Watts Water Technologies, Inc. WTS reported third-quarter 2017 adjusted earnings of 80 cents per share, up 13% year over year. Notably, this was also a third-quarter record. The improvement came on the back of its continued execution of key strategic initiatives, including many transformations and restructuring actions undertaken by the company. It also benefited from PVI acquisition and higher volumes. Earnings also surpassed the Zacks Consensus Estimate of 78 cents.
On a reported basis, including special items, Watts Water’s earnings were 77 cents per share in the quarter, up 22% year over year from 63 cents recorded in the year-ago quarter.
Total revenues were up 7% year over year to $364.7 million in the quarter. It came ahead of the Zacks Consensus Estimate of $360 million. Organic sales inched up 1% year over year.
Regionally, organic sales improved 4% in the Americas driven by growth in plumbing, drains along with heating and hot water products. Organic sales growth dipped 3% in Europe as water and plumbing products were affected by planned product rationalization and lower demand for HVAC products, partially offset by growth in the drains business. APMEA’s organic sales suffered a decline of 10%, impacted by planned product rationalization.
Watts Water Technologies, Inc. Price, Consensus and EPS Surprise
Watts Water Technologies, Inc. Price, Consensus and EPS Surprise | Watts Water Technologies, Inc. Quote
Cost and Margins
Cost of sales edged went up 6.5% year over year to $212 million. Gross profit increased 8% to $152.7 million. Gross margin in the reported quarter expanded 30 basis points (bps) to 41.9%. Selling, general and administrative expenses went up to $107 million from $104.5 million in the prior-year quarter.
Adjusted operating profit went up 11% to $45.8 million in the reported quarter. Adjusted operating margin advanced 50 bps to 12.6% — an all-time record. Higher volumes, productivity, restructuring and transformation benefits drove the record margin performance.
Segment Performance
Americas: Net sales climbed 11% to $250.5 million in the reported quarter. Adjusted operating profit increased 12% to $40.5 million.
Europe: Net sales inched up 1.9% year over year to $109 million. The segment reported adjusted operating profit of $14 million compared with $12.7 million recorded in the year-ago quarter.
APMEA: Net sales declined 9% year over year to $16.6 million. Adjusted operating profit tanked to $0.7 million from $2.1 million in the prior-year quarter.
Financial Performance
Watts Water had cash and cash equivalents of $246.6 million at the end of third-quarter 2017 compared with $338.4 million at the end of 2016. The company recorded cash from operations of $73.4 million for the nine-month period ended Oct 1, 2017, compared with $69.6 million recorded in the comparable period last year.
The company repurchased 73,000 shares of Class A common stock for $4.7 million during the quarter. So far this year, the company has repurchased approximately 214,000 shares at a cost of approximately $14 million.
Net debt was at $276.5 million as of Oct 1, 2017, lower than $312 million as of Dec 31, 2016. Consequently, net debt-to-capitalization ratio slumped to 25% as of Oct 1, 2017 from 29.8% as of Dec 321, 2016.
Expectations for Q4
For the fourth quarter, Watts Water expects organic sales growth rate to improve on a sequential basis. Europe and Asia-Pacific will likely improve over third-quarter levels. Product rationalization in the quarter is projected at around $3 million. The company anticipates year-over-year expansion in operating margin driven by volume growth and continued execution of productivity and transformation initiatives. However, material cost headwinds will persist.
The company will perk up its capital expenditure in the fourth quarter bringing the total expenditure for the year in the $30 million range. Also, the fourth quarter is a strong cash flow quarter for the company traditionally and this quarter will be no exception.
Share Price Performance
In a year, Watts Water has underperformed the industry with respect to price performance. The stock gained around 11.1%, while the industry recorded growth of 27.3%.
Zacks Rank and Key Picks
Watts Water currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the same sector are Adobe Systems Incorporated ADBE, Autohome Inc. ATHM and Cray Inc. CRAY. All three stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Adobe Systems has expected long-term growth rate of 17.0%.
Autohome has expected long-term growth rate of 18.8%.
Cray has expected long-term growth rate of 20.0%.
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