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Watts Water Technologies, Inc. (WTS - Analyst Report) reported fourth-quarter 2012 adjusted earnings of 61 cents per share, up 9% from the year-ago quarter EPS of 56 cents and ahead of the Zacks Consensus Estimate of 58 cents by 5%. On a reported basis, including special items, earnings in the quarter were 52 cents per share compared with 47 cents in the year-ago quarter.

 
Total revenue edged up 0.5% to $359.2 million, beating the Zacks Consensus Estimate of $358 million. Negative impacts of foreign currency translation, mainly due to weakening of the Euro against the U.S dollar mitigated the benefits from organic growth and acquisitions.
 
Cost and Margins
 
Cost of sales remained flat at $229 million in the quarter. Gross profit inched up 1% to $129.7 million. Consequently, gross margin expanded 30 basis points (bps) to 36.1% in the quarter.
 
Selling, general and administrative expenses increased 5% to $96 million. Adjusted operating profit remained flat at $37.2 million and adjusted operating margin contracted 10 bps to 10.4%.
 
Segment Performance
 
North America: Net sales went up 5% to $205.9 million, aided by acquired sales of $3.6 million and organic sales growth and favorable foreign currency translation with the strengthening of the Canadian dollar against the U.S. dollar. Operating profit decreased 10% to $24.9 million in the quarter.
 
EMEA: Net sales were $145.3 million, down 6% on a year-over-year basis due to a negative impact of foreign currency translation and lower organic sales. The segment, however, reported an operating profit of $12.7 million, reversing its year-ago operating loss of $2.5 million.
 
Asia: Net sales increased 31% to $8 million in the quarter, aided by an increase in organic sales. Operating profit plunged 77% to $2.2 million in the quarter.
 
Fiscal 2012 Performance
 
Adjusted earnings per share in fiscal 2012 remained flat at $2.18 year over year but beat the Zacks Consensus Estimate by a cent. Including special items, earnings per share was $1.96, up 14%. Revenues for the year increased 1% to $1.445 billion, missing the Zacks Consensus Estimate of $1.46 billion. Acquisitions and organic growth offset by a negative impact foreign exchange translation led to the overall increase. Sales achieved during the year were the highest since 2008.
 
Financial Updates
 
Cash and cash equivalents were $271.8 million as of Dec 31, 2012, compared with $250 million as of Dec 31, 2011. Cash flow from operations for 2012 was $131.9 million versus $127.4 million in 2011.
 
Long-term debt excluding current portion amounted to $307.5 million as of Dec 31, 2012, compared with $397 million as of Dec 31, 2011. Net debt-to-capitalization ratio improved to 29% as of Dec 31, 2012, compared with 30.3% as of Dec 31, 2011.
 
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 will 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 growing 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 world leader in the manufacture of innovative products to control the efficiency, safety, and quality of water within applications (residential, commercial, and institutional). Watts Water retains a Zacks Rank #3 (Hold).
 
Other stocks to watch out from in the same industry are Roper Industries Inc. (ROP - Snapshot Report), Badger Meter Inc. (BMI - Analyst Report) and Woodward, Inc. (WWD - Snapshot Report); all carrying a Zacks Rank #2 (Buy).

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