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Watts Water (WTS) Beats on Q4 Earnings; Revenues Lag

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Watts Water Technologies, Inc.WTS reported fourth-quarter 2016 adjusted earnings of 64 cents per share, an 8.5% year-over-year improvement driven by a strong operating performances. Earnings came in line with the Zacks Consensus Estimate.

On a reported basis, including special items, Watts Water's earnings were 51 cents per share in the quarter, a reversal from a loss per share of $3.41 in the year-ago quarter.

Total revenue dipped 5% year over year to $342 million in the quarter, falling short of the Zacks Consensus Estimate of $348 million. Organic sales were flat in the quarter compared with the year-ago quarter.

Watts Water Technologies, Inc. Price, Consensus and EPS Surprise

Watts Water Technologies, Inc. Price, Consensus and EPS Surprise | Watts Water Technologies, Inc. Quote

Organic sales were flat in the Americas, affected by anticipated headwinds in the retail channel, which offset growth in the company's core plumbing and valves product lines. Organic sales edged down 1% in Europe, impacted by lower demand in larger geographical markets. Organic sales climbed18% in the Asia-Pacific region, aided by consistent growth in the residential markets in China and the commercial markets outside China.

Cost and Margins

Cost of sales declined 8.7% year over year to $204 million. Gross profit increased 2.3% to $137.7 million. Gross margin in the reported quarter expanded 270 basis points (bps) to 40.3%. Selling, general and administrative expenses went down 5.5% to $106.5 million from $112.7 million in the prior-year quarter.

Adjusted operating profit went up 5% to $37.2 million in the reported quarter. Adjusted operating margin advanced 100 bps to 10.9% driven primarily by strong productivity resulting from the company's transformation initiatives.

Segment Performance

Americas: Net sales declined 4.3% to $223.3 million in the reported quarter. Adjusted operating profit increased 2.7% to $34.2 million.

EMEA: Net sales decreased 8% year over year to $104 million. Adjusted operating profit went down 13.7% to $8.8 million from $10.2 million in the prior-year quarter.

Asia-Pacific: Net sales jumped 25.9% to $14.6 million from $11.6 million in the year-earlier quarter. The segment reported adjusted operating profit of $2.1 million compared to $0.7 million in the year-ago quarter.

Financial Performance

Watts Water reported cash and cash equivalents of $338.4 million at the end of 2016, up from $296 million as of Dec 31, 2015. At the end of 2016, long-term debt was approximately $511 million, down from $574 million as of Dec 31, 2015.

In 2016, the company delivered $138 million of operating cash flow compared with $109 million in 2015. Watts Water repurchased 68,000 shares of Class A common stock for $4 million during the quarter. For 2016, approximately 501,000 shares were purchased at a cost of approximately $27 million. Roughly $56 million remains available under the company's current authorization, which has no expiration date.

2016 Performance

Watts Water posted adjusted earnings of $2.67 per share for 2016, up 10.8% year over year. Earnings beat the Zacks Consensus Estimate of $2.66. On a reported basis, including special items, Watts Water's earnings were $2.44 per share in the quarter, a reversal from a loss per share of $3.24 in the year-ago quarter.

Revenues for full-year 2016 went down 5% year over year to $1.4 billion. Revenues came in line with the Zacks Consensus Estimate.

The company continued to focus on realigning its business teams and product platforms, getting closer to customers, executing itsrestructuring initiatives and re-investing for future growth. It also expanded solutions offering for commercial boiler room applications with the acquisition of PVI Industries. Watts Water expects its efforts in 2016 will drive growth. It also foresees margin expansion moving ahead.

Share Price Performance

In the last one year, Watts Water has underperformed the Zacks classified Instruments-Control sub-industry with respect to price performance. The stock gained around 25.9%, while the industry rose 36.7% over the same time frame.

Zacks Rank& Key Picks

Watts Water currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the same sector are Applied Optoelectronics, Inc. AAOI , Axcelis Technologies, Inc. ACLS and Acxiom Corporation ACXM .

Applied Optoelectronics has delivered an average positive earnings surprise of 106.74% in the last four quarters. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Axcelis Technologies also boasts a Zacks Rank #1 and has delivered an average positive earnings surprise of 151.25% for the trailing four quarters. Acxiom Corporation, another Zacks Rank #1 stock, has an average positive earnings surprise of 147.14% for the past four quarters.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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