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Watts Water (WTS) Q3 Earnings Beat, Revenues Lag Estimates

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Watts Water Technologies, Inc. (WTS - Free Report) reported healthy third-quarter 2019 financial results, wherein both the top line and bottom line increased on a year-over-year basis. The results were primarily driven by strong operating performance, significant organic sales coupled with the acquisition of Backflow Direct LLC.

Net Income

On a reported basis, quarterly net income was $32.3 million or 94 cents per share, an increase of 2.5% from $31.5 million or 92 cents per share in the year-ago quarter. The improvement was mainly driven by higher prices, increased productivity and reduced non-operating expenses.

Adjusted net income was $35.6 million or $1.04 per share compared with $34 million or $99 cents per share a year ago. The bottom line beat the Zacks Consensus Estimate by a penny.

Watts Water Technologies, Inc. Price, Consensus and EPS Surprise

Revenues

On a reported basis, quarterly net sales increased 1% year over year to $394.7 million, driven by pricing actions and organic volume in the Americas and Europe. The top line lagged the Zacks Consensus Estimate of $398 million.

Organic sales witnessed growth of 2% year over year. Regionally, organic sales in the Americas increased 3%, driven by significant growth in plumbing, heating and water quality products. Organic sales improved 1.3% in Europe owing to strength in drains business. Asia Pacific Middle East and Africa (APMEA) organic sales increased 1.2%, primarily driven by stronger sales in China, partially offset by continued softness in Korea and Middle East.

Segmental Performance

The Americas: Net sales increased 2.9% to $270.3 million from $262.7 million in the year-ago quarter, driven by incremental price and higher volume. Adjusted operating income increased 8.7% to $48.8 million.

Europe: Net sales decreased 3.3% to $107.9 million from $111.6 million in the year-ago quarter, affected by negative foreign exchange momentum. The segment’s adjusted operating income was $12.1 million compared with $12.8 million in the year-ago quarter, down 5.5% as the benefits from incremental price and productivity were subdued by increased investments and costs.

APMEA: Net sales decreased 0.6% to $16.5 million from $16.6 million. Adjusted operating income came in at $1.4 million compared with $2.5 million in the prior-year quarter, driven by a significant reduction in volume, investments and sales mix.

Other Details

Cost of goods sold declined 0.1% year over year to $226.1 million. Gross profit increased 2.5% to $168.6 million driven by top-line growth. Operating income was $48.8 million, up 4.1%. GAAP and adjusted operating margin came in at 12.4% and 13.3% respectively, both up 40 basis points.

Cash Flow & Liquidity

During the first nine months of 2019, Watts Water generated $94.9 million of net cash from operating activities compared with $66.6 million in the year-ago period. The increase was primarily driven by higher income and decrease in inventory and tax payments. As of Sep 29, 2019, the company had $173.7 million in cash and cash equivalents with $238.5 million of long-term debt (net of current portion).

Watts Water repurchased about 48,000 shares for $4.5 million during the reported quarter. It repatriated $7 million in cash during the quarter and used it to pay down revolving debt.

Going Forward

Watts Water is focused on accelerating organic growth, drive margin expansion and reinvest in growth and productivity initiatives. Adjusted effective tax rate is expected to be 28.5% for the fourth quarter. Operating cash flow and free cash flow are anticipated to improve due to normal seasonality. The acquisition of California-based manufacturing company Backflow Direct LLC is expected to cater a wide range of customers by leveraging broader product portfolio and R&D efforts. The company is also committed to enhance shareholder value and execute its balanced cash allocation strategy by driving the business organically and through acquisitions.

Zacks Rank & Stocks to Consider

Watts Water currently carries a Zacks Rank #4 (Sell).

A few better-ranked stocks in the broader industry are Woodward, Inc. (WWD - Free Report) , Entegris, Inc. (ENTG - Free Report) and Intevac, Inc. (IVAC - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Woodward surpassed earnings estimates in each of the trailing four quarters, the average positive surprise being 20.1%.

Entegris surpassed earnings estimates thrice in the preceding four quarters, the average positive surprise being 2.6%.

Intevac surpassed earnings estimates in each of the trailing four quarters, the average positive surprise being 46.7%.

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