Business context and reporting period
Watts Water Technologies, Inc. supplies fluid and energy management products for commercial and residential buildings across the Americas, Europe, and Asia-Pacific, Middle East and Africa (APMEA). This unaudited Form 10-Q covers the third quarter ended September 25, 2022, and the first nine months of 2022; comparisons are with the corresponding 2021 periods.
Financial performance and position
Amounts are in millions, except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $487.8 | $455.0 | $1,477.6 | $1,335.3 |
| Gross profit / margin | $217.9 / 44.7% | $194.0 / 42.6% | $655.7 / 44.4% | $567.8 / 42.5% |
| Operating income / margin | $80.4 / 16.5% | $64.7 / 14.2% | $247.8 / 16.8% | $177.0 / 13.3% |
| Net income | $58.7 | $46.4 | $182.9 | $125.6 |
| Diluted EPS | $1.75 | $1.37 | $5.43 | $3.70 |
- Q3 reported sales grew 7.2%; organic sales growth was 11.5%, offset in part by a $21.3 million unfavorable foreign-exchange impact. Nine-month reported sales increased 10.7%, with 13.9% organic growth and a $49.5 million FX headwind.
- Q3 operating cash flow was $86.3 million for the first nine months, versus $134.9 million a year earlier. Free cash flow, a non-GAAP measure, was $67.0 million versus $120.2 million; conversion of free cash flow to net income was 36.6% versus 95.7%.
- At September 25, cash and equivalents were $219.5 million, long-term debt was $182.4 million, and net cash was $37.1 million. The $800 million revolving facility had $602.9 million available after borrowings and letters of credit. The company reported compliance with facility covenants.
- Current assets were $936.8 million and current liabilities $378.5 million. Inventory increased to $422.6 million from $370.7 million at year-end 2021.
Material changes versus prior comparable periods
- Q3 net income rose 26.5% and diluted EPS rose from $1.37 to $1.75. Nine-month net income increased to $182.9 million from $125.6 million.
- Higher pricing and productivity improved gross margin. Q3 operating income rose 24.3%, primarily from price, productivity gains, and savings from prior restructuring, partly offset by material and labor inflation, logistics and energy costs, and investment spending.
- Americas sales increased 13.2% organically in Q3, while Europe sales declined 8.9% on a reported basis, mainly reflecting currency impacts. Europe organic sales grew 6.3%, but were negatively affected by the company’s exit from direct sales to Russia.
- Foreign-currency translation contributed to a $56.3 million nine-month other comprehensive loss, primarily from currency translation.
- Nine-month restructuring charges declined to $4.4 million from $18.2 million in 2021. The company repurchased $65.1 million of shares in the first nine months of 2022 versus $11.8 million in the prior-year period.
Outlook, commentary, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management cautions that interim results are not necessarily indicative of full-year results and says the effects of inflation, recession risk, the Ukraine war, COVID-19 restrictions, and supply-chain disruption remain uncertain.
- Management cited persistent electronic-component shortages, logistics constraints, labor shortages, and higher materials, labor, transportation, and energy costs. Pricing actions and productivity initiatives helped offset cost pressures during the quarter, but future effects on service levels and margins are uncertain.
- Management expected approximately $15 million of capital-equipment spending and around $3 million of French restructuring costs in Q4 2022. It also expected approximately $4 million of proceeds from the sale of the French facility; the filing estimates a $1.8 million pretax gain and annual after-tax savings of about $3 million, expected to be fully realized by 2023.
- The France facility consolidation was expected to cost about $24.2 million pretax in total, with $22.4 million incurred through September 25, 2022. The program is expected to conclude by year-end 2022.
- Management estimated reasonably possible contingency losses beyond accrued amounts at approximately $4.5 million. For the Chemetco environmental matter, the company could not estimate a loss range because remediation scope, costs, and responsible parties remain unresolved.
- The company declared a quarterly dividend of $0.30 per share on October 31, 2022, payable December 15, 2022.
Important facts for investors to verify
- Whether organic sales momentum and pricing can continue to offset inflation, FX pressure, and potential weaker demand.
- Inventory growth and working-capital use, including the extent to which supply-chain normalization releases cash.
- Cash generation and capital allocation after substantial 2022 repurchases, dividends, and planned capital spending.
- Revolver borrowings, floating-rate exposure, and covenant headroom; the facility’s weighted-average rate was 3.79%, or 2.94% including the interest-rate swap.
- Completion costs, sale proceeds, and projected savings from the French restructuring, as well as the outcome and potential exposure from environmental and other contingencies.