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Watts Water (WTS) Q2 Earnings & Revenues Beat Estimates - Analyst Blog

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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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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