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Watts Water (WTS) Beats Q2 Earnings & Revenues, Shares Up
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Shares of Watts Water Technologies, Inc. (WTS - Free Report) gained around 1.7% to close at $62.56 yesterday, following the company’s record second-quarter 2016 earnings reported on Aug 5. Adjusted earnings for the quarter improved roughly 8.7% year over year to 75 cents per share on the back of strong operating performance.
Expanded operating margins resulting from increased volume and productivity, including sourcing, transformation and restructuring actions, led to the record earnings. Earnings also surpassed the Zacks Consensus Estimate of 70 cents.
On a reported basis, including special items, Watts Water’s earnings increased to 83 cents per share in the second quarter from 55 cents in the year-ago quarter.
Total revenue dropped 4.1% year over year to $371 million in the quarter due to the 2015 exit of non-core product. Revenues, however, beat the Zacks Consensus Estimate of $366.8 million. The company’s organic sales increased 4% in the quarter, driven by growth across all regions.
Cost and Margins
Cost of sales declined 8.6% year over year to $220.4 million. Gross profit improved 3.4% to $150.7 million. Gross margin in the reported quarter expanded 290 basis points to 40.6%. Selling, general and administrative expenses increased to $110.5 million from $106.3 million in the prior-year quarter.
Adjusted operating profit rose 5% to $44 million in the reported quarter. Adjusted operating margin grew 100 basis points to 11.9%.
Segment Performance
Americas: Net sales declined 8.9% to $239.5 million in the reported quarter. Adjusted operating profit increased 2.3% to $39.5 million.
EMEA: Net sales went up 4.6% year over year to $117.4 million. Adjusted operating profit rose 22.4% to $13.1 million from the year-ago quarter figure of $10.7 million.
Asia-Pacific: Net sales increased 19% to $14.2 million from $11.9 million in the prior-year quarter. The segment reported adjusted operating profit of $1.3 million compared to $1.6 million in the year-ago quarter.
Financial Performance
Watts Water had cash and cash equivalents of $286.7 million at the end of second-quarter 2016 compared with $296 million at 2015 end. The company posted $7.8 million of cash in operations for the six-month period ended Jul 3, 2016 compared with $41.9 million in the comparable year-ago period.
As of quarter end, Watts Water’s net debt was $316.3 million, up from $279 million as of Dec 31, 2015. Net debt-to-capitalization ratio increased to 30.1% as of Jul 3, 2016, from 28.4% as of Dec 31, 2015.
In the second quarter, the company recorded an after-tax gain of about $8 million related to the sale of a China subsidiary. Most of the gain was related to accumulative currency translation adjustment as part of the disposition. Cash proceeds of about $8 million are expected to be received by the end of the third quarter. Following this, phase one of the Americas Asia-Pacific transformation initiative will be successfully completed.
Watts Water repurchased 91,500 shares of Class A common stock at a cost of approximately $5.2 million during the second quarter. Year to date, it purchased approximately 359,000 shares at a cost of approximately $17.6 million. Approximately $65 million remains under the company’s current authorization, which has no expiration date.
Outlook
Watts Water expects organic sales growth excluding shipping days in second-half 2016 to remain fairly consistent with the first half, at approximately 3%. Excluding additional shipping days, adjusted operating margins grew by about 150 basis points during the first half of 2016. The company expects margin expansion to moderate more in the second half due to tough comparisons and ramp-up of investment spending to fund growth initiatives. It also expects to attain full-year operating margin expansion of 100 plus basis points, with the potential for some upside. Also, Watts Water anticipates an improvement in free cash flow during the second half of 2016.
By region, the Americas should see consistent growth from relatively stable end markets. The company remains cautious about EMEA given recent events and certain tougher comparisons in the fourth quarter. Therefore, it projects flattest growth for the region in the second half of the year. Also, the company expects Asia-Pacific sales to pick up pace in the back half of the year as the China valve business recovers and continued growth is seen in countries outside of China.
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 #3 (Hold).
Some better-ranked stocks in the same sector include Adobe Systems Incorporated (ADBE - Free Report) , Advanced Energy Industries, Inc. (AEIS - Free Report) and Amkor Technology, Inc. (AMKR - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy).
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Watts Water (WTS) Beats Q2 Earnings & Revenues, Shares Up
Shares of Watts Water Technologies, Inc. (WTS - Free Report) gained around 1.7% to close at $62.56 yesterday, following the company’s record second-quarter 2016 earnings reported on Aug 5. Adjusted earnings for the quarter improved roughly 8.7% year over year to 75 cents per share on the back of strong operating performance.
Expanded operating margins resulting from increased volume and productivity, including sourcing, transformation and restructuring actions, led to the record earnings. Earnings also surpassed the Zacks Consensus Estimate of 70 cents.
On a reported basis, including special items, Watts Water’s earnings increased to 83 cents per share in the second quarter from 55 cents in the year-ago quarter.
Total revenue dropped 4.1% year over year to $371 million in the quarter due to the 2015 exit of non-core product. Revenues, however, beat the Zacks Consensus Estimate of $366.8 million. The company’s organic sales increased 4% in the quarter, driven by growth across all regions.
Cost and Margins
Cost of sales declined 8.6% year over year to $220.4 million. Gross profit improved 3.4% to $150.7 million. Gross margin in the reported quarter expanded 290 basis points to 40.6%. Selling, general and administrative expenses increased to $110.5 million from $106.3 million in the prior-year quarter.
Adjusted operating profit rose 5% to $44 million in the reported quarter. Adjusted operating margin grew 100 basis points to 11.9%.
Segment Performance
Americas: Net sales declined 8.9% to $239.5 million in the reported quarter. Adjusted operating profit increased 2.3% to $39.5 million.
EMEA: Net sales went up 4.6% year over year to $117.4 million. Adjusted operating profit rose 22.4% to $13.1 million from the year-ago quarter figure of $10.7 million.
Asia-Pacific: Net sales increased 19% to $14.2 million from $11.9 million in the prior-year quarter. The segment reported adjusted operating profit of $1.3 million compared to $1.6 million in the year-ago quarter.
Financial Performance
Watts Water had cash and cash equivalents of $286.7 million at the end of second-quarter 2016 compared with $296 million at 2015 end. The company posted $7.8 million of cash in operations for the six-month period ended Jul 3, 2016 compared with $41.9 million in the comparable year-ago period.
As of quarter end, Watts Water’s net debt was $316.3 million, up from $279 million as of Dec 31, 2015. Net debt-to-capitalization ratio increased to 30.1% as of Jul 3, 2016, from 28.4% as of Dec 31, 2015.
WATTS WATER TEC Price, Consensus and EPS Surprise
WATTS WATER TEC Price, Consensus and EPS Surprise | WATTS WATER TEC Quote
In the second quarter, the company recorded an after-tax gain of about $8 million related to the sale of a China subsidiary. Most of the gain was related to accumulative currency translation adjustment as part of the disposition. Cash proceeds of about $8 million are expected to be received by the end of the third quarter. Following this, phase one of the Americas Asia-Pacific transformation initiative will be successfully completed.
Watts Water repurchased 91,500 shares of Class A common stock at a cost of approximately $5.2 million during the second quarter. Year to date, it purchased approximately 359,000 shares at a cost of approximately $17.6 million. Approximately $65 million remains under the company’s current authorization, which has no expiration date.
Outlook
Watts Water expects organic sales growth excluding shipping days in second-half 2016 to remain fairly consistent with the first half, at approximately 3%. Excluding additional shipping days, adjusted operating margins grew by about 150 basis points during the first half of 2016. The company expects margin expansion to moderate more in the second half due to tough comparisons and ramp-up of investment spending to fund growth initiatives. It also expects to attain full-year operating margin expansion of 100 plus basis points, with the potential for some upside. Also, Watts Water anticipates an improvement in free cash flow during the second half of 2016.
By region, the Americas should see consistent growth from relatively stable end markets. The company remains cautious about EMEA given recent events and certain tougher comparisons in the fourth quarter. Therefore, it projects flattest growth for the region in the second half of the year. Also, the company expects Asia-Pacific sales to pick up pace in the back half of the year as the China valve business recovers and continued growth is seen in countries outside of China.
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 #3 (Hold).
Some better-ranked stocks in the same sector include Adobe Systems Incorporated (ADBE - Free Report) , Advanced Energy Industries, Inc. (AEIS - Free Report) and Amkor Technology, Inc. (AMKR - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>