Watts Water Technologies Reports Second Quarter 2009 Results

Watts Water Technologies, Inc. (NYSE: WTS) today announced results for the second quarter ended June 28, 2009. Sales for the second quarter of 2009 were $312.4 million, a decrease of $72.5 million, or 19%, compared to the second quarter of 2008. Net loss for the second quarter of 2009 was $3.6 million, or ($0.10) per share, compared to net income of $19.8 million, or $0.54 per share, for the second quarter of 2008. The net loss for the second quarter of 2009 includes a loss from discontinued operations of $18.7 million, or ($0.51) per share, primarily related to a loss incurred from placing TEAM Precision Pipework, Ltd. (TEAM) in administration, as previously announced. Quarterly and year-to-date results for 2009 and 2008 have been restated to include TEAM’s operating results in discontinued operations. Income from continuing operations attributable to Watts Water Technologies, Inc. for the second quarter of 2009 decreased by $4.8 million, or 24%, to $15.1 million, or $0.41 per share, compared to income from continuing operations for the second quarter of 2008 of $19.9 million, or $0.54 per share.

Sales for the first six months of 2009 were $605.9 million, a decrease of $118.7 million, or 16%, compared to the comparable period of 2008. Net loss for the first six months of 2009 was $0.2 million, or ($0.01) per share, compared to net income of $33.5 million, or $0.91 per share, for the comparable period of 2008. Income from continuing operations attributable to Watts Water Technologies, Inc. for the first six months of 2009 decreased by $14.4 million, or 43%, to $18.9 million, or $0.51 per share, compared to income from continuing operations for the comparable period of 2008 of $33.3 million, or $0.90 per share.

Results for the second quarter of 2009 include after-tax charge of $0.01 per share for restructuring, compared to an after-tax charge of $0.02 per share, for the second quarter of 2008. Second quarter results for 2009 also include net after-tax income of $0.03 per share, as a result of two legal settlements.

The effective tax rate for continuing operations increased to 34.2% in the second quarter of 2009 from 31.2% in the second quarter of 2008. The increase was primarily due to a 2008 one-time benefit associated with a tax law change in Italy and the favorable completion of statutory tax audits in the second quarter of 2008 totaling $1.1 million, or approximately $0.03 per share.

Patrick S. O’Keefe, Chief Executive Officer, commented, "Our results for the second quarter continued to be negatively affected by a weak U.S. commercial construction market and recessionary pressures in Europe. Consolidated sales decreased by $72.5 million, or 19%, due primarily to a decrease in organic sales of $63.5 million, or 17%, and unfavorable changes in foreign exchange rates of $16.4 million, or 4%, offset by contributions from Blücher Metals A/S (Blücher) of $10.6 million, or 3%. Also, sales in the second quarter of 2008 included $3.2 million, or 1%, attributable to Tianjin Tanggu Watts Valve Co. Ltd (TWT), a company we sold in October 2008.

"Sales in our North American segment decreased in the second quarter of 2009 by $40.2 million, or 17%, to $194.4 million, compared to $234.6 million for the second quarter of 2008. This decrease was primarily due to a decline in organic sales of $37.7 million, or 16%, and unfavorable foreign exchange movements of $2.5 million, or 1%, associated with the weakening of the Canadian Dollar versus the U.S. dollar.

"Organic sales in our North American wholesale market for the second quarter of 2009 decreased 18% compared to the second quarter of 2008, primarily from reductions in sales of our backflow, plumbing and heating and gas connector product lines. Our North American home improvement retail market sales declined 7% for the second quarter of 2009 compared to the second quarter of 2008 due to significant product rollouts last year and a decline in discretionary remodeling.

"We derived 35% of our total sales for the second quarter of 2009 from our European segment. European sales decreased $26.0 million, or 19%, to $109.1 million compared to $135.1 million for the second quarter of 2008. This decrease was primarily due to a decline in organic sales of $22.6 million, or 17%, and unfavorable foreign exchange movements associated with the weakening of the euro versus the U.S. dollar of $14.0 million, or 10%, offset by contributions from Blücher, which we acquired on May 30, 2008, of $10.6 million, or 8%. Sales in all major channels and markets declined, led by wholesale sales declines in Italy, Germany and Eastern Europe and OEM sales declines in Germany.

"Sales in our China segment in the second quarter of 2009 decreased $6.3 million, or 41%, to $8.9 million compared to the second quarter of 2008. As mentioned previously, sales in the second quarter of 2008 included $3.2 million attributable to TWT. In addition, organic sales decreased $3.2 million, or 21%.

Mr. O’Keefe continued, "Our operating income for the second quarter of 2009 decreased by $6.6 million, or 19%, to $28.4 million as compared to $35.0 million in the second quarter of 2008. The decrease was due to an organic decline of $8.0 million, or 23% and unfavorable foreign exchange movements of $1.9 million, or 5%, partially offset by an increase from the acquisition of Blücher of $1.1 million, or 3%. Further, in 2008, an operating loss of $2.0 million, or 6%, was recorded for TWT. Operating margins of 9.1% in the second quarter of 2009 were consistent with the second quarter of 2008. A gross margin increase of 1.1% was offset by a similar increase in operating expenses. The higher gross margin percentage was due primarily to the inclusion of Blücher for a full quarter’s results in 2009 and the elimination of TWT’s operations from this year’s results. Organically, operating expenses decreased 13%.”

Mr. O’ Keefe concluded, "We continue to generate positive cash flow through our various working capital initiatives. For the six month period ended June 28, 2009, we generated approximately $66.0 million of free cash flow, which compares favorably to free cash flow of $27.5 million in the first six months of 2008. Free cash flow as a percentage of income from continuing operations was 349% in the first six months of 2009 as compare to 83% in the first six months of 2008. This strong result was due to better working capital management and also closely monitoring our capital spending.”

To supplement our consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), we sometimes use non-GAAP financial measures, such as free cash flow and the net debt to capitalization ratio, that we believe are appropriate to enhance an overall understanding of our historical financial performance and future prospects. The non-GAAP items, which 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. For these reasons, management believes these non-GAAP financial measures can be useful to investors, potential investors and others. The presentation of this additional information is not meant to be considered in isolation or as a substitute for changes in cash and cash equivalents prepared in accordance with GAAP.

Watts Water Technologies, Inc. will hold a live web cast of its conference call to discuss second quarter results for 2009 on Tuesday, July 28, 2009, at 5:00 p.m. Eastern Time. This press release and the live web cast can be accessed by visiting the Investor Relations section of the Company's website at www.wattswater.com. Following the web cast, an archived version of the call will be available at the same address until July 28, 2010.

Watts Water Technologies, Inc. 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. Its expertise in a wide variety of water technologies enables it to be a comprehensive supplier to the water industry.

This Press Release may include statements that are not historical facts and are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect Watts Water Technologies’ current views about future results of operations and other forward-looking information. In some cases you can identify these statements by forward-looking words such as "anticipate,” "believe,” "could,” "estimate,” "expect,” "intend,” "may,” "should,” "will” and "would” or similar words. You should not rely on forward-looking statements because Watts’ actual results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. These factors include, but are not limited to, the following: the current economic and financial crisis, which can affect levels of housing starts and remodeling, affecting the markets where the Company’s products are sold, manufactured, or marketed; shortages in and pricing of raw materials and supplies; loss of market share through competition; introduction of competing products by other companies; pressure on prices from competitors, suppliers, and/or customers; changes in variable interest rates on Company borrowings; identification and disclosure of material weaknesses in our internal control over financial reporting; failure to expand our markets through acquisitions; failure or delay in developing new products; lack of acceptance of new products; failure to manufacture products that meet required performance and safety standards; foreign exchange rate fluctuations; cyclicality of industries, such as plumbing and heating wholesalers and home improvement retailers, in which the Company markets certain of its products; environmental compliance costs; product liability risks; the results and timing of the Company’s manufacturing restructuring plan; changes in the status of current litigation, including the James Jones case; and other risks and uncertainties discussed under the heading "Item 1A. Risk Factors” in the Watts Water Technologies, Inc. Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities Exchange Commission and other reports Watts files from time to time with the Securities and Exchange Commission. Watts does not intend to, and undertakes no duty to, update the information contained in this Press Release, except as required by law.