Watts Water Technologies Reports Third Quarter 2007 Results and Announces Restructuring Program

Watts Water Technologies, Inc. (NYSE: WTS) today announced results for the third quarter ended September 30, 2007 and a global manufacturing restructuring program. Sales for the third quarter of 2007 were $340.5 million, an increase of $15.4 million, or 5%, compared to the third quarter of 2006. Net income for the third quarter of 2007 was $18.1 million, or $0.46 per share, compared to net income of $18.2 million, or $0.55 per share, for the third quarter of 2006, which included a loss from discontinued operations of $3.1 million, or ($0.09). Income from continuing operations for the third quarter of 2007 decreased by $3.2 million, or 15%, to $18.2 million, or $0.47 per share, compared to income from continuing operations for the third quarter of 2006 of $21.3 million, or $0.65 per share. Results for the third quarter of 2007 include an after-tax charge of $4.2 million, or ($0.11) per share, as part of the global restructuring program and charges for discontinued product lines. Sales for the first nine months of 2007 were $1.04 billion, an increase of $136.7 million, or 15%, compared to the first nine months of 2006. Net income for the first nine months of 2007 was $55.9 million, or $1.43 per share, compared to net income of $55.6 million, or $1.68 per share, for the first nine months of 2006, which included a loss from discontinued operations of $3.4 million, or ($0.10) per share. Income from continuing operations for the first nine months of 2007 decreased by $3.0 million, or 5%, to $55.9 million, or $1.43 per share, compared to income from continuing operations for the first nine months of 2006 of $58.9 million, or $1.79 per share. In the third quarter, the Company undertook a review of certain product lines and its overall manufacturing capacity. Based on that review, the Company is initiating a global restructuring program that was approved by the Board of Directors today. The Company is also discontinuing certain product lines. This program is expected to include the shutdown of five manufacturing facilities and the rightsizing of a sixth facility, including the relocation of the Company’s joint venture facility in China that was previously disclosed. The restructuring program and charges for product line eliminations will include pre-tax charges totaling approximately $13.4 million, including charges for severance ($4.3 million), relocation costs ($2.8 million) and other asset write-downs and expected net losses on asset disposals ($2.0 million) and will result in the elimination of approximately 330 positions worldwide. The product lines that are being discontinued resulted in a pre-tax charge of $4.3 million. Total net after tax charges for this program are expected to be approximately $9.7 million ($4.7 million non-cash), with costs being incurred through early 2010. The Company expects to spend approximately $13.4 million in capital expenditures to consolidate operations and will fund approximately $8.0 million of this amount through proceeds from the sale of buildings and other assets being disposed of as part of the restructuring program. Annual cash savings, net of tax, are estimated to be $4.5 million, which we expect to fully realize by the second half of 2009. The Company recorded non-cash after-tax charges of approximately $4.2 million, or ($0.11) per share, in the third quarter of 2007 for inventory product rationalization and other asset write-downs. In November 2006, the Company completed a public offering of 5.75 million shares of Class A common stock and received net proceeds of approximately $219.0 million. The net proceeds are currently being invested in short-term securities, which provided approximately $2.0 million and $5.8 million in after-tax income in the third quarter and first nine months of 2007, respectively. The issuance of an additional 5.75 million shares had a dilutive impact on earnings per share of $0.03 per share and $0.09 per share in the third quarter and first nine months of 2007, respectively, after considering the interest income from the net proceeds. The Company had approximately $348.0 million in cash and cash equivalents and short-term investments at September 30, 2007. Patrick S. O’Keefe, Chief Executive Officer, commented, "The goals of our restructuring program are to rationalize our product offerings and to introduce greater efficiencies and cost reductions into our manufacturing processes. We plan to continue to review our operational footprint and we may consider further actions in the future, if necessary.” Commenting on third quarter sales, Mr. O’Keefe noted, "The sales increase was achieved through favorable changes in foreign exchange rates of $9.7 million, or 3%, internal growth of $4.2 million, or 1%, and, to a lesser extent, contributions from acquired companies. "Sales in our North American segment increased for the third quarter of 2007 by $4.0 million, or 2%, to $215.8 million compared to $211.8 million for third quarter of 2006. This increase was achieved through internal sales growth of $3.0 million, or 1%, and, to a lesser extent, from favorable foreign exchange rates of $1.0 million associated with the strengthening of the Canadian Dollar versus the U.S. dollar. "Internal sales in our North American wholesale market for the third quarter of 2007 increased 4% over the third quarter of 2006. This increase was primarily due to price increases implemented to cover increases in the costs of copper and other raw materials. Our North American home improvement retail market sales declined 8% for the third quarter of 2007 compared to the third quarter of 2006. This decrease was primarily due to our exiting markets in certain lower margin product lines, partially offset by new product rollouts and price increases. "We derived 32% of our total sales for the third quarter of 2007 from our European segment. European sales increased $9.1 million, or 9%, to $110.5 million compared to $101.4 million for the third quarter of 2006. This increase was achieved through favorable foreign exchange movement associated with the strengthening of the euro versus the US dollar of $7.9 million, or 8%, and the inclusion of an acquired company. Our internal growth in Europe was flat for the third quarter as minor increases in wholesale sales were offset by reduced sales into the OEM market. "China’s segment sales in the third quarter of 2007 increased $2.2 million, or 19%, to $14.2 million compared to the third quarter of 2006. This increase was achieved through internal growth of $1.5 million, or 13%, and favorable foreign exchange rates associated with the yuan strengthening against the U.S. dollar of $0.7 million, or 6%.” Mr. O’Keefe concluded, "Our operating income for the third quarter of 2007 decreased by $6.3 million, or 17%, to $30.1 million as compared to $36.4 million in the third quarter of 2006. Restructuring costs increased by $4.7 million, or 13%, and internal operating earnings decreased $3.2 million, or 8%, partially offset by favorable foreign exchange movements, which contributed $1.4 million, or 4%. Operating margins in the third quarter of 2007 decreased by approximately 240 basis points to 8.8% as compared to 11.2% in the third quarter of 2006. Restructuring costs decreased operating margins in the third quarter of 2007 and the third quarter of 2006 by 180 basis points and 40 basis points, respectively. Compared to last year, our operating margins were impacted by increased commodity costs, which were only partially offset by price increases.” As previously discussed, the Company recorded a $4.2 million loss, net of tax, or $0.11 per share, for restructuring and other costs in the third quarter of 2007. The Company recorded a loss, net of tax, of $0.8 million, or $0.02 per share, in the third quarter of 2006 for its manufacturing restructuring plan. For the third quarter of 2006, these costs were primarily for severance costs related to its European and Chinese restructuring plans. The Company recorded a loss, net of tax, of $4.5 million, or $0.12 per share, in the first nine months of 2007 compared to income, net of tax, of $2.6 million, or $0.08 per share, in the first nine months of 2006 for its manufacturing restructuring plan and product line eliminations. In the first nine months of 2006, the Company benefited from an after-tax gain of approximately $4.1 million, or $0.12 per share, related to the sale of a building in Italy, which was recorded in the third quarter of 2006. This benefit was offset by after-tax costs of approximately $1.5 million, or $0.04 per share, primarily for severance costs related to the Company’s European and Chinese restructuring plans. Watts Water Technologies, Inc. will hold a live web cast of its conference call to discuss third quarter results for 2007 on Tuesday, October 30, 2007, 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 October 30, 2008. 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 includes 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: shortages in and pricing of raw materials and supplies including recent price increases by suppliers of raw materials and the Company’s ability to pass these costs on to customers, 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, economic factors, such as the levels of housing starts and remodeling, affecting the markets where the Company’s products are sold, manufactured, or marketed, 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, 2006 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. WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share information) (Unaudited)         Third Quarter Ended Nine Months Ended September 30, October 1, September 30, October 1,   2007     2006     2007     2006   STATEMENTS OF INCOME   Net sales $ 340,487 $ 325,137 $ 1,037,001 $ 900,262   Income from continuing operations $ 18,174 $ 21,324 $ 55,914 $ 58,954 Loss from discontinued operations   (80 )   (3,137 )   (54 )   (3,358 ) Net income $ 18,094   $ 18,187   $ 55,860   $ 55,596       DILUTED EARNINGS PER SHARE   Weighted Average Number of Common Shares & Equivalents 39,070 33,051 39,027 33,027   Income (loss) per Share: Continuing operations $ 0.47 $ 0.65 $ 1.43 $ 1.79 Discontinued operations   -     (0.09 )   -     (0.10 ) Net income $ 0.46   $ 0.55   $ 1.43   $ 1.68       Cash dividends per share $ 0.10 $ 0.09 $ 0.30 $ 0.27 WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share information) (Unaudited)         September 30, December 31, ASSETS   2007     2006   CURRENT ASSETS: Cash and cash equivalents $ 308,670 $ 342,979 Investment securities 38,975 11,825 Trade accounts receivable, less allowance for doubtful accounts of $14,886 at September 30, 2007 and $10,543 at December 31, 2006 253,622 228,502 Inventories, net: Raw materials 110,776 103,587 Work in process 51,541 39,593 Finished goods   191,713     173,236   Total Inventories 354,030 316,416 Prepaid expenses and other assets 20,591 15,842 Deferred income taxes 36,356 26,739 Assets of discontinued operations   10,434     10,079   Total Current Assets   1,022,678     952,382   PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment, at cost 427,634 391,923 Accumulated depreciation   (212,007 )   (185,763 ) Property, plant and equipment, net   215,627     206,160   OTHER ASSETS: Goodwill 369,193 356,090 Other, net   140,027     146,218   TOTAL ASSETS $ 1,747,525   $ 1,660,850       LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 106,464 $ 120,954 Accrued expenses and other liabilities 107,961 100,437 Accrued compensation and benefits 39,386 42,593 Current portion of long-term debt 5,153 7,522 Liabilities of discontinued operations   28,507     27,852   Total Current Liabilities   287,471     299,358   LONG-TERM DEBT, NET OF CURRENT PORTION 458,563 441,697 DEFERRED INCOME TAXES 39,798 34,585 OTHER NONCURRENT LIABILITIES 48,949 52,686 MINORITY INTEREST 4,278 5,971 STOCKHOLDERS' EQUITY: Preferred Stock, $.10 par value; 5,000,000 shares authorized; no shares issued or outstanding - - Class A Common Stock, $.10 par value; 80,000,000 shares authorized; 1 vote per share; issued and outstanding: 31,480,417 shares at September 30, 2007 and 31,239,111 shares at December 31, 2006 3,148 3,124 Class B Common Stock, $.10 par value; 25,000,000 shares authorized; 10 votes per share; issued and outstanding: 7,293,880 shares at September 30, 2007 and at December 31, 2006 729 729 Additional paid-in capital 376,262 367,795 Retained earnings 472,630 429,555 Accumulated other comprehensive income   55,697     25,350   Total Stockholders' Equity   908,466     826,553   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,747,525   $ 1,660,850   WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share information) (Unaudited)         Third Quarter Ended Nine Months Ended September 30, October 1, September 30, October 1,   2007     2006   2007   2006   Net sales $ 340,487 $ 325,137 $ 1,037,001 $ 900,262 Cost of goods sold   230,031     212,809   697,238   585,267   GROSS PROFIT 110,456 112,328 339,763 314,995 Selling, general & administrative expenses 78,742 75,549 246,896 218,399 Restructuring and other charges   1,596     332   2,066   (5,109 ) OPERATING INCOME   30,118     36,447   90,801   101,705   Other (income) expense: Interest income (3,698 ) (1,150 ) (10,947 ) (2,459 ) Interest expense 6,820 6,520 19,871 15,664 Minority interest (775 ) (273 ) (1,885 ) (131 ) Other   606     (151 ) 1,683   (1,047 )   2,953     4,946   8,722   12,027   INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 27,165 31,501 82,079 89,678 Provision for income taxes   8,991     10,177   26,165   30,724   INCOME FROM CONTINUING OPERATIONS 18,174 21,324 55,914 58,954 Loss from discontinued operations, net of taxes   (80 )   (3,137 ) (54 ) (3,358 ) NET INCOME $ 18,094   $ 18,187   $ 55,860   $ 55,596   BASIC EPS Income (loss) per share: Continuing operations $ 0.47 $ 0.65 $ 1.45 $ 1.81 Discontinued operations   -   $ (0.10 ) -   (0.10 ) NET INCOME $ 0.47   $ 0.56   $ 1.45   $ 1.70   Weighted average number of shares   38,728     32,707   38,653   32,651   DILUTED EPS Income (loss) per share: Continuing operations $ 0.47 $ 0.65 $ 1.43 $ 1.79 Discontinued operations   -   $ (0.09 ) -   (0.10 ) NET INCOME $ 0.46   $ 0.55   $ 1.43   $ 1.68   Weighted average number of shares   39,070     33,051   39,027   33,027   Dividends per share $ 0.10   $ 0.09   $ 0.30   $ 0.27   WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES SEGMENT INFORMATION (Amounts in thousands) (Unaudited)           Net Sales   Third Quarter Ended Nine Months Ended September 30, October 1, September 30, October 1,   2007     2006     2007     2006     North America $ 215,809 $ 211,769 $ 658,586 $ 616,584 Europe 110,518 101,437 334,285 257,553 China   14,160     11,931     44,130     26,125   Total $ 340,487   $ 325,137   $ 1,037,001   $ 900,262       Operating Income   Third Quarter Ended Nine Months Ended September 30, October 1, September 30, October 1,   2007     2006     2007     2006     North America $ 22,629 $ 26,626 $ 64,044 $ 75,153 Europe 13,861 12,889 41,104 38,067 China 716 3,556 6,780 6,968 Corporate   (7,088 )   (6,624 )   (21,127 )   (18,483 ) Total $ 30,118   $ 36,447   $ 90,801   $ 101,705