter of 2011 of $26.6 million, which yielded an operating margin of 7.1%. On an adjusted basis, operating income in the second quarter of 2012 was $34.9 million compared to $35.7 million in the second quarter of 2011, a 2% decrease. On an adjusted basis, operating margins decreased 0.1 percentage point to 9.4% in the second quarter of 2012, compared to 9.5% on an adjusted basis for the second quarter of 2011.

North American sales increased $9.8 million, or 4.6%, to $221.8 million in the second quarter of 2012, compared to $212.0 million for the second quarter of 2011. This increase was primarily due to acquired sales of $3.1 million and an organic sales increase of $7.6 million, or 3.6%, offset partially by unfavorable foreign exchange movements of $0.9 million associated with the weakening of the Canadian dollar against the U.S. dollar. Sales into the North American wholesale market increased organically by 2.3% during the second quarter as compared to the same period in 2011, primarily from increased sales in our residential and commercial flow control and HVAC and gas product lines. Organic sales into the North American DIY home improvement market increased 8.9% for the second quarter of 2012 as compared to the second quarter of 2011 primarily from increased sales of the residential and commercial flow control product lines.

EMEA sales decreased $15.0 million to $142.8 million for the second quarter of 2012, compared to $157.8 million for the second quarter of 2011. This decrease was primarily due to unfavorable foreign exchange movements associated with the weakening of the euro versus the U.S. dollar of $15.5 million and an organic sales decrease of $9.3 million, or (5.9%), partially offset by sales from an acquired company of $9.8 million. Deterioration in the economic environment in southern Europe contributed to the decline in sales volume in 2012 versus 2011. Organic sales in the EMEA wholesale market were down 2% in the quarter, and OEM sales decreased by 9% compared to the second quarter of 2011. EMEA segment sales represented approximately 39% and 42% of total Company sales in the second quarters of 2012 and 2011, respectively.

Consolidated sales for the first six months of 2012 were $735.3 million, an increase of $29.7 million, or 4%, compared to the first six months of 2011, primarily from acquired growth being partially offset by unfavorable foreign exchange. Organic sales were essentially flat, with growth in North America and Asia being offset by a reduction in EMEA.

David J. Coghlan, Chief Executive Officer, commented, “Our adjusted operating income decreased by 2% in the second quarter of 2012 as compared to the second quarter of 2011. As we noted during the first quarter, in North America, gross margin was affected by increases in non-commodity product costs and preproduction costs resulting from the continuing conversion of certain manufacturing plants to lead-free production. The effect of these factors has significantly diminished from the first quarter as we work through the conversion issues. We have also taken several cost recovery actions in the second quarter to mitigate their effects, and our product liability costs decreased. These developments, along with additional North American sales volume, increased our adjusted operating margin by 1.5 percentage points to 9.4% as compared to the first quarter of this year and the second quarter 2012 operating margin was only 0.1 percentage point below the second quarter of 2011.

Mr. Coghlan concluded, “We generated free cash flow of $15.3 million through the first six months of 2012, an increase of approximately 65% as compared to free cash flow of $9.3 million for the same period in 2011. The increase is primarily due to incremental cash provided by operations along with lower year-to-date capital spend in 2012 as compared to 2011. We successfully completed the previously announced share repurchase program during the first week of July, purchasing approximately $63.2 million of shares during the quarter, and $65.8 million in total. At July 1, 2012, our net debt to capitalization ratio was 20%, as compared to 13.9% at December 31, 2011, the increase driven primarily by cash used to fund the share repurchase program. As of quarter end, we had approximately $168 million of cash on hand and approximately $265 million in available credit under our credit agreement.”

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, free cash flow, net debt to capitalization ratio and the cash conversion rate of free cash flow to net income) 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 are appropriate to enhance an overall understanding of our historical financial performance and future prospects. Adjusted operating income, adjusted operating margins, adjusted net income and adjusted earnings per share eliminate certain expenses incurred in the periods presented that relate primarily to our global restructuring programs, CEO separation costs, significant legal and customs settlements, due diligence costs, acquisition accounting costs, tax adjustments, and other costs and related tax benefits. Management then utilizes these adjusted financial measures to assess the run-rate of the Company’s continuing operations against those of comparable periods without the distortion of those factors. Free cash flow 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. The cash conversion rate of free cash flow to net income is also a measure of our performance in cash flow generation. 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.

Watts Water Technologies, Inc. will hold a live web cast of its conference call to discuss second quarter results for 2012 on Wednesday, August 1, 2012, at 9:00 a.m. Eastern Time. This press release and the live web cast can be accessed by visiting the Investor Relations section of the Company's website at www.wattswater.com. Following the web cast, an archived version of the call will be available at the same address until August 1, 2013.

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 Watts to be a comprehensive supplier to the water industry.

This Press Release includes statements that are not historical facts and are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect Watts Water Technologies’ current views about future results of operations and other forward-looking information. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should” and “would” or similar words. You should not rely on forward-looking statements because Watts’ actual results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. These factors include, but are not limited to, the following: the effectiveness of our operational excellence initiatives and cost recovery actions, the current economic and financial condition, which can affect levels of housing starts and remodeling, affecting the markets where the Company’s products are sold, manufactured, or marketed; shortages in and pricing of raw materials and supplies; loss of market share through competition; introduction of competing products by other companies; pressure on prices from competitors, suppliers, and/or customers; changes in variable interest rates on Company borrowings; identification and disclosure of material weaknesses in our internal control over financial reporting; failure to expand our markets through acquisitions; failure or delay in developing new products; lack of acceptance of new products; failure to manufacture products that meet required performance and safety standards; foreign exchange rate fluctuations; cyclicality of industries, such as plumbing and heating wholesalers and home improvement retailers, in which the Company markets certain of its products; environmental compliance costs; product liability costs; the results and timing of the Company’s manufacturing restructuring plan; changes in the status of current litigation; and other risks and uncertainties discussed under the heading “Item 1A. Risk Factors” and in Note 14 of the Notes to the Consolidated Financial Statements in the Watts Water Technologies, Inc. Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities Exchange Commission and other reports Watts files from time to time with the Securities and Exchange Commission. Watts does not intend to, and undertakes no duty to, update the information contained in this Press Release, except as required by law.

Source: Watts Water Technologies, Inc.

Watts Water Technologies, Inc.
William C. McCartney, 978-688-1811
Chief Financial Officer
Fax: 978-688-2976