Watts Water Technologies Reports Second Quarter 2010 Results

Watts Water Technologies Inc. announced results for the second quarter ended July 4, 2010. Net income per diluted share from continuing operations (EPS) for the second quarter of 2010 was $0.59. This represents an increase of 44% as compared to $0.41 of EPS reported in the second quarter of 2009. Second quarter 2010 results include a negative $0.06 impact from restructuring and impairment charges, offset by $0.08 in income tax benefits, mainly related to the release of a valuation allowance previously established against net operating loss carry-forwards in Europe.

Adjusting for these items, second quarter 2010 EPS was $0.57, compared to second quarter 2009 adjusted EPS of $0.39, an increase of 46%. Foreign exchange negatively impacted EPS by $0.03, primarily due to the euro weakening against the U.S. dollar compared to the same period last year.

Sales for the second quarter of 2010 were $324.0 million, an increase of $15.8 million, or 5%, compared to the second quarter of 2009. An organic sales increase of 7% was offset by a 2% reduction due to foreign exchange, primarily due to the weakening of the euro against the U.S. dollar. Operating income in the second quarter of 2010 was $33.3 million, providing operating margins of 10.3%. On an adjusted basis, operating income was $36.4 million compared to $27.8 million in the second quarter of 2009, a 31% increase. On an adjusted basis, operating margins increased 2.2 percentage points to 11.2% in the second quarter of 2010, compared to 9% on an adjusted basis for the same period in 2009.

North American sales increased $11.9 million, or 6%, during the second quarter compared to the same period last year. This increase was primarily due to an organic sales increase of $9.2 million, or 5%, and favorable foreign exchange movements of $2.3 million, or 1%, associated with the strengthening of the Canadian dollar versus the U.S. dollar. Sales into the North American wholesale market increased organically by 4% during the second quarter as compared to the same period in 2009, primarily from increased unit volume. Organic sales into the North American retail home improvement market increased 7% for the second quarter as compared to the second quarter of 2009 primarily from increased unit volume.

European sales increased $3.0 million, or 3%, to $112.1 million, compared to $109.1 million for the second quarter of 2009. This increase was primarily due to an increase in organic sales of $11.8 million, or 11%, offset by unfavorable foreign exchange movements associated with the weakening of the euro versus the U.S. dollar of $8.8 million, or 8%. Organic sales in all major channels improved over the second quarter of 2009. European sales represented approximately 35% of total Company sales in the second quarters of 2010 and 2009.

China segment sales in the second quarter of 2010 increased $0.9 million, or 19%, to $5.6 million compared to the second quarter of 2009. The entire increase was organic and related to volume growth in the domestic Chinese marketplace.

Sales for the first six months of 2010 were $643.3 million, an increase of $44.4 million, or 7%, compared to the first six months of 2009, primarily from organic growth.

"Our organic sales grew by 7% for the second quarter in a row with solid increases in all segments,” said Patrick S. O'Keefe, CEO. “Organically, operating income grew by 27% as compared to the second quarter of 2009. Our operating income grew faster than sales because of the leverage we achieved through our various productivity and cost savings programs that we have initiated over the last two years. Increased sales volume also had a positive impact on plant absorption.

"We continued to generate positive cash flow through the first half of this year, although below prior year. For the six-month period ended July 4, 2010, we generated $21.7 million of free cash flow, as compared to free cash flow of $65.3 million in the first six months of 2009. Free cash flow is lower mainly due to increased working capital supporting our sales growth along with increased safety stock supporting our restructuring efforts in Europe. Free cash flow remains a key focus for us as the year progresses.”