Watts Water(WTS) - 2024 Q4 - Annual Results

Executive Summary & Highlights Watts Water Technologies reported record Q4 and full year 2024 results, driven by strategic acquisitions and strong financial performance, while monitoring future market uncertainties Company Overview Watts Water Technologies, Inc. is a leading manufacturer and provider of plumbing, heating, and water quality products and solutions, announcing record results for Q4 and full year 2024 - Watts Water Technologies, Inc. is a leading manufacturer and provider of plumbing, heating, and water quality products and solutions[3] - The company announced record results for the fourth quarter and full year 2024, including record operating income, adjusted earnings per share, and full year sales[4] CEO Commentary CEO Robert J. Pagano Jr. highlighted record Q4 and full year 2024 results, successful execution of new product development, and advancement of long-term strategy. He also noted the completion of the I-CON Systems acquisition, which is expected to expand digital offerings and provide growth in the correctional facility market. The company is monitoring geo-political uncertainty and mixed global markets for 2025, focusing on cost structure adjustments, strategic investments, and shareholder value creation - Watts closed 2024 with record results for the quarter and full year, including record operating income, adjusted earnings per share, and full year sales[4] - The acquisition of I-CON Systems was completed on January 2, 2025, aiming to expand digital offerings and provide growth opportunities in the correctional facility niche of the institutional market[4] - For 2025, the company is monitoring geo-political uncertainty and mixed global markets, taking actions to adjust its cost structure, and plans to continue strategic investments and return capital to shareholders[4] Fourth Quarter 2024 Highlights Fourth quarter 2024 saw a slight decrease in reported sales but significant improvements in operating margin and diluted EPS, alongside the strategic acquisition of I-CON Systems Fourth Quarter 2024 Key Financial Highlights | Metric | Value | Change (YoY) | | :-------------------------- | :---------- | :----------- | | Sales | $540 million | -1% reported, -5% organically | | Operating margin | 16.5% | +210 bps | | Adjusted operating margin | 16.8% | +100 bps | | Diluted EPS | $2.02 | +21% | | Adjusted diluted EPS | $2.05 | +4% | - Closed the acquisition of I-CON Systems, Inc. on January 2, 2025[5] Full Year 2024 Highlights Full year 2024 demonstrated strong reported sales growth and double-digit increases in diluted EPS, supported by robust operating and free cash flow generation Full Year 2024 Key Financial Highlights | Metric | Value | Change (YoY) | | :-------------------------- | :---------- | :----------- | | Sales | $2.25 billion | +10% reported, -1% organically | | Operating margin | 17.3% | +20 bps | | Adjusted operating margin | 17.7% | -10 bps | | Diluted EPS | $8.69 | +11% | | Adjusted diluted EPS | $8.86 | +7% | | Operating cash flow | $361 million | +16% | | Free cash flow | $332 million | +18% | Financial Performance Overview The company's consolidated earnings for Q4 and full year 2024 reflect mixed sales but strong operating income and EPS growth, driven by effective cost management Consolidated Earnings Summary The consolidated earnings summary for Q4 and full year 2024 shows a mixed sales performance with strong operating income and EPS growth, particularly on an adjusted basis, reflecting effective cost management and strategic initiatives Fourth Quarter and Full Year Earnings Summary (2024 vs 2023) | Metric | Q4 2024 | Q4 2023 | Q4 % Change | FY 2024 | FY 2023 | FY % Change | | :-------------------------- | :------ | :------ | :---------- | :-------- | :-------- | :---------- | | Net sales (in millions) | $540.4 | $547.5 | (1)% | $2,252.2 | $2,056.3 | 10% | | Organic sales growth % | (5)% | N/A | N/A | (1)% | N/A | N/A | | Operating income (in millions) | $89.0 | $78.8 | 13% | $390.4 | $350.9 | 11% | | Operating margin % | 16.5% | 14.4% | 210 bps | 17.3% | 17.1% | 20 bps | | Adjusted operating income (in millions) | $90.9 | $86.4 | 5% | $399.6 | $365.2 | 9% | | Adjusted operating margin % | 16.8% | 15.8% | 100 bps | 17.7% | 17.8% | (10) bps | | Diluted earnings per share ($) | $2.02 | $1.67 | 21% | $8.69 | $7.82 | 11% | | Adjusted diluted earnings per share ($) | $2.05 | $1.97 | 4% | $8.86 | $8.27 | 7% | Detailed Fourth Quarter Financial Highlights Fourth quarter 2024 saw a slight sales decrease but significant operating margin improvement, driven by pricing and productivity despite volume challenges Sales Performance Fourth quarter sales decreased 1% reported and 5% organically, primarily due to fewer shipping days impacting Americas and Europe, partially offset by acquisition contributions and APMEA growth - Fourth quarter 2024 sales were $540 million, a 1% decrease on a reported basis and a 5% decrease on an organic basis compared to Q4 2023[7] - Incremental sales from acquisitions within the Americas totaled $23 million, contributing 4% to reported growth[7] - Organic sales declines in the Americas and Europe, primarily due to fewer shipping days (approximately 5% of the sales decrease), more than offset growth in APMEA[7] Operating Margin Analysis Operating margin increased significantly in Q4 2024, driven by favorable pricing and productivity, which mitigated the negative impacts of volume deleverage, inflation, and acquisition dilution - Operating margin increased 210 basis points on a reported basis and 100 basis points on an adjusted basis in Q4 2024[8] - The increase in adjusted operating margin was primarily due to favorable price and productivity, which more than offset volume deleverage from fewer shipping days, inflation, and the dilutive impact of the Bradley acquisition[8] - Operating margin was favorably impacted by a decrease in restructuring and acquisition-related charges[8] Regional Performance Regional performance varied, with Americas showing acquisition-driven growth, Europe experiencing declines, and APMEA achieving growth, all impacted by shipping days and market dynamics Americas The Americas segment experienced reported sales growth driven by acquisitions, but organic sales declined due to fewer shipping days. Segment margin improved due to price realization and productivity - Americas sales increased 3% on a reported basis to $398 million but declined 3% organically[9] - Acquisitions of Bradley and Josam contributed $23 million (6%) to reported growth[9] - Organic sales decreased primarily due to fewer shipping days, which reduced sales by mid-single-digits, partially offset by price realization[9] - Segment margin increased 160 basis points, with benefits from price realization and productivity offsetting inflation, volume deleverage, and the dilutive impact of the Bradley acquisition[10] Europe Europe faced significant sales and margin declines due to lower volumes from fewer shipping days, reduced OEM channel demand, and destocking, with inflation further impacting profitability - Europe sales decreased 15% on both reported and organic bases to $109 million[11] - Sales declined due to lower volumes from fewer shipping days and reduced OEM channel demand, impacted by government energy incentives and continued heat pump and wholesale channel destocking[11] - Segment margin decreased 480 basis points, as volume deleverage and inflation more than offset productivity benefits[11] APMEA The APMEA segment achieved reported and organic sales growth, driven by strong performance in China and the Middle East, despite some headwinds from fewer shipping days in other regions. Segment margin saw substantial improvement - APMEA sales increased 4% on a reported basis and 3% on an organic basis to $34 million[12] - Sales growth was driven by China and the Middle East, partly offset by declines in Australia and New Zealand due to fewer shipping days[12] - Segment margin increased 490 basis points, benefiting from higher trade and affiliates sales volume and productivity, which offset inflation and incremental investments[12] Cash Flow and Capital Allocation The company demonstrated strong cash flow generation and continued its share repurchase program in 2024, reflecting effective capital management Cash Flow Watts Water Technologies demonstrated strong cash flow generation in 2024, with significant increases in both operating and free cash flow, primarily driven by higher net income, improved working capital, and contributions from acquisitions Full Year Cash Flow Performance (2024 vs 2023) | Metric | FY 2024 (in millions) | FY 2023 (in millions) | Change | | :------------------------ | :-------------------- | :-------------------- | :----- | | Operating cash flow | $361 | $311 | +16% | | Net capital expenditures | $29 | $30 | -3.3% | | Free cash flow | $332 | $281 | +18% | - Operating and free cash flow increased in 2024 due to higher net income, improved working capital, and cash flow generated by acquisitions[13] Share Repurchase Program The company continued its share repurchase program in 2024, repurchasing shares in both the fourth quarter and full year, with a substantial amount remaining authorized for future repurchases Share Repurchase Activity (2024) | Period | Shares Repurchased (approx.) | Aggregate Cost (in millions) | | :-------------------- | :--------------------------- | :--------------------------- | | Fourth Quarter 2024 | 20,000 | $4 | | Full Year 2024 | 85,000 | $17 | - Approximately $145 million remains available under the stock repurchase program authorized in 2023, with no expiration date[14] Full Year 2025 Outlook Watts Water Technologies anticipates a modest sales growth range for full year 2025, with operating margin expected to be stable to slightly down, while adjusted operating margin is projected to be flat to moderately up Full Year 2025 Outlook | Metric | Range | | :-------------------------- | :---------------- | | Sales growth (reported & organic) (%) | Down 3% to Up 2% | | Operating margin (%) | 16.7% to 17.3% (down 60 bps to flat) | | Adjusted operating margin (%) | 17.7% to 18.3% (flat to up 60 bps) | Non-GAAP Financial Measures Explanation This section defines and explains the usefulness of various non-GAAP financial measures, including segment earnings, adjusted operating income, adjusted net income, organic sales, and free cash flow, emphasizing their role in evaluating underlying performance trends and cash generation, while noting they are not substitutes for GAAP measures - Segment earnings are defined as the GAAP performance measure used by the CODM to assess segment results, excluding non-recurring and unusual items[26] - Non-GAAP measures like adjusted operating income, adjusted net income, and adjusted diluted EPS eliminate certain expenses (e.g., restructuring, acquisition-related costs) to assess the run rate of operations[27] - Organic sales and organic sales growth exclude impacts of foreign exchange, acquisitions, and divestitures to provide a clearer understanding of underlying sales trends[27] - Free cash flow, cash conversion rate, and net debt to capitalization ratio are used to evaluate cash flow generation and balance sheet leverage, and are primary indicators for management[27] Consolidated Financial Statements This section presents the company's complete financial statements, including statements of operations, balance sheets, and cash flows, for the fourth quarter and full year 2024 Consolidated Statements of Operations The Consolidated Statements of Operations show Watts Water Technologies' financial performance for the fourth quarter and full year 2024, highlighting net sales, gross profit, operating income, net income, and earnings per share, with comparisons to the prior year Consolidated Statements of Operations (Amounts in millions, except per share information) | Metric | Q4 2024 | Q4 2023 | FY 2024 | FY 2023 | | :---------------------------------- | :------ | :------ | :-------- | :-------- | | Net sales | $540.4 | $547.5 | $2,252.2 | $2,056.3 | | Cost of goods sold | 287.7 | 291.8 | 1,190.2 | 1,095.4 | | GROSS PROFIT | 252.7 | 255.7 | 1,062.0 | 960.9 | | Selling, general and administrative expenses | 162.9 | 173.1 | 664.4 | 604.5 | | Restructuring | 0.8 | 3.8 | 7.2 | 5.5 | | OPERATING INCOME | 89.0 | 78.8 | 390.4 | 350.9 | | Total other expense | — | 1.4 | 4.4 | 1.4 | | INCOME BEFORE INCOME TAXES | 89.0 | 77.4 | 386.0 | 349.5 | | Provision for income taxes | 21.5 | 21.6 | 94.8 | 87.4 | | NET INCOME | $67.5 | $55.8 | $291.2 | $262.1 | | BASIC EPS | $2.02 | $1.67 | $8.70 | $7.85 | | DILUTED EPS | $2.02 | $1.67 | $8.69 | $7.82 | | Dividends declared per share | $0.43 | $0.36 | $1.65 | $1.38 | Consolidated Balance Sheets The Consolidated Balance Sheets provide a snapshot of the company's financial position at December 31, 2024, compared to December 31, 2023, detailing assets, liabilities, and stockholders' equity Consolidated Balance Sheets (Amounts in millions) | Asset/Liability/Equity | Dec 31, 2024 | Dec 31, 2023 | | :------------------------------------ | :----------- | :----------- | | ASSETS: | | | | Cash and cash equivalents | $386.9 | $350.1 | | Trade accounts receivable, net | 253.2 | 259.8 | | Total Inventories | 392.1 | 399.3 | | Total Current Assets | 1,083.5 | 1,061.0 | | Property, plant and equipment, net | 254.8 | 248.2 | | Goodwill | 715.0 | 693.0 | | Intangible assets, net | 235.0 | 216.1 | | TOTAL ASSETS | $2,397.0 | $2,309.4 | | LIABILITIES AND STOCKHOLDERS' EQUITY: | | | | Total Current Liabilities | $417.9 | $405.8 | | LONG-TERM DEBT | 197.0 | 298.3 | | Total Stockholders' Equity | 1,707.9 | 1,513.3 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $2,397.0 | $2,309.4 | Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows illustrate the sources and uses of cash for the full year 2024, categorized into operating, investing, and financing activities, showing a net increase in cash and cash equivalents Consolidated Statements of Cash Flows (Amounts in millions) | Activity | FY 2024 | FY 2023 | | :------------------------------------------ | :------ | :------ | | Net cash provided by operating activities | $361.1 | $310.8 | | Net cash used in investing activities | (124.7) | (343.1) | | Net cash (used in) provided by financing activities | (190.5) | 69.0 | | Effect of exchange rate changes on cash | (9.1) | 2.6 | | INCREASE IN CASH AND CASH EQUIVALENTS | 36.8 | 39.3 | | Cash and cash equivalents at end of year | $386.9 | $350.1 | Reconciliation of GAAP to Non-GAAP Financial Measures This section provides comprehensive reconciliations of GAAP to non-GAAP financial measures, including consolidated results, segment earnings, organic sales, cash flow, and debt ratios Consolidated Results Reconciliation This section provides a detailed reconciliation of GAAP financial measures to non-GAAP adjusted measures for consolidated results, highlighting the impact of special items on operating income, net income, and diluted EPS for both the fourth quarter and full year Reconciliation of GAAP to Non-GAAP Consolidated Results (Amounts in millions, except per share information) | Metric | Q4 2024 GAAP | Q4 2024 Adj. | Q4 2023 GAAP | Q4 2023 Adj. | FY 2024 GAAP | FY 2024 Adj. | FY 2023 GAAP | FY 2023 Adj. | | :------------------------------------ | :----------- | :----------- | :----------- | :----------- | :----------- | :----------- | :----------- | :----------- | | Operating income | $89.0 | $90.9 | $78.8 | $86.4 | $390.4 | $399.6 | $350.9 | $365.2 | | Operating margin % | 16.5% | 16.8% | 14.4% | 15.8% | 17.3% | 17.7% | 17.1% | 17.8% | | Net income | $67.5 | $68.5 | $55.8 | $66.1 | $291.2 | $297.0 | $262.1 | $277.3 | | Diluted earnings per share | $2.02 | $2.05 | $1.67 | $1.97 | $8.69 | $8.86 | $7.82 | $8.27 | | Total adjustments for special items (pre-tax) | $1.9 | N/A | $7.6 | N/A | $9.2 | N/A | $14.3 | N/A | | Total adjustments for special items (tax-effected) | $1.0 | N/A | $10.3 | N/A | $5.8 | N/A | $15.2 | N/A | Segment Information - Reconciliation of Segment Earnings to Consolidated Operating Income This reconciliation details segment net sales and earnings for Americas, Europe, and APMEA, along with corporate operating loss and adjustments for segment special items, to arrive at the consolidated operating income for both the fourth quarter and full year Segment Earnings Reconciliation to Consolidated Operating Income (Amounts in millions) | Metric | Q4 2024 Americas | Q4 2024 Europe | Q4 2024 APMEA | Q4 2024 Total Segment | Q4 2024 Consolidated | | :-------------------------- | :--------------- | :------------- | :------------ | :-------------------- | :------------------- | | Net sales from external customers | $398.0 | $108.6 | $33.8 | $540.4 | $540.4 | | Segment earnings | $86.9 | $11.0 | $5.9 | $103.8 | N/A | | Segment margin % | 21.8% | 10.2% | 17.5% | 19.2% | N/A | | Corporate operating loss (excl. special items) | N/A | N/A | N/A | N/A | $(12.9) | | Corporate special items | N/A | N/A | N/A | N/A | $(1.1) | | Adjustments for segment special items | $1.2 | $(1.9) | $(0.1) | $(0.8) | N/A | | Operating income | N/A | N/A | N/A | N/A | $89.0 | | Operating margin % | N/A | N/A | N/A | N/A | 16.5% | | Metric | FY 2024 Americas | FY 2024 Europe | FY 2024 APMEA | FY 2024 Total Segment | FY 2024 Consolidated | | :-------------------------- | :--------------- | :------------- | :------------ | :-------------------- | :------------------- | | Net sales from external customers | $1,664.9 | $453.3 | $134.0 | $2,252.2 | $2,252.2 | | Segment earnings | $376.0 | $53.2 | $24.5 | $453.7 | N/A | | Segment margin % | 22.6% | 11.7% | 18.3% | 20.1% | N/A | | Corporate operating loss (excl. special items) | N/A | N/A | N/A | N/A | $(54.1) | | Corporate special items | N/A | N/A | N/A | N/A | $(1.7) | | Adjustments for segment special items | $(3.5) | $(3.4) | $(0.6) | $(7.5) | N/A | | Operating income | N/A | N/A | N/A | N/A | $390.4 | | Operating margin % | N/A | N/A | N/A | N/A | 17.3% | Segment Information - Reconciliation of Net Sales to Non-GAAP Organic Sales This table reconciles reported net sales to non-GAAP organic sales for each segment (Americas, Europe, APMEA) and total, by adjusting for foreign exchange and acquisition impacts across multiple periods, providing a clearer view of underlying sales trends Reconciliation of Net Sales to Non-GAAP Organic Sales (Amounts in millions) | Metric | Q4 2024 Americas | Q4 2024 Europe | Q4 2024 APMEA | Q4 2024 Total | | :-------------------------- | :--------------- | :------------- | :------------ | :------------ | | Net sales December 31, 2024 | $398.0 | $108.6 | $33.8 | $540.4 | | Net sales December 31, 2023 | 387.0 | 128.0 | 32.5 | 547.5 | | Net sales % increase (decrease) | 2.8% | (15.2)% | 4.0% | (1.3)% | | Foreign exchange impact | 0.2% | (0.1)% | (0.6)% | —% | | Acquisition impact | (5.9)% | —% | —% | (4.1)% | | Organic sales (decrease) increase | (2.9)% | (15.3)% | 3.4% | (5.4)% | | Metric | FY 2024 Americas | FY 2024 Europe | FY 2024 APMEA | FY 2024 Total | | :-------------------------- | :--------------- | :------------- | :------------ | :------------ | | Net sales December 31, 2024 | $1,664.9 | $453.3 | $134.0 | $2,252.2 | | Net sales December 31, 2023 | 1,428.1 | 512.1 | 116.1 | 2,056.3 | | Net sales % increase (decrease) | 16.6% | (11.5)% | 15.4% | 9.5% | | Foreign exchange impact | 0.1% | (0.3)% | 0.8% | —% | | Acquisition impact | (14.5)% | —% | (7.0)% | (10.4)% | | Organic sales increase (decrease) | 2.2% | (11.8)% | 9.2% | (0.9)% | Reconciliation of Net Cash Provided by Operations to Free Cash Flow This reconciliation details the calculation of free cash flow from net cash provided by operating activities, including adjustments for capital expenditures and proceeds from asset sales, and presents the cash conversion rate of free cash flow to net income Reconciliation of Net Cash Provided by Operations to Free Cash Flow (Amounts in millions) | Metric | FY 2024 | FY 2023 | | :------------------------------------------ | :------ | :------ | | Net cash provided by operations | $361.1 | $310.8 | | Less: additions to property, plant, and equipment | (35.3) | (29.7) | | Plus: proceeds from the sale of property, plant, and equipment | 5.9 | — | | Free cash flow | $331.7 | $281.1 | | Net income | $291.2 | $262.1 | | Cash conversion rate of free cash flow to net income | 113.9% | 107.2% | Reconciliation of Long-Term Debt to Net Debt and Net Debt to Capitalization Ratio This reconciliation calculates net debt by subtracting cash and cash equivalents from total long-term debt, and then determines the net debt to capitalization ratio, providing insight into the company's leverage Reconciliation of Long-Term Debt to Net Debt and Net Debt to Capitalization Ratio (Amounts in millions) | Metric | Dec 31, 2024 | Dec 31, 2023 | | :------------------------------------ | :----------- | :----------- | | Current portion of long-term debt | $— | $— | | Plus: Long-term debt, net of current portion | 197.0 | 298.3 | | Less: Cash and cash equivalents | (386.9) | (350.1) | | Net debt | $(189.9) | $(51.8) | | Plus: Total stockholders' equity | 1,707.9 | 1,513.3 | | Capitalization | $1,518.0 | $1,461.5 | | Net debt to capitalization ratio | (12.5)% | (3.5)% | 2025 Full Year Outlook – Reconciliation of Net Sales Growth to Organic Sales Growth and Operating Margin to Adjusted Operating Margin This reconciliation provides the forecasted ranges for net sales growth and operating margin for the full year 2025, distinguishing between reported and organic sales growth and GAAP and adjusted operating margins, including the impact of forecasted restructuring and other costs 2025 Full Year Outlook Reconciliation | Metric | 2025 Outlook (Approximately) | | :------------------------------------ | :--------------------------- | | Net Sales Growth (%) | (3)% to 2% | | Forecasted impact of acquisition / FX | - | | Organic Sales Growth (%) | (3)% to 2% | | Operating Margin (%) | 16.7% to 17.3% | | Forecasted restructuring / other costs (%) | 1.0% | | Adjusted Operating Margin (%) | 17.7% to 18.3% | Additional Information This section provides details on the upcoming conference call and webcast, along with important disclosures regarding forward-looking statements and potential risk factors Conference Call and Webcast Watts Water Technologies will host a live webcast and conference call on February 11, 2025, to discuss its fourth quarter and full year 2024 results, with the recording available online for a year - A live webcast of the conference call to discuss Q4 and full year 2024 results will be held on Tuesday, February 11, 2025, at 9:00 a.m. EST[17] - The webcast and press release can be accessed via the Investor Relations section of the company's website (www.watts.com), with the call recording available until February 10, 2026[17] Forward-Looking Statements and Risk Factors This section outlines forward-looking statements regarding 2025 financial results, strategy, investments, and acquisitions, cautioning that actual results may differ due to various potential risks and uncertainties, including economic conditions, supply chain issues, and geopolitical events - The press release includes forward-looking statements regarding expected full year 2025 financial results, strategy, investments, benefits from recent acquisitions, ability to manage geo-political uncertainty, market conditions, and return of capital to shareholders[18] - Actual results may differ materially due to potential risks and uncertainties, including the effectiveness of cost-cutting actions, integration of acquired businesses, current economic and financial conditions, raw material shortages, competition, interest rates, inflation, new product development, foreign exchange fluctuations, cyclicality of industries, environmental compliance, product liability, litigation, global crises, and supply chain disruptions[18] - Readers should not rely on forward-looking statements, and the company undertakes no duty to update the information except as required by law[18]