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Watts Water Technologies, Inc.’s (WTS - Analyst Report) second-quarter 2013 adjusted earnings increased 10% year over year to 57 cents per share, driven by higher sales in North America and Asia, cost reductions in North America as well as share repurchases. Earnings beat the Zacks Consensus Estimate of 55 cents by 4%.
 
On a reported basis, including special items, earnings in the quarter were 53 cents per share compared with 50 cents in the year-ago quarter.
 
Total revenue edged up 1% year over year to $371.3 million, falling short of the Zacks Consensus Estimate of $376 million. Organic sales growth in North America and Asia were offset by a reduction in Europe, Middle East and Africa (EMEA).

Cost and Margins
 
Cost of sales remained flat at $238 million in the quarter. Gross profit increased 3% to $133.7 million. Consequently, gross margin expanded 50 basis points (bps) to 36% in the quarter. Selling, general and administrative expenses remained flat at $96 million. Adjusted operating profit increased 9% to $37.6 million and adjusted operating margin expanded 70 bps to 10.1%.
 
Segment Performance
 

North America: Net sales went up 3% to $224 million, aided by organic sales growth of 3%; partially offset by unfavorable foreign currency translation with the weakening of the Canadian dollar against the U.S. dollar. Operating profit increased 20% to $31 million in the quarter.
 
EMEA: Net sales were $139 million, down 3% on a year-over-year basis as positive impact of foreign currency translation was offset by lower organic sales. The segment reported an operating profit of $9.8 million, down 18% from the year-ago operating income of $12 million.
 
Asia: Net sales increased 28% to $8 million in the quarter. Operating profit increased 14% to $2.4 million from $2.1 million in the prior-year quarter, driven by an organic sales increase of 26.2% relating to residential valve and heating products.

Financial Updates
 
Cash and cash equivalents were $182 million as of Jun 30, 2013 compared with $272 million as of Dec 31, 2012. Cash flow from operations for the quarter was $21 million in the first half of 2013 compared with $23 million in the prior-year period.
 
Long-term debt, excluding current portion, amounted to $306 million as of Jun 30, 2013 compared with $307 million as of Dec 31, 2012. Net debt-to-capitalization ratio increased to 11.7% as of Jun 30, 2013, compared with 10.7% as of Dec 31, 2012.
 
During the quarter, Watts Water repurchased 2.2 million shares for $10 million as part of the $90 million share repurchase program announced in April.

Our View

Watts Water has made strategic investments in both people and systems and lead-free conversion program in North America. Even though it has affected near-term results, it is expected to lead to improved margins in the long term. The company will benefit from the residential construction recovery that seems imminent in the U.S. Its focus on expanding its business and leveraging the substantial market expansion opportunities in Asia will add to its growth profile. However, weak economic condition in Europe is still a headwind for the company.
 
Watts Water, 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). Watts Water retains a Zacks Rank #4 (Sell).
 
Peer Performance
 
Roper Industries Inc. (ROP - Snapshot Report) reported earnings of $1.31 per share, up 13.9% from the year-ago quarter and beat the Zacks Consensus Estimate by a penny.

Badger Meter Inc. (BMI - Analyst Report) reported first-quarter earnings per share of 44 cents, a 15.4% decline from 52 cents earned in the year-ago quarter and was well short of the Zacks Consensus Estimate of 55 cents.

On the other hand, Nanometrics Incorporated (NANO - Snapshot Report) reported first-quarter loss per share of 17 cents, narrower than the year-ago quarter’s loss per share of 22 cents and the Zacks Consensus Estimate of a loss per share of 19 cents.

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