Watts Water Technologies — Third Quarter 2026 Earnings Summary

Financial Performance:

• Net sales reached $728.0 million for the third quarter of 2026, a 19% increase on a reported basis and 12% on an organic basis compared to the same period in 2025.
• Operating income was $190.8 million, up 71% from $111.4 million in the prior year period.
• Reported operating margin expanded to 26.2%, an increase of 800 basis points from 18.2% in the prior year.
• Adjusted operating income was $151.8 million, up 34% from $113.3 million, with an adjusted operating margin of 20.9%, up 240 basis points from 18.5%.
• Diluted earnings per share (EPS) were $4.34, up 77% from $2.45.
• Adjusted diluted EPS was $3.40, up 36% from $2.50.
• For the first nine months of 2026, operating cash flow was $279 million and free cash flow was $230 million, compared to $247 million and $216 million, respectively, in the prior year period.
• Net debt to capitalization ratio was -17.6% as of September 27, 2026, compared to -11.4% as of December 31, 2025.

Guidance and Future Outlook:

• The company increased its full-year 2026 sales outlook to a reported growth range of 17% to 18% and an organic growth range of 11% to 12%.
• Full-year 2026 operating margin is expected to be between 21.6% and 21.7%, representing an increase of 320 to 330 basis points.
• Full-year 2026 adjusted operating margin is expected to be between 20.3% and 20.4%, representing an increase of 70 to 80 basis points.
• The outlook assumes no change in the impact of the Middle East conflict, incorporates estimated impacts of tariffs in place or announced, and excludes the impact of tariff refunds and related interest income.
• Management anticipates strong operating and free cash flow in the fourth quarter due to normal seasonality.

Business Segments and Product Lines:

• Americas segment sales were $553 million, up 19% reported and 12% organic, driven by data center growth and favorable price realization; segment margin increased 180 basis points.
• Europe segment sales were $120 million, up 7% reported and 9% organic, driven by higher volumes and price realization; segment margin increased 230 basis points.
• APMEA segment sales were $56 million, up 54% reported and 30% organic, driven by data center growth and price realization; segment margin increased 170 basis points.
• Acquisition sales contributed $41 million (7%) to total reported sales growth, with $35 million from the Americas and $6 million from APMEA.
• Data center applications are cited as a primary driver of volume growth across regions.

Market and Competitive Landscape:

• Demand remains particularly strong in data center applications, reinforcing confidence in the long-term potential of this market.
• Higher interest rates and ongoing market uncertainty continue to weigh on new construction markets.
• The company attributes strong performance to customer-driven innovation, digital capabilities, and the One Watts Performance System.
• Management notes the ability to capitalize on attractive growth opportunities across diversified markets.

Risks and Challenges:

• Potential risks include the imposition or changes to tariff rates, inflation, and foreign exchange rate fluctuations.
• Challenges include the integration of acquired businesses, supply chain disruptions, labor shortages, and raw material shortages.
• Economic conditions affecting housing and construction markets, as well as the duration of global crises like the Middle East conflict and the war in Ukraine, are cited as uncertainties.
• The press release notes that actual results may differ materially from forward-looking statements due to these and other risks.

Management Commentary and Tone:

• CEO Robert J. Pagano Jr. stated that strong execution drove double-digit organic growth and significant margin expansion, reflecting the strength of the diversified portfolio.
• Management expressed confidence in the long-term potential of the data center market and cited strong price performance as a key support for the outlook.
• The tone is confident, highlighting the company's ability to navigate market uncertainty through momentum in data center sales and price realization.
• Management plans to continue building competitive strengths through innovation and the One Watts Performance System.

Other Key Points:

• The company repurchased approximately 11,000 shares of Class A common stock for $3.9 million during the third quarter of 2026.
• Approximately $117 million remains available under the stock repurchase program authorized in 2023, which has no expiration date.
• Operating margin expansion was significantly aided by $39 million in tariff refunds, which were classified as special items and excluded from adjusted operating margin.
• Working capital levels increased due to higher accounts receivable from sales growth and higher inventory levels driven by inflation and strategic investments for data center demand.
• Long-term debt decreased to $98.2 million from $197.7 million as of December 31, 2025.
• Dividends declared per share for the nine months ended September 27, 2026, were $1.78, compared to $1.47 in the prior year period.