Watts Water Technologies, Inc. — Q1 2024 10-Q
Reporting period: First quarter ended March 31, 2024; comparison is with the first quarter ended March 26, 2023. Amounts are in U.S. dollars unless stated otherwise.
Business context and performance
Watts supplies water, plumbing, heating, drainage and water-quality products to residential, commercial and industrial markets. It reports three geographic segments: Americas, Europe and APMEA.
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $570.9 million | $471.7 million | +21.0%; organic sales +6.4% |
| Gross profit / margin | $267.5 million / 46.9% | $218.1 million / 46.2% | Margin +0.7 percentage points |
| Operating income / margin | $96.7 million / 16.9% | $84.7 million / 18.0% | Income +14.2%; margin lower |
| Net income | $72.6 million | $64.7 million | +12.2% |
| Diluted EPS | $2.17 | $1.93 | Up $0.24 |
| Cash from operations | $45.6 million | $33.4 million | +$12.2 million |
| Free cash flow (non-GAAP) | $36.6 million | $28.3 million | +$8.3 million |
Americas sales were $418.8 million, up 29.6%; Europe sales were $123.3 million, down 3.9%; and APMEA sales were $28.8 million, up 42.6%. Reported sales growth included $68.3 million from acquisitions. Organic growth was 11.0% in the Americas and 6.4% in APMEA, offset by a 5.1% decline in Europe.
Liquidity, debt and capital allocation
- Cash and equivalents were $237.1 million at March 31, down from $350.1 million at year-end. Current assets were $1,010.0 million and current liabilities $407.3 million.
- Long-term debt was $283.5 million. Net debt was $46.4 million, compared with net cash of $51.8 million at December 31, 2023. The net-debt-to-capitalization ratio was 2.9%, versus negative 3.5% at year-end.
- The $800 million revolving facility had $285.0 million drawn, $12.5 million of letters of credit and $502.5 million of available capacity. The weighted average rate on facility debt was 6.50%; including swaps, the reported average was 4.79%. The company reported compliance with its debt covenants.
- Operating cash flow was partly offset by $109.8 million of investing outflows, including $100.8 million for acquisitions and $10.1 million of capital expenditures. Financing outflows were $44.6 million, including debt repayments, dividends and share repurchases.
- Q1 dividends declared were $0.36 per share. A quarterly dividend of $0.43 per share was declared May 7, payable June 14, 2024.
Material changes and notable items
- Watts completed its acquisition of Josam on January 1, 2024 for approximately $98.9 million net of acquired cash. Josam contributed to the Americas segment; its results were not material individually. The preliminary allocation included $34.6 million of goodwill and $39.4 million of intangible assets.
- Acquired sales also reflect Bradley, acquired in October 2023, and Enware, acquired in March 2023. Acquisition-related and purchase-accounting charges affected results; Q1 2024 included $5.2 million of after-tax acquisition-related costs, or $0.15 per diluted share.
- Gross margin improved on price realization, volume leverage and productivity, partly offset by inflation and acquisition inventory step-up amortization. SG&A increased $35.9 million, including acquisition costs and increased investment; SG&A was 29.7% of sales versus 28.3% a year earlier. Operating margin declined despite higher operating income.
- Net income also included $0.9 million after tax of restructuring charges and an $0.8 million after-tax gain on asset sale. Foreign-currency translation reduced other comprehensive income by $12.9 million.
Outlook, commentary and risks
- No specific full-year sales or EPS guidance is provided in the filing. Management expects to spend approximately $35–$45 million on capital expenditures over the remainder of 2024.
- Management notes mixed global indicators and possible weakening market conditions for the rest of 2024, elevated interest rates that may weigh on new construction, inflation in labor and overhead, weakness in Europe and a slowdown in China, and heightened geopolitical risks. Additional Q1 shipping days boosted sales and organic growth; management expects this timing benefit to be offset in Q4.
- Management cites product innovation, acquisitions, water conservation and safety regulations, and smart and connected solutions as growth drivers, while continuing investment in products and productivity initiatives.
- Reasonably possible losses on contingencies in excess of amounts accrued were estimated at approximately $4.6 million. The Chemetco Superfund matter remains unresolved; the company cannot estimate a loss range because remediation scope, costs and responsible-party allocations are undetermined. Management does not currently expect the matters overall to materially adversely affect financial condition.
- Other risks include foreign-exchange, floating-rate debt and commodity-price exposure. The company uses hedges for risk management and does not use derivatives for trading. It reported no material changes to the risk factors in its 2023 Form 10-K.
Important facts for investors to verify
- How much reported and organic growth persists after the unusually favorable shipping-day comparison reverses in Q4, especially given Europe’s organic decline.
- Whether acquisition contributions, integration costs and purchase-price allocations for Josam and Bradley develop as expected.
- Whether higher SG&A and acquisition-related costs continue to pressure operating margins despite improved gross margin.
- How cash conversion and working capital evolve after the acquisition-related cash outflow and the decline in cash balances.
- Any developments in the Chemetco matter or other contingencies that could change the estimated exposure.