UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended
or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number
WATTS WATER TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or | (I.R.S. Employer Identification No.) | |
(Address of Principal Executive Offices) | (Zip Code) |
(
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Accelerated filer ☐ | ||
Non-accelerated filer ☐ | Smaller reporting company Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at April 24, 2022 | |
Class A Common Stock, $0.10 par value | ||
Class B Common Stock, $0.10 par value |
1
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
| 3 | ||
3 | |||
Consolidated Balance Sheets at March 27, 2022 and December 31, 2021 (unaudited) | 3 | ||
4 | |||
5 | |||
6 | |||
7 | |||
8 | |||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 | ||
29 | |||
30 | |||
30 | |||
30 | |||
30 | |||
31 | |||
32 | |||
33 | |||
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except share information)
(Unaudited)
March 27, | December 31, | |||||
| 2022 |
| 2021 | |||
ASSETS |
| |||||
CURRENT ASSETS: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Trade accounts receivable, less reserve allowances of $ |
| |
| | ||
Raw materials | | | ||||
Work in process | | | ||||
Finished goods | | | ||||
Total Inventories | | | ||||
Prepaid expenses and other current assets |
| |
| | ||
Total Current Assets |
| |
| | ||
PROPERTY, PLANT AND EQUIPMENT |
|
| ||||
Property, plant and equipment, at cost | | | ||||
Accumulated depreciation | ( | ( | ||||
Property, plant and equipment, net | | | ||||
OTHER ASSETS: | ||||||
Goodwill |
| |
| | ||
Intangible assets, net |
| |
| | ||
Deferred income taxes |
| |
| | ||
Other, net |
| |
| | ||
TOTAL ASSETS | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
CURRENT LIABILITIES: | ||||||
Accounts payable | $ | | $ | | ||
Accrued expenses and other liabilities |
| |
| | ||
Accrued compensation and benefits |
| |
| | ||
Total Current Liabilities |
| |
| | ||
LONG-TERM DEBT |
| |
| | ||
DEFERRED INCOME TAXES |
| |
| | ||
OTHER NONCURRENT LIABILITIES |
| |
| | ||
STOCKHOLDERS’ EQUITY: | ||||||
Preferred Stock, $ |
|
| ||||
Class A common stock, $ |
| |
| | ||
Class B common stock, $ |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Retained earnings |
| |
| | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Total Stockholders’ Equity |
| |
| | ||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | | $ | | ||
See accompanying notes to consolidated financial statements.
3
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in millions, except per share information)
(Unaudited)
First Quarter Ended | ||||||
March 27, | March 28, | |||||
| 2022 |
| 2021 | |||
Net sales | $ | | $ | | ||
Cost of goods sold |
| |
| | ||
GROSS PROFIT |
| |
| | ||
Selling, general and administrative expenses |
| |
| | ||
Restructuring |
| |
| | ||
OPERATING INCOME |
| |
| | ||
Other (income) expense: | ||||||
Interest income |
| ( |
| — | ||
Interest expense |
| |
| | ||
Other expense (income), net |
| |
| ( | ||
Total other expense |
| |
| | ||
INCOME BEFORE INCOME TAXES |
| |
| | ||
Provision for income taxes |
| |
| | ||
NET INCOME | $ | | $ | | ||
Basic EPS | ||||||
NET INCOME PER SHARE | $ | | $ | | ||
Weighted average number of shares |
| |
| | ||
Diluted EPS | ||||||
NET INCOME PER SHARE | $ | | $ | | ||
Weighted average number of shares |
| |
| | ||
Dividends declared per share | $ | | $ | | ||
See accompanying notes to consolidated financial statements.
4
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in millions)
(Unaudited)
| First Quarter Ended | |||||
March 27, | March 28, | |||||
| 2022 |
| 2021 | |||
Net income | $ | | $ | | ||
Other comprehensive (loss) gain net of tax: | ||||||
Foreign currency translation adjustments |
| ( |
| ( | ||
Cash flow hedges | | ( | ||||
Other comprehensive loss |
| ( |
| ( | ||
Comprehensive income | $ | | $ | | ||
See accompanying notes to consolidated financial statements.
5
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in millions)
(Unaudited)
Accumulated | ||||||||||||||||||||||
Class A | Class B | Additional | Other | Total | ||||||||||||||||||
(For the first quarter ended | Common Stock | Common Stock | Paid-In | Retained | Comprehensive | Stockholders’ | ||||||||||||||||
March 27, 2022) |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Loss |
| Equity | ||||||
Balance at December 31, 2021 |
| | $ | |
| | $ | | $ | | $ | | $ | ( | $ | | ||||||
Net income | — | — | — | — | — | | — | | ||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | ( | ( | ||||||||||||||
Comprehensive income | | |||||||||||||||||||||
Shares of Class A common stock issued upon the exercise of stock options |
| | — | — | — | — | — | — | — | |||||||||||||
Stock-based compensation |
| — | — | — | — | | — | — | | |||||||||||||
Stock repurchase |
| ( | ( | — | — | — | ( | — | ( | |||||||||||||
Net change in restricted and performance stock units | | — | — | — | | ( | — | ( | ||||||||||||||
Common stock dividends | — | — | — | — | — | ( | — | ( | ||||||||||||||
Balance at March 27, 2022 |
| | $ | |
| | $ | | $ | | $ | | $ | ( | $ | | ||||||
Accumulated | ||||||||||||||||||||||
Class A | Class B | Additional | Other | Total | ||||||||||||||||||
(For the first quarter ended | Common Stock | Common Stock | Paid-In | Retained | Comprehensive | Stockholders’ | ||||||||||||||||
March 28, 2021) |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Loss |
| Equity | ||||||
Balance at December 31, 2020 |
| | $ | |
| | $ | | $ | | $ | | $ | ( | $ | | ||||||
Net income | — | — | — | — | — | | — | | ||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | ( | ( | ||||||||||||||
Comprehensive income | | |||||||||||||||||||||
Shares of Class B common stock converted to Class A common stock | | — | ( | — | — | — | — | — | ||||||||||||||
Stock-based compensation | — | — | — | — | | — | — | | ||||||||||||||
Stock repurchase | ( | — | — | — | — | ( | — | ( | ||||||||||||||
Net change in restricted and performance stock units | | — | — | — | | ( | — | ( | ||||||||||||||
Common stock dividends | — | — | — | — | — | ( | — | ( | ||||||||||||||
Balance at March 28, 2021 | | $ | | | $ | | $ | | $ | | $ | ( | | |||||||||
See accompanying notes to consolidated financial statements.
6
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
First Quarter Ended | ||||||
March 27, | March 28, | |||||
| 2022 |
| 2021 | |||
OPERATING ACTIVITIES | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||
Depreciation |
| |
| | ||
Amortization of intangibles |
| |
| | ||
Loss on disposal and impairment of property, plant and equipment and other |
| |
| | ||
Stock-based compensation |
| |
| | ||
Deferred income tax |
| |
| | ||
Changes in operating assets and liabilities: | ||||||
Accounts receivable |
| ( |
| ( | ||
Inventories |
| ( |
| ( | ||
Prepaid expenses and other assets |
| — |
| ( | ||
Accounts payable, accrued expenses and other liabilities |
| |
| | ||
Net cash (used in) provided by operating activities |
| ( |
| | ||
INVESTING ACTIVITIES | ||||||
Additions to property, plant and equipment |
| ( |
| ( | ||
Proceeds from the sale of property, plant and equipment |
| — |
| | ||
Net cash used in investing activities |
| ( |
| ( | ||
FINANCING ACTIVITIES | ||||||
Proceeds from long-term borrowings | | | ||||
Payments of long-term debt |
| — |
| ( | ||
Payments for withholding taxes on vested awards |
| ( |
| ( | ||
Payments for finance leases and other | ( | ( | ||||
Payments to repurchase common stock |
| ( |
| ( | ||
Dividends |
| ( |
| ( | ||
Net cash used in financing activities |
| ( |
| ( | ||
Effect of exchange rate changes on cash and cash equivalents |
| ( |
| ( | ||
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
| ( |
| | ||
Cash and cash equivalents at beginning of year |
| |
| | ||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | | $ | | ||
SUPPLEMENTAL CASH FLOW DISCLOSURE: | ||||||
Issuance of stock under management stock purchase plan | $ | | $ | | ||
CASH PAID FOR: | ||||||
Interest | $ | | $ | | ||
Income taxes | $ | | $ | | ||
See accompanying notes to consolidated financial statements.
7
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the Watts Water Technologies, Inc. (the “Company”) Consolidated Balance Sheet as of March 27, 2022, the Consolidated Statements of Operations for the first quarters ended March 27, 2022 and March 28, 2021, the Consolidated Statements of Comprehensive Income for the first quarters ended March 27, 2022 and March 28, 2021, the Consolidated Statements of Stockholders’ Equity for the first quarters ended March 27, 2022 and March 28, 2021, and the Consolidated Statements of Cash Flows for the first quarters ended March 27, 2022 and March 28, 2021.
The consolidated balance sheet at December 31, 2021 has been derived from the audited consolidated financial statements at that date. The accounting policies followed by the Company are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The financial statements included in this report should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2021. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2022.
The Company operates on a -week fiscal year ending on December 31, with each quarter, except the fourth quarter, ending on a Sunday. Any quarterly data contained in this Quarterly Report on Form 10-Q generally reflect the results of operations for a -week period.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We are not aware of any specific event or circumstance that would require updates to the Company’s estimates or judgments or require the Company to revise the carrying value of the Company’s assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ from those estimates.
2. Accounting Policies
The significant accounting policies used in preparation of these consolidated financial statements for the first quarter ended March 27, 2022, are consistent with those discussed in Note 2 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Shipping and Handling
Shipping and handling costs included in selling, general and administrative expenses amounted to $
Research and Development
Research and development costs included in selling, general and administrative expenses amounted to $
8
3. Revenue Recognition
The Company is a leading supplier of products that manage and conserve the flow of fluids and energy into, through and out of buildings in the commercial and residential markets of the Americas, Europe, and Asia-Pacific, Middle East, and Africa (“APMEA”). For over
The Company distributes products through
| ● | Residential & commercial flow control products—includes products typically sold into plumbing and hot water applications such as backflow preventers, water pressure regulators, temperature and pressure relief valves, thermostatic mixing valves and leak detection products. |
| ● | HVAC & gas products—includes commercial high-efficiency boilers, water heaters and heating solutions, hydronic and electric heating systems for under-floor radiant applications, custom heat and hot water solutions, hydronic pump groups for boiler manufacturers and alternative energy control packages, and flexible stainless steel connectors for natural and liquid propane gas in commercial food service and residential applications. HVAC is an acronym for heating, ventilation and air conditioning. |
| ● | Drainage & water re-use products—includes drainage products and engineered rain water harvesting solutions for commercial, industrial, marine and residential applications. |
| ● | Water quality products—includes point-of-use and point-of-entry water filtration, conditioning and scale prevention systems for commercial, marine and residential applications. |
The following table disaggregates revenue, which is presented as net sales in the financial statements, for each reportable segment, by distribution channel and principal product line:
For the first quarter ended March 27, 2022 | ||||||||||||
(in millions) | ||||||||||||
Distribution Channel | Americas | Europe | APMEA | Consolidated | ||||||||
Wholesale | $ | | $ | | $ | | $ | | ||||
OEM | |
| |
| |
| | |||||
Specialty | |
| — |
| — |
| | |||||
DIY |
| |
| |
| — |
| | ||||
Total | $ | | $ | | $ | | $ | | ||||
For the first quarter ended March 27, 2022 | ||||||||||||
(in millions) | ||||||||||||
Principal Product Line | Americas | Europe | APMEA | Consolidated | ||||||||
Residential & Commercial Flow Control | $ | | $ | | $ | | $ | | ||||
HVAC and Gas Products | |
| |
| |
| | |||||
Drainage and Water Re-use Products | |
| |
| |
| | |||||
Water Quality Products |
| |
| |
| |
| | ||||
Total | $ | | $ | | $ | | $ | | ||||
9
For the first quarter ended March 28, 2021 | ||||||||||||
(in millions) | ||||||||||||
Distribution Channel | Americas | Europe | APMEA | Consolidated | ||||||||
Wholesale | $ | | $ | | $ | | $ | | ||||
OEM | |
| |
| |
| | |||||
Specialty | |
| — |
| — |
| | |||||
DIY |
| |
| |
| — |
| | ||||
Total | $ | | $ | | $ | | $ | | ||||
For the first quarter ended March 28, 2021 | ||||||||||||
(in millions) | ||||||||||||
Principal Product Line | Americas | Europe | APMEA | Consolidated | ||||||||
Residential & Commercial Flow Control | $ | | $ | | $ | | $ | | ||||
HVAC and Gas Products | |
| |
| |
| | |||||
Drainage and Water Re-use Products | |
| |
| |
| | |||||
Water Quality Products |
| |
| |
| |
| | ||||
Total | $ | | $ | | $ | | $ | | ||||
The Company generally considers customer purchase orders, which in some cases are governed by master sales agreements, to represent the contract with a customer. The Company’s contracts with customers are generally for products only and typically do not include other performance obligations such as professional services, extended warranties, or other material rights. In situations where sales are to a distributor, the Company has concluded that its contracts are with the distributor as the Company holds a contract bearing enforceable rights and obligations only with the distributor. As part of its consideration of the contract, the Company evaluates certain factors, including the customer’s ability to pay (or credit risk). For each contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified performance obligations. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. As the Company’s standard payment terms are less than one year, the Company has elected not to assess whether a contract has a significant financing component. The Company allocates the transaction price to each distinct product based on its relative standalone selling price. The product price as specified on the purchase order is considered the standalone selling price as it is an observable input which depicts the price as if sold to a similar customer in similar circumstances. Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment from the Company’s manufacturing site or distribution center, or delivery to the customer’s named location. In certain circumstances, revenue from shipments to retail customers is recognized only when the product is consumed by the customer, as based on the terms of the arrangement, transfer of control is not satisfied until that point in time. In determining whether control has transferred, the Company considers if there is a present right to payment, physical possession and legal title, along with risks and rewards of ownership having transferred to the customer. In certain circumstances, the Company manufactures customized product without alternative use for its customers. However, as these arrangements do not entitle the Company to a right to payment of cost plus a profit for work completed, the Company has concluded that revenue recognition at the point in time control transfers is appropriate and not over time recognition.
At times, the Company receives orders for products to be delivered over multiple dates that may extend across reporting periods. The Company invoices for each delivery upon shipment and recognizes revenues for each distinct product delivered, assuming transfer of control has occurred. As scheduled delivery dates are within one year, under the optional exemption provided by the guidance, revenues allocated to future shipments of partially completed contracts are not disclosed.
The Company generally provides an assurance warranty that its products will substantially conform to the published specification. The Company’s liability is limited to either a credit equal to the purchase price or replacement of the defective part. Returns under warranty have historically been immaterial. The Company does not consider activities related to such warranty, if any, to be a separate performance obligation. For certain of its products, the Company will separately sell extended warranty and service policies to its customers. The Company considers the sale of these as separate performance obligations. These policies typically are for periods ranging from to
10
The timing of revenue recognition, billings and cash collections from the Company’s contracts with customers can vary based on the payment terms and conditions in the customer contracts. In limited cases, customers will partially prepay for their goods. In addition, there are constraints which cause variability in the ultimate consideration to be recognized. These constraints typically include early payment discounts, volume rebates, rights of return, cooperative advertising, and market development funds. The Company includes these constraints in the estimated transaction price when there is a basis to reasonably estimate the amount of variable consideration. These estimates are based on historical experience, anticipated future performance and the Company’s best judgment at the time. The Company did not recognize any material revenue from obligations satisfied in prior periods. When the timing of the Company’s recognition of revenue is different from the timing of payments made by the customer, the Company recognizes a contract liability (customer payment precedes performance). For all periods presented, the recognized contract liabilities and the associated revenue deferred are not material to the consolidated financial statements.
The Company incurs costs to obtain and fulfill a contract; however, the Company has elected to recognize all incremental costs to obtain a contract as an expense when incurred if the amortization period is one year or less. The Company has elected to treat shipping and handling activities performed after the customer has obtained control of the related goods as a fulfillment cost and the related cost is accrued for in conjunction with the recording of revenue for the goods.
4. Goodwill & Intangibles
The Company operates in
March 27, 2022 | ||||||||||||||||||||||||
Gross Balance | Accumulated Impairment Losses | Net Goodwill | ||||||||||||||||||||||
Acquired | Foreign | |||||||||||||||||||||||
Balance | During | Currency | Balance | Balance | Impairment | Balance | ||||||||||||||||||
January 1, | the | Translation | March 27, | January 1, | Loss During | March 27, | March 27, | |||||||||||||||||
| 2022 |
| Period |
| and Other |
| 2022 |
| 2022 |
| the Period |
| 2022 |
| 2022 | |||||||||
(in millions) | ||||||||||||||||||||||||
Americas | $ | | — | $ | | $ | | $ | ( | — | $ | ( | $ | | ||||||||||
Europe |
| |
| — |
| ( |
| |
| ( |
| — |
| ( |
| | ||||||||
APMEA |
| |
| — |
| |
| |
| ( |
| — |
| ( |
| | ||||||||
Total | $ | | — | $ | ( | $ | | $ | ( | — | $ | ( | $ | | ||||||||||
December 31, 2021 | ||||||||||||||||||||||||
Gross Balance | Accumulated Impairment Losses | Net Goodwill | ||||||||||||||||||||||
Acquired | Foreign | |||||||||||||||||||||||
Balance | During | Currency | Balance | Balance | Impairment | Balance | ||||||||||||||||||
January 1, | the | Translation | December 31, | January 1, | Loss During | December 31, | December 31, | |||||||||||||||||
| 2021 |
| Period |
| and Other |
| 2021 |
| 2021 |
| the Period |
| 2021 |
| 2021 | |||||||||
(in millions) | ||||||||||||||||||||||||
Americas | $ | | $ | | $ | — | $ | | $ | ( | $ | — | $ | ( | $ | | ||||||||
Europe |
| |
| — |
| ( |
| |
| ( |
| — |
| ( |
| | ||||||||
APMEA |
| |
| — |
| ( |
| |
| ( |
| — |
| ( |
| | ||||||||
Total | $ | | $ | | $ | ( | $ | | $ | ( | $ | — | $ | ( | $ | | ||||||||
Goodwill and indefinite-lived intangible assets are tested for impairment at least annually or more frequently if events or circumstances indicate that it is “more likely than not” that they might be impaired, such as from a change in business conditions. The Company performs its annual goodwill and indefinite-lived intangible assets impairment assessment in the fourth quarter of each year. At the most recent annual impairment test which occurred in the fourth quarter of 2021, the Company performed qualitative fair value assessments, including an evaluation of certain key assumptions for all
11