Watts Water Technologies Reports Strong Finish to Record Year and Announces $150 Million Share Repurchase Program

Watts Water Technologies, Inc. (NYSE: WTS) today announced results for the fourth quarter and full-year 2018.

“I am pleased that we finished the year with a strong fourth quarter. We continued to drive top-line growth and margin expansion, which as in prior quarters, was led by an excellent performance from the Americas,” said Chief Executive Officer Robert J. Pagano Jr. “We delivered record quarterly sales driven by solid organic growth in the Americas and Europe. We leveraged our incremental sales and the benefits from productivity and restructuring into higher operating income, and record fourth quarter operating margin and earnings per share.”

Commenting on the stock repurchase program, Mr. Pagano noted, “This action reflects our ongoing commitment to enhance shareholder value and to execute our balanced cash allocation strategy. We expect to use available cash to fund this program. We remain committed to our long-term growth strategy of growing the business organically and through acquisitions and we believe we will continue to have sufficient capital available to fund future acquisitions and innovative initiatives.”

Sales for the fourth quarter and the full year were $388 million and $1.57 billion, up 6% and 7%, respectively, as compared to the similar periods of 2017. Net income per diluted share (EPS) for the fourth quarter and for the year ended December 31, 2018 was $0.85 and $3.64, respectively, as compared to $(0.07) and $2.12 for the prior-year periods. GAAP results for the current and prior year quarters and full years were impacted by provisional adjustments relating to the Tax Act, which will be finalized in our Annual Report on Form 10-K. Adjusted EPS for the fourth quarter and year ended December 31, 2018 was $0.88 and $3.74, respectively, as compared to $0.74 and $3.02 for the prior-year periods. GAAP and adjusted EPS for the quarter and full year 2018 improved due to a strong operating performance in the Americas, the benefits of tax reform and lower interest costs.

A summary of fourth quarter and full-year financial results is as follows:

(1) Special items and adjusted earnings per share represent non-GAAP financial measures. For a reconciliation of GAAP to non-GAAP items please see the tables attached to this press release.

Mr. Pagano concluded, “Our goals for 2018 were to accelerate organic growth, drive margin expansion and continue to reinvest in future growth and productivity initiatives. The team delivered on all counts, which drove record financial results for the year. We will continue to focus on these key metrics during the coming year. We also intend to introduce our smart and connected product strategy in 2019, which we believe will provide further differentiation for us in the marketplace.”

Fourth Quarter Financial Highlights:

Segment Update

Sales increased 6% and 7% on a reported and organic basis, respectively, compared to the fourth quarter last year; reported operating margin increased 150 basis points primarily from reduced restructuring and impairment charges in 2018 and adjusted operating margin increased 30 basis points. Regionally:

• Americas: Sales increased 10% on a reported and organic basis with broad growth in plumbing, drains, electronics, water quality and heating and hot water products. Operating margin increased 130 and 60 basis points on a reported and adjusted basis, respectively. Reported and adjusted operating margin increased as benefits from price, volume, and productivity savings were offset in part by growth investments and inflation. The reported margin also expanded from reduced impairment charges in 2018.
• Europe: Reported sales were flat, impacted by negative foreign exchange movements, and up 3% organically driven by continued strength in our drains and electronics businesses. Operating margin increased 300 and 70 basis points on a reported and adjusted basis, respectively. Reported and adjusted operating margin expanded due to increased volume, price and productivity, including benefits from restructuring programs that were partially offset by growth investments and inflation. The reported margin also expanded from reduced restructuring charges in 2018.
• APMEA: Reported and organic sales decreased 6% and 4%, respectively, as gains in greater Asia and the Middle East and Africa were more than offset by continued weakness in the China market. Reported sales were also impacted by negative foreign exchange movement. Reported and adjusted operating margin both increased 300 basis points, due to an increase in affiliate volume, product mix and productivity, partially offset by growth investments and inflation.

Cash Flow and Capital Allocation

• For 2018, operating cash flow was $169 million and net capital expenditures were $34 million, resulting in free cash flow of $136 million. In 2017, operating cash flow was $156 million, net capital expenditures were $29 million and free cash flow was $127 million.
• The Company repatriated $5.6 million in cash during the fourth quarter. For 2018, $126.5 million was repatriated, a majority of which was used to pay down revolving debt.
• The Company repurchased approximately 144,000 shares of Class A common stock at a cost of approximately $10.5 million during the fourth quarter of 2018, under its previously announced share repurchase program. For 2018, approximately 340,000 shares were purchased at a cost of approximately $26 million, which more than offset dilution from our stock compensation programs. Approximately $12 million remains available for stock repurchases under the previous stock repurchase program initiated in 2015, which has no expiration date.
• The Company’s Board of Directors has authorized the repurchase of up to $150 million of the Company’s Class A common stock from time to time on the open market or in privately negotiated transactions. The timing and number of any shares repurchased will be determined by the Company’s management based on its evaluation of market conditions. There is no expiration date for this program.

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 fourth quarter and year end results for 2018 on Friday, February 8, 2019, at 9:00 a.m. EST. 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, an archived version of the call will be available at the same address until February 8, 2020.

The Company's 2019 Annual Meeting of Stockholders will be held at 9:00 a.m. EDT on Friday, May 17, 2019 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’s expertise in a wide variety of water technologies enables it 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 our smart and connected product strategy in 2019. 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 Tax Act; the timing and expected impact of tariffs, the effectiveness, the timing and the expected savings associated with our 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; 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; 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, 2017 filed with the SEC and our subsequent filings with the SEC. We undertake no duty to update the information contained in this Press Release, except as required by law.

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