“We achieved another quarter of record results that exceeded our expectations, driven by the continued operational excellence of the Watts team. I would like to thank the team for their contributions to our success and their unwavering support of our customers,” stated Chief Executive Officer Robert J. Pagano Jr. “We generated record sales, operating earnings, operating margin and EPS, despite the challenging comparison to a very strong second quarter in 2022. Given our first half performance and our third quarter expectations, we are increasing our full-year 2023 outlook. Organic revenue growth is now expected to range from negative 2% to positive 2%, raising the midpoint by 2%. Adjusted operating margin is now expected to range from 16.7% to 17.3%, raising the midpoint by 100 basis points. Our balance sheet and cash flow remain strong and provide ample flexibility to continue to invest in the business and support the execution of our long-term strategy.”
Second Quarter Financial Highlights
Second quarter 2023 performance relative to second quarter 2022
- Sales of $533 million increased 1% on a reported basis and were flat organically, primarily due to a tough prior year comparison with 16% organic growth in the second quarter of 2022. Mid-single digit organic growth in Europe and Asia Pacific, Middle East and Africa (“APMEA”) was offset by a low-single digit organic decline in the Americas. Sales from acquisitions totaled approximately $8 million and are reported within APMEA. Unfavorable foreign exchange movements had an immaterial impact in the quarter.
- Operating margin increased 60 basis points on a reported basis and 100 basis points on an adjusted basis, driven by favorable price, product mix and productivity, which more than offset inflation, lower volume and incremental investments. Reported operating margin was unfavorably impacted by restructuring and non-recurring acquisition charges.
Regional Performance
Americas
- Sales of $367 million decreased 2% on both a reported basis and an organic basis, largely due to a tough prior year comparison with 22% organic growth in the second quarter of 2022. Growth in core valve products was more than offset by declines in gas connectors, marine instrumentation and radiant heating products.
- Operating margin increased 220 basis points on a reported basis and 210 basis points on an adjusted basis as benefits from price realization, favorable product mix and productivity more than offset inflation, lower volume and incremental investments.
Europe
- Sales of $136 million increased 6% on a reported basis, which included favorable foreign exchange movements of 1%. Organic sales increased 5%, primarily driven by price realization, with sales growth in fluid solutions products, partially offset by a decline in sales of drains products.
- Operating margin increased 50 basis points on a reported basis and decreased 10 basis points on an adjusted basis. Reported operating margin benefited from a decline in restructuring charges in 2023. Reported and adjusted operating margin both benefited from increased price and productivity, but these benefits were more than offset by inflation, lower volume and incremental investments.
APMEA
- Sales of $30 million increased 33% on a reported basis, which included unfavorable foreign exchange movements of 6%. Organic sales increased 6%, driven by growth in the Middle East and Australia. Sales from acquisitions totaled approximately $8 million.
- Operating margin decreased 720 basis points on a reported basis but increased 250 basis points on an adjusted basis. Reported and adjusted margins both benefited from increased trade and affiliate sales volume, price and productivity, which more than offset inflation. Reported operating margin was unfavorably impacted by restructuring and non-recurring acquisition charges.
Cash Flow and Capital Allocation
- For the first six months of 2023, operating cash flow was $101 million and net capital expenditures were $12 million, resulting in free cash flow of $89 million. In the comparable period last year, operating cash flow was $45 million and net capital expenditures were $12 million, resulting in free cash flow of $33 million. Operating and free cash flow increased due to higher net income and reduced working capital investment. Sequential improvement in operating and free cash flow is expected throughout 2023 due to normal seasonality.
- The Company repurchased approximately 24,000 shares of Class A common stock at a cost of $4.0 million during the second quarter. For the first six months of 2023, the Company repurchased approximately 47,000 shares at a cost of approximately $7.7 million. Approximately $20 million remains available for stock repurchases under the stock repurchase program authorized in 2019, which has no expiration date.
- On July 31, 2023, the Company’s Board of Directors authorized the repurchase of up to an additional $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.
Source: Watts Water Technologies, Inc.
