Watts Water Technologies Reports Record First Quarter 2022 Results

Watts Water Technologies, Inc. (NYSE: WTS) today announced results for the first quarter of 2022.

Chief Executive Officer Robert J. Pagano Jr. commented, "All three regions delivered double-digit organic sales growth and strong operating margin expansion in the quarter versus the prior year. Challenges from market demand and supply chain disruptions continued, and our sourcing and operations teams rose to these challenges to support our customers' needs. I want to thank our employees around the world, who continue to navigate the challenging macro landscape. Their efforts resulted in another record quarter, with both consolidated sales and operating margin higher than anticipated. Given our strong start, we are increasing our full year 2022 outlook for adjusted operating margin expansion to 20 to 60 basis points from our previous outlook of zero to 40 basis points. We are maintaining organic sales growth of 3% to 8%, compared to last year, due to the uncertainty caused by the war in Ukraine."

A summary of first quarter financial results is as follows:

First Quarter Financial Highlights
First quarter 2022 performance relative to first quarter 2021

• Sales of $463 million increased 12% on a reported basis and 14% organically due to double-digit organic growth in all regions. Sales from acquisitions totaled approximately $2 million and were more than offset by unfavorable foreign exchange movements, which reduced sales by $10 million.
• Operating margin increased 100 basis points on a reported basis and 120 basis points on an adjusted basis, benefiting from price, volume, productivity and cost savings, which more than offset inflation, incremental investments and business normalization costs. GAAP operating margin was reduced by incremental restructuring charges year-over-year.

Regional Performance

Americas

• Sales of $314 million increased 15% on a reported basis and 14% on an organic basis. Sales from acquisitions contributed growth of 1%. The majority of product lines grew by double-digits.
• Operating margin increased 60 basis points on a GAAP basis and 70 basis points on an adjusted basis as benefits from price realization and productivity more than offset inflation, incremental growth investments and business normalization costs. GAAP operating margin in 2022 was negatively impacted by restructuring charges.

Europe

• Sales of $130 million increased 6% on a reported basis and 14% on an organic basis, with growth in both Fluid Solutions and Drains platforms. Unfavorable foreign exchange movements totaled 8%.
• Operating margin increased 30 basis points on a GAAP basis and 120 basis points on an adjusted basis benefiting from increased price, volume and productivity, partially offset by inflation and growth investments. GAAP operating margin in 2022 was negatively impacted by restructuring charges.

Asia-Pacific, Middle East and Africa ("APMEA")

• Sales of $19 million increased 10% on a reported basis and 13% on an organic basis, driven by growth in all major regions. Unfavorable foreign exchange movements totaled 3%.
• Operating margin increased 250 basis points on a GAAP basis and 30 basis points on an adjusted basis. GAAP and adjusted margins both benefited from increased volume, price and productivity, which offset inflation and reduced affiliate volume. GAAP operating margin in 2022 was positively impacted by lower restructuring costs year-over-year.

Cash Flow and Capital Allocation

• For the first quarter of 2022, operating cash flow was negative $2 million and net capital expenditures were $6 million, resulting in free cash flow of negative $8 million. In the comparable period last year, operating cash flow was $34 million and net capital expenditures were $2 million, resulting in free cash flow of $32 million. Operating cash flow and free cash flow decreased primarily due to a proactive decision to increase inventories in response to strong market demand and continued supply chain disruptions, in addition to increased payments related to restructuring and employee and customer incentives. We expect improvement in free cash flow throughout 2022 due to normal seasonality.

• The Company repurchased approximately 293,000 shares of Class A common stock at a cost of $42.9 million during the first quarter.

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 first quarter 2022 results on Wednesday, May 4, 2022, at 9:00 a.m. EDT. This press release and the live webcast can be accessed by visiting the Investor Relations section of the Company's website at www.wattswater.com. Following the webcast, the call recording will be available at the same address until May 4, 2023.

The Company's 2022 Annual Meeting of Stockholders will be held at 9:00 a.m. EDT on Wednesday, May 11, 2022 at the Company's executive offices located at 815 Chestnut Street, North Andover, Massachusetts.

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 within 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 expected full year 2022 results and improvements in free cashflow throughout 2022. 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 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 and the war in Ukraine; supply chain and logistical disruptions or other workforce disruptions that could negatively affect our supply chain, manufacturing, distribution, or other business processes; 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, 2021, 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 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, which 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.