Watts Water Technologies, Inc. WTS reported second-quarter 2015 earnings of 69 cents per share, flat year over year but ahead of the Zacks Consensus Estimate of 62 cents. This resulted in a positive earnings surprise of 11%. Stronger operating profits and a 9 cent contribution from AERCO were offset by lower sales, increased interest charges, a higher effective tax rate and a 7 cent impact from unfavorable currency translation. Shares of Watts Water have gained 9.8% since reporting the results on Jul 29.
On a reported basis, including special items, Watts Water posted earnings of 55 cents per share in the reported quarter, down 8% from 60 cents per share in the year-ago quarter.
Total revenue dipped 2.3% year over year to $387 million in the quarter but surpassed the Zacks Consensus Estimate of $385 million. The company’s organic sales declined 3.4% in the quarter. Organic sales growth of 14.6% in Asia-Pacific was offset by declines of 3.8% in the Americas and 4.1% in Europe, the Middle East and Africa (EMEA). Foreign exchange movements reduced sales by 7.1% year over year.
Cost and Margins
Cost of sales declined 6% from the year-ago quarter to $241 million. Gross profit improved 5% to $146 million. Gross margin in the reported quarter expanded 260 basis points to 37.7%. Selling, general and administrative expenses increased 7% year over year to $106 million.
Adjusted operating profit increased 3% to $42 million from the year-ago quarter. Adjusted operating margin increased 60 basis points to 10.9%. A favorable product mix, strong productivity and other cost saving initiatives helped counter the impact of lower sales volume, under-absorption of plants and an anticipated estimated higher general and administrative expenses.
Segment Performance
North America: Net sales grew 9% to $263 million aided by organic sales growth of 5.9%. Adjusted operating profit increased 31% to $39 million.
EMEA: Net sales decreased 22% year over year to $112 million. Adjusted operating profit declined 37% to $11 million from the year-ago quarter figure of $17 million.
Asia: Net sales increased 16% to $12 million from $10 million in the prior-year quarter. The segment reported an operating profit of $1.6 million, a 24% drop from $2.1 million in the year-earlier quarter.
Financial Performance
Watts Water had cash and cash equivalents of $285 million at quarter end, down from $301 million as of 2014 end. The company generated cash flow from operations of $41 million in the first half of 2015 compared with cash usage of $18 million in the prior-year period.
Net debt was $294 million as of Jun 28, 2015 compared with $279 million as of Dec 31, 2014. Net debt-to-capitalization ratio increased to 25.2% as of Jun 30, 2015 from 23.4% as of Dec 31, 2014.
Watts Water’s board of directors has authorized the repurchase of up to $100 million of its shares.
The company repurchased approximately 185,000 shares during the quarter for $10.1 million under its previous share repurchase program.
Watts Water announced the signing of a definitive agreement with Sioux Chief Mfg. Co. as per which it will sell certain assets related to its brass fittings, brass & tubular and vinyl tubing product lines for $35.5 million. The transaction, pursuant to customary closing conditions, is expected to close by the end of the third quarter.
The company’s top-line growth remains challenged by weak EMEA activity and slower-than-anticipated growth in the Americas. Watts Water continues to pursue its transformation initiatives and is selling certain product lines to Sioux Chief under Phase 1 of its Americas transformation effort. The company will announce plans for Phase 2 next quarter. The company expects the transformation plan to drive margin expansion in 2016 and beyond.
Watts Water, which operates through its subsidiaries, is a leading manufacturer of innovative products that control the efficiency, safety and quality of water within applications (residential, commercial, and institutional). At present, Watts Water carries a Zacks Rank #3 (Hold).
Peer Performance
Roper Technologies, Inc. ROP reported second-quarter 2015 adjusted earnings of $1.70 per share, which rose 9% year over year and beat the Zacks Consensus Estimate of $1.64.
Badger Meter Inc. BMI reported a 9.8% year-over-year decline in earnings to 55 cents per share in the second quarter of 2015. Earnings were also short of the Zacks Consensus Estimate of 74 cents by a wide margin, a negative earnings surprise of 25.7%.
Woodward, Inc. WWD reported fiscal third-quarter 2015 (ended Jun 30, 2015) earnings of 66 cents per share, missing the Zacks Consensus Estimate of 71 cents by 7%. Earnings were also down 4.3% year over year.
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