Watts Water Technologies Reports Record Third Quarter 2021 Results

• Reported sales of $455 million, up 18%; up 17% on an organic basis

• GAAP operating margin of 14.2%, up 170 bps; adjusted operating margin of 14.4%, up 60 bps

• GAAP and adjusted EPS of $1.37 and $1.39, representing increases of 41% and 32%, respectively

• Generated year-to-date operating cash flow of $135 million and free cash flow of $120 million, approximately 6% and 26% increases, respectively, over same period last year

• Increasing full year 2021 sales outlook; full year adjusted margin expansion in line with previous outlook

Note: Current quarter performance relative to comparable third quarter 2020

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

Chief Executive Officer Robert J. Pagano Jr. commented, “As expected, challenges from market demand and supply chain disruptions continued into the third quarter, but our supply chain and operations teams continued to support our customers’ needs. I want to again thank them, and our entire team, for keeping a customer focus under continuing challenging circumstances. Their efforts resulted in another record quarter, with both consolidated sales and operating margin higher than we had anticipated. We also generated incremental free cash flow that, along with an already strong balance sheet, provides us flexibility to execute on our strategic priorities. We have increased our full year 2021 organic sales growth outlook to be 14% to 17% and are maintaining our previous expectations for adjusted operating margin expansion.”

A summary of third quarter financial results is as follows:

Third Quarter Financial Highlights

Third quarter 2021 performance relative to third quarter 2020

• Sales of $455 million increased 18% on a reported basis and 17% on an organic basis, driven by double digit growth in all regions.
• Operating margin increased 170 basis points on a reported basis and 60 basis points on an adjusted basis, benefiting from price, volume, productivity and cost savings, which more than offset inflation, incremental investments, incentives and business normalization costs. GAAP operating margin was also positively impacted by lower restructuring charges year-over-year.

Regional Performance:

Americas

• Sales of $309 million increased 18% on a reported basis and 17% on an organic basis, which included widespread growth in all major product lines.
• Operating margin was flat on a GAAP basis and decreased 30 basis points on an adjusted basis, as benefits from price, volume, cost reduction actions and productivity initiatives were offset by inflation, incremental investments, incentives and business normalization costs. GAAP operating margin was positively impacted by lower restructuring charges year-over-year.

Europe

• Sales of $124 million increased 16% on a reported basis, including a 14% organic increase, with growth in all platforms, and a 2% positive foreign exchange impact.
• Operating margin increased 490 basis points on a GAAP basis and increased 420 basis points on an adjusted basis. Both measures were positively affected by price, volume and productivity initiatives that more than offset inflation, incremental investments and business normalization costs. GAAP operating margin was positively impacted by lower restructuring charges year-over-year.

APMEA

• Sales of $22 million increased 39% on a reported basis, including 6% from positive foreign currency impact. Organically, sales increased 33% from growth in China, Australia and the Middle East.
• Operating margin increased 1,970 basis points on a GAAP basis and 400 basis points on an adjusted basis, both benefiting from volume, productivity initiatives, restructuring savings as well as higher affiliate volume, which were partially offset by inflation, incentives and business normalization costs. GAAP operating margin was positively impacted by lower restructuring charges year-over-year.

Cash Flow and Capital Allocation

• For the first nine months of 2021, operating cash flow was approximately $135 million, net capital expenditures were approximately $15 million and free cash flow was approximately $120 million. In the comparable period last year, operating cash flow was approximately $127 million, net capital expenditures were approximately $32 million and free cash flow was approximately $95 million. The free cash flow increase was primarily driven by higher net income and lower net capital expenditures. We expect continued improvement in free cash flow through the fourth quarter of 2021, due to normal seasonality.

• We repurchased approximately 25,000 shares of Class A common stock at an investment of approximately $4 million during the third quarter. For the first nine months of 2021, we repurchased approximately 87,000 shares at an investment of approximately $12 million, primarily to offset dilution.

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 third quarter results for 2021 on Thursday, November 4, 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 November 4, 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 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 expected sales and adjusted operating margins for the full year 2021 and free cash flow for the remainder of 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 vaccine mandates, implementations and the impact of the virus variants; 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, 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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