Watts Water Technologies, Inc. — Q1 2022 10-Q
Business context and period. Watts supplies flow-control, HVAC and gas, drainage and water-reuse, and water-quality products to residential and commercial markets. This unaudited report covers the 13-week first quarter ended March 27, 2022, compared with the quarter ended March 28, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $463.2 | $413.3 | +12.1% reported; +14.0% organic |
| Gross profit / margin | $198.6 / 42.9% | $173.7 / 42.0% | Margin +0.9 percentage points |
| Operating income | $71.5 | $59.6 | +20.0% |
| Net income | $54.5 | $41.7 | +30.7% |
| Diluted EPS | $1.61 | $1.23 | +$0.38 |
| Operating cash flow | $(2.0) | $33.9 | Down $35.9 |
| Free cash flow | $(7.6) | $31.9 | Down $39.5 |
Sales grew across all three regions: Americas $313.9 million (up 15.1%), Europe $129.9 million (up 5.7%), and APMEA $19.4 million (up 10.2%). Organic growth reflected pricing and higher volume; reported growth was reduced by $10.0 million of unfavorable foreign exchange and included $2.1 million of acquired sales. Management estimated Q1 2021 sales had benefited by about 3% from severe freezing weather in the South-Central U.S.
Gross margin improved on pricing, volume, and productivity, partly offset by material and labor inflation, freight and logistics costs, and normalized business expenses. Operating income growth also benefited from prior restructuring savings. SG&A rose 10.8% to $126.1 million, though declined as a share of sales to 27.2% from 27.5%. The effective tax rate fell to 22.0% from 28.0%, reflecting geographic earnings mix, stock-compensation tax benefits, and changes in tax contingencies.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $226.8 million at quarter-end, down from $242.0 million at year-end. Cash flow from operations was negative, mainly because the company built inventory amid strong demand and supply-chain disruption, and made higher restructuring and incentive payments.
- Inventory increased to $402.1 million from $370.7 million at December 31, 2021; accounts receivable increased to $261.7 million from $220.9 million.
- Long-term debt was $202.0 million on the balance sheet; the company reported $205.0 million drawn on its revolving facility. It had $581.0 million of unused available revolver capacity after $14.0 million of letters of credit. The facility matures March 30, 2026; the company was in covenant compliance. Weighted-average borrowing cost was 1.32%, or 1.71% including the interest-rate swap.
- The company reported net cash (debt less cash) of $24.8 million and a net debt-to-capitalization ratio of (2.2%), versus net cash of $100.1 million and (9.3%) at year-end.
- Share repurchases were $42.9 million for 293,390 shares, compared with $3.8 million in Q1 2021. Dividends paid were $9.0 million; the Q1 declared dividend was $0.26 per share. After quarter-end, the company declared a $0.30-per-share dividend payable June 15, 2022.
Outlook, risks, and unusual items
- No specific full-year sales or earnings guidance is provided. Management cautions that Q1 results are not necessarily indicative of full-year results and says it cannot predict the full effect of ongoing uncertainties.
- For the remainder of 2022, management expected approximately $35–$40 million in capital expenditures and about $10 million in spending on the French restructuring program. The France facility consolidation is expected to be completed in the second half of 2022; total pre-tax charges were revised to approximately $23.7 million, with estimated annual after-tax cash savings of about $3.0 million fully realized by 2023. A further $1.5 million of facility-exit charges was expected in Q2 and Q3 2022.
- Key pressures include inflation, supply-chain and logistics constraints, shortages of electronic components and labor, higher freight and energy costs, the war in Ukraine, and COVID-19 restrictions. APMEA faced lockdowns in New Zealand and Shanghai; management said the war’s Q1 impact was not significant. The company raised prices but could not predict future effects on service levels or margins.
- Reasonably possible losses above accrued amounts for contingencies were estimated at approximately $4.2 million pre-tax. For the Chemetco Superfund matter, the company could not estimate a reasonably possible loss range because investigation, remediation plans, responsible-party shares, and costs remain uncertain. Management did not expect the overall matters to materially affect financial condition, though a particular period’s results or cash flows could be affected.
- Q1 included a $1.0 million restructuring charge, including $0.7 million after tax. The company used a $100 million interest-rate swap to hedge floating-rate exposure and foreign-exchange forwards to hedge certain forecast intercompany transactions.
Most important facts for investors to verify
- Whether pricing continues to offset input, labor, freight, and energy inflation, and whether the gross-margin improvement is sustained.
- Whether inventory and receivables convert to cash; Q1 operating cash flow and free cash flow turned negative despite higher earnings.
- Whether supply constraints, regional lockdowns, and the Ukraine war affect deliveries, costs, or demand beyond Q1.
- Progress, final costs, and savings from the France restructuring, alongside planned capital spending and further facility-exit charges.
- Developments in the $4.2 million reasonably possible contingency exposure and the currently unquantifiable Chemetco remediation matter.