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Watts Water (WTS) Beats Earnings & Revenue Estimates in Q3

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Watts Water Technologies, Inc. (WTS - Free Report) reported solid third-quarter 2021 results, wherein both the bottom and the top lines beat the Zacks Consensus Estimate.

The company’s supply chain and operations teams continued to support its customers’ needs despite market demand challenges and supply chain disruptions.

Net Income

On a reported basis, net income in the quarter was $46.4 million or $1.37 per share compared with $32.9 million or 97 cents per share in the prior-year quarter. The improvement mainly resulted from a higher operating income.

Adjusted net income was $47.1 million or $1.39 per share compared with $35.6 million or $1.05 per share in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 9 cents, delivering a surprise of 6.9%.

Revenues

On a reported basis, quarterly net sales grew 18.5% year over year to $455 million, driven by double-digit growth in all regions. The top line surpassed the consensus estimate of $434 million. Organic sales increased 17% year over year.

Segment Results

The Americas: Net sales grew 18.2% year over year to $309.1 million. Organic sales increased 17% on the back of widespread growth in all major product lines. Adjusted operating income improved 16% to $55.9 million. However, the adjusted operating margin decreased 30 basis points (bps) to 18.1% as benefits from price, volume, cost reduction actions, and productivity initiatives were offset by inflation, incremental investments, incentives, and business normalization costs.

Europe: Net sales grew 16.3% year over year to $124.1 million, thanks to growth in all platforms and a 2% positive foreign exchange impact. Organic sales were up 14%. Adjusted operating income was $19.2 million, up 58.7% year over year, driven by price, volume, and productivity initiatives.

Asia-Pacific, Middle East and Africa: Net sales improved 38.9% to $21.8 million, including 6% from positive foreign currency impact. Organic sales increased 33% on growth in China, Australia, and the Middle East. Adjusted operating income was $4.2 million compared with $2.4 million in the prior-year quarter, benefiting from volume, productivity initiatives, restructuring savings as well as higher affiliate volume.

Other Details

Cost of goods sold increased to $261 million from $225.4 million in the prior-year quarter. Gross profit grew to $194 million from $158.8 million. Operating income was $64.7 million, up 35.1%. GAAP operating margin was up 170 bps to 14.2%. Adjusted operating margin was 14.4%, up 60 bps, benefiting from price, volume, productivity, and cost savings.

The company repurchased almost 25,000 shares for about $4 million during the third quarter. In the first nine months of 2021, it repurchased 87,000 shares for $12 million to offset dilution.

Cash Flow & Liquidity

During the first nine months of 2021, Watts Water generated $134.9 million of cash from operating activities compared with $127.4 million in the year-ago period. Free cash flow in the same period totaled $120.2 million, up from $95.1 million, driven by higher net income and lower capital expenditures. It expects an improvement in free cash flow through the fourth quarter of 2021 due to normal seasonality.

As of Sep 26, 2021, the company had $238.7 million in cash and cash equivalents with $151.7 million of long-term debt.

Outlook

Watts Water has raised the outlook for full-year 2021 organic sales growth. It now expects the same to increase between 14% and 17% compared with the previous expectation of 10% and 14%. The company, however, has maintained its outlook for adjusted operating margin expansion of between 100 bps and 150 bps year over year.

Zacks Rank & Stocks to Consider

Watts Water currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader industry are Harmonic Inc. (HLIT - Free Report) , Clearfield, Inc. (CLFD - Free Report) , and SeaChange International, Inc. (SEAC - Free Report) . While Harmonic and Clearfield sport a Zacks Rank #1 (Strong Buy), SeaChange carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Harmonic delivered a trailing four-quarter earnings surprise of 61.1%, on average.

Clearfield pulled off a trailing four-quarter earnings surprise of 49%, on average.

SeaChange delivered a trailing four-quarter earnings surprise of 28.9%, on average.

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