Watts Water Technologies Reports Record Second Quarter 2021 Results

• Reported sales of $467 million, up 38%; up 32% on an organic basis

• GAAP operating margin of 11.3%, up 210 bps; adjusted operating margin of 14.9%, up 380 bps

• GAAP EPS of $1.11, up 88%; adjusted EPS of $1.48, up 100%

• Recorded $18 million of restructuring and other charges related to French facility exit

• Increasing adjusted full year 2021 outlook

Note: Second quarter 2021 performance relative to second quarter in 2020

Watts Water Technologies, Inc. (NYSE: WTS) today announced second quarter 2021 results.

Chief Executive Officer Robert J. Pagano Jr. commented, “I want to recognize and thank the exemplary performance of the Watts team and especially our associates in supply chain and operations in navigating through the dual challenges of stronger than anticipated market demand as well as unique dynamics challenging the supply chains globally. Although much of this quarter’s performance improvement is related to COVID-19’s impact last year, underlying market conditions, especially in repair and replacement, were stronger than we originally anticipated. Consequently, we delivered a record quarter, with both sales and adjusted operating margin higher than expected across all regions. As we guided, the February weather freeze in the South-Central U.S. continued to benefit us. After another stronger than expected quarter, which included recording restructuring and other charges associated with the successfully completed negotiations to exit one of our French operations, we are again raising our adjusted full year 2021 outlook.”

A summary of second quarter results is as follows:

Second Quarter 2021 Financial Highlights

Second quarter 2021 performance relative to second quarter in 2020

• Sales of $467 million increased 38% on a reported basis and 32% organically primarily driven by the global economic recovery following the significant negative effect of COVID-19 last year. In addition, the continuing impact of the February 2021 freezing weather in the South-Central U.S. was estimated to have contributed approximately 4% of incremental sales during the second quarter.
• Operating margin increased 210 basis points and 380 basis points on a reported and adjusted basis, respectively, benefiting from price, volume, productivity and restructuring savings, partially offset by incremental investments, and the return of expenses related to business normalization. GAAP operating margin was negatively impacted by higher restructuring charges in 2021 related to the approved French facility exit.

Regional Performance:

Americas

• Sales of $307 million increased 29% on a reported basis and 28% on an organic basis, supported by the global economic recovery. Sales attributable to the February 2021 freezing weather in the South-Central U.S. contributed approximated 5% to growth.
• Operating margin increased 560 basis points on a GAAP basis and 270 basis points on an adjusted basis as benefits from volume, pricing, productivity and restructuring savings were partially offset by incremental investments and normalized costs. The GAAP operating margin benefited from lower year-over-year restructuring and footprint optimization charges.

Europe

• Sales of $137 million increased 55% on a reported basis, including a 41% organic increase, primarily driven by the global economic recovery, and a 14% positive foreign exchange impact.
• Operating margin decreased 650 basis points and increased 700 basis points, on a GAAP and adjusted basis, respectively. Both benefited from volume, pricing, productivity and restructuring savings partially offset by incremental investments and normalized costs. The GAAP operating margin was negatively impacted by the charges related to the restructuring activities in France.

APMEA

• Sales of $23 million increased 75% on a reported basis, including acquired sales of 14% and a 10% positive foreign exchange impact. Organically, sales increased 51% from strong growth in China and New Zealand and from the global economic recovery.
• Operating margin increased 1,250 basis points and 460 basis points on a GAAP and adjusted basis, respectively, both benefiting from volume, productivity initiatives, restructuring savings as well as higher affiliate volume, which were partially offset by normalized costs. The GAAP operating margin benefited from lower year-over-year restructuring charges.

Cash Flow and Capital Allocation

• For the first six months of 2021, operating cash flow approximated $73 million, net capital expenditures approximated $8 million and free cash flow approximated $65 million. In the comparable period last year, operating cash flow approximated $47 million, net capital expenditures approximated $22 million and free cash flow approximated $25 million. The increase in operating cash flow was primarily related to higher net income. The free cash flow increase was primarily driven by higher net income and lower net capital expenditures. We expect continued improvement in operating cash flow and in free cash flow during the second half of 2021, due to normal seasonality.

• The Company repurchased approximately 31,000 shares of Class A common stock at an investment of $4 million during the second quarter. For the first six months of 2021, the Company repurchased approximately 62,000 shares at an investment of approximately $8 million.

Mr. Pagano concluded, “I’m pleased with our performance during the quarter which was supported by a strengthening macro backdrop and continued solid execution across our organization. Given accelerating demand in our end markets, especially the continued strength in repair and replacement activity, we are updating our adjusted full year 2021 outlook. We now expect consolidated organic revenue growth of 10% to 14% and consolidated adjusted operating margin expansion of 100 to 150 basis points, compared to last year. Market uncertainties appear to have eased to some extent, but we continue to closely monitor nonresidential new construction activity, supply chain issues, inflation, vaccine implementations and the impact of the virus variants. We remain focused on our long-term strategic priorities while addressing lingering near-term disruptions caused by the pandemic.”

For a reconciliation of GAAP to non-GAAP items and a statement regarding the usefulness of these measures to investors and management in evaluating our operating performance, please see the tables attached to this press release.

Watts Water Technologies, Inc. will hold a live webcast of its conference call to discuss second quarter results for 2021 on Thursday, August 5, 2021, at 9:00 a.m. Eastern Time. This press release and the live webcast can be accessed by visiting the Investors section of the Company's website at www.wattswater.com. Following the webcast, an archived version of the call will be available at the same address until August 5, 2022.

Watts Water Technologies, Inc., through its subsidiaries, is a world leader in the manufacture of innovative products to control the efficiency, safety, and quality of water in residential, commercial, and institutional applications. Watts’ expertise in a wide variety of water technologies enables us to be a comprehensive supplier to the water industry.

This Press Release includes “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995, including statements relating to the impact of COVID-19 on our 2021 results; our expected revenue, organic revenue, operating margin and adjusted operating margin for full year 2021; our expected cash flow; and our expected liquidity position for 2021 . These forward-looking statements reflect our current views about future events. You should not rely on forward-looking statements because our actual results may differ materially from those predicted as a result of a number of potential risks and uncertainties. These potential risks and uncertainties include, but are not limited to: the effects of the 2017 Tax Act; the effectiveness, the timing and the expected savings associated with our cost-cutting actions, restructuring and transformation programs and initiatives; current economic and financial conditions, which can affect the housing and construction markets where our products are sold, manufactured and marketed; shortages in and pricing of raw materials and supplies; our ability to compete effectively; changes in variable interest rates on our borrowings; inflation; failure to expand our markets through acquisitions; failure to successfully develop and introduce new product offerings or enhancements to existing products; failure to manufacture products that meet required performance and safety standards; foreign exchange rate fluctuations; cyclicality of industries where we market our products, such as plumbing and heating wholesalers and home improvement retailers; environmental compliance costs; product liability risks; changes in the status of current litigation; the risks and uncertainties relating to the COVID-19 pandemic, including supply chain issues, vaccine implementations and the impact of the virus variants; and other risks and uncertainties discussed under the heading “Item 1A. Risk Factors” and in Note 15 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC, as well as risk factors disclosed in our subsequent filings with the SEC. We undertake no duty to update the information contained in this Press Release, except as required by law.

Key Performance Indicators and Non-GAAP Measures

In this press release, we refer to non-GAAP financial measures (including adjusted operating income, adjusted operating margins, adjusted net income, adjusted earnings per share, organic sales, free cash flow, cash conversion rate of free cash flow to net income and net debt to capitalization ratio) and provide a reconciliation of those non-GAAP financial measures to the corresponding financial measures contained in our consolidated financial statements prepared in accordance with GAAP. We believe that these financial measures enhance the overall understanding of our historical financial performance and give insight into our future prospects. Adjusted operating income, adjusted operating margins, adjusted net income and adjusted earnings per share eliminate certain expenses incurred and benefits recognized in the periods presented that relate primarily to our global restructuring programs, footprint optimization costs, other long-lived asset impairment charges and the related income tax impacts on these items. Management then utilizes these adjusted financial measures to assess the run-rate of the Company’s operations against those of comparable periods. Organic sales growth is a non-GAAP measure of sales growth excluding the impacts of foreign exchange, acquisitions and divestitures from period-over-period comparisons. Management believes reporting organic sales growth provides useful information to investors, potential investors and others, and allows for a more complete understanding of underlying sales trends by providing sales growth on a consistent basis. Free cash flow, cash conversion rate of free cash flow to net income, and the net debt to capitalization ratio, are adjusted to exclude certain cash inflows and outlays, and include only certain balance sheet accounts from the comparable GAAP measures, are an indication of our performance in cash flow generation and also provide an indication of the Company's relative balance sheet leverage to other industrial manufacturing companies. These non-GAAP financial measures are among the primary indicators management uses as a basis for evaluating our cash flow generation and our capitalization structure. In addition, free cash flow is used as a criterion to measure and pay certain compensation-based incentives. For these reasons, management believes these non-GAAP financial measures can be useful to investors, potential investors and others. The Company’s non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies. The presentation of this additional information is not meant to be considered in isolation or as a substitute for financial measures prepared in accordance with GAAP.

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