Watts Water Technologies Inc Q1 2026 results
Snapshot
Watts Water Technologies Inc reported $677M of revenue in Q1 2026, up 21.4% year over year, with diluted EPS of $2.97 and an operating margin of 19.6%.
- Revenue
- $677M
- YoY growth
- +21.4%
- Diluted EPS
- $2.97
- Operating margin
- 19.6%
What management said
- •We began 2026 with better-than-expected results, including record sales, operating income, operating margin, and earnings per share.
- •Organic sales rose 12% in the quarter as we benefited from price and incremental volume.
- •Adjusted operating margin of 20.1% increased 110 basis points due to better than expected price, volume, and productivity, which more than offset tariff costs, inflation, and acquisition dilution of 80 basis points.
- •Our balance sheet remains strong and provides ample capacity to support our disciplined capital allocation strategy.
- •As a result of our solid start to 2026 and expected cash flows for the remainder of the year, we announced a 21% increase to our dividend beginning in June.
- •To support this growth and meet our customers' needs, we're investing in our team and accelerating innovation across our product portfolio.
- •Together, these strategic initiatives are driving growth and helping to offset softer end markets.
- •In 2025, we completed five acquisitions, enhancing our technology capabilities and expanding our product range, geographic reach, and exposure to high-growth non-residential end markets.
- •Our strong first quarter performance and outlook for the second quarter give us a solid start towards achieving our outlook for the full year.
- •In light of these factors, we believe it's prudent to maintain our full year outlook, and we'll revisit in our next earnings call.
- •With that, let me turn the call over to Diane, who will address our first quarter results and our second quarter and full year outlook.
- •Sales reached $677 million, reflecting a 21% increase on a reported basis and a 12% increase organically.
What went well
- •Watts opened 2026 with record first quarter sales, operating income, operating margin, and earnings per share, with organic sales rising 12% on the strength of price and incremental volume.
- •Adjusted operating margin of 20.1% expanded 110 basis points as better-than-expected price, volume, and productivity more than offset tariff costs, inflation, and 80 basis points of acquisition dilution.
- •Data center cooling sales more than doubled in the quarter, and management characterized the data center opportunity as an addressable market over $1 billion that is accretive to overall Watts operating income.
- •The Americas region delivered standout organic growth of 16% and reported growth of 23%, exceeding expectations, while adjusted EPS of $3.04 rose 28% year over year.
- •On the back of a solid start and expected cash flows, the company announced a 21% dividend increase beginning in June, supported by a strong balance sheet.
- •The five acquisitions completed in 2025 are performing well and integrating through the OneWatts Performance System, with the company on track to achieve or exceed targeted synergies.
What went wrong
- •Free cash flow fell to $7 million from $46 million a year earlier, driven by higher accounts receivable on increased sales volume, the timing of annual customer rebate payments, and a strategic and tariff-related inventory build.
- •The Middle East conflict is creating a roughly $8 million sales headwind and $5 million-$6 million margin headwind in the second quarter, with management keeping its Middle East team in place leading to negative absorption costs.
- •Residential construction markets are running a little softer than anticipated due to uncertainty and elevated fuel costs, with new construction still soft and big-ticket remodeling being deferred.
- •Europe segment margin declined 20 basis points to 13.7% on lower volume, 80/20 product rationalization, seasonality, and a small mix issue.
Guidance changes
| Metric | Period | Previous | Current | Change |
|---|---|---|---|---|
| Full-year consolidated organic sales growth | FY2026 | +2% to +6% | +2% to +6% | Reaffirmed |
| Full-year reported sales growth | FY2026 | +8% to +12% | +8% to +12% | Reaffirmed |
| Full-year free cash flow conversion | FY2026 | >= 90% of net income | >= 90% of net income | Reaffirmed |
| Q2 reported sales growth | Q2 2026 | — | +10% to +14% | New |
| Q2 organic sales growth | Q2 2026 | — | +4% to +8% | New |
| Q2 adjusted EBITDA margin | Q2 2026 | — | 22.3% to 22.9% | New |
| Q2 adjusted operating margin | Q2 2026 | — | 20% to 20.6% | New |
Performance breakdown
| Metric | YoY change | Reason |
|---|---|---|
| Total sales | +21% reported, +12% organic | Favorable price and volume, including growth in data center sales |
| Americas organic sales | +16% organic, +23% reported | Strong demand exceeding expectations; acquisitions added $31 million / 7 points to reported growth |
| Europe organic sales | +1% organic, +12% reported | Favorable pricing organically; reported also aided by positive foreign exchange |
| APMEA organic sales | +3% organic, +29% reported | Acquisitions added 19% and favorable foreign exchange added 7% |
| Adjusted EBITDA | +27% | Margin of 22.3%, up 90 bps, on pricing, volume leverage, and productivity |
| Adjusted operating income | +28% | Margin up 110 bps to 20.1% on price, volume leverage, and productivity, offsetting inflation, tariffs, and acquisition dilution |
| Adjusted EPS | +28% to $3.04 | Operational performance, acquisitions, tax, and FX gains outweighed higher net interest expense |
| Free cash flow | $7 million vs $46 million prior year | Higher receivables on volume, timing of customer rebate payments, and tariff-related and strategic inventory increases |
Earnings call themes & trends
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| Data center cooling | Ramped up in 2025 with stronger second half | Sales more than doubled; targeting high double-digit growth for the year on a >$1B addressable market | Accelerating |
| Middle East conflict exposure | — | About 2% of global sales (mostly APMEA, including Saudi Cast); roughly $8M Q2 sales headwind; mitigating via pricing and sourcing | Emerging headwind |
| Tariffs / price-cost | — | IEEPA tariffs eliminated but offset by Section 122 and Section 232 changes; well positioned on price-cost; ~8% price in Q1 | Fluid but managed |
| 80/20 product rationalization | ~$15 million sales impact in first half | Expected to ramp significantly in second half and wrap into early 2027 | Ramping |
| Residential / new construction demand | Characterized as remaining soft in 2026 | A little softer than anticipated; new construction soft, big remodeling deferred, repair and replacement holding | Softening |
| Nexa digital water management | — | Continued slow but steady growth; being enabled across main products to protect core business and command higher pricing | Growing |
Q&A summary
Given the first quarter beat and strong Q2 guide, is the unchanged full-year outlook just conservatism on the macro?
It is prudence given an uncertain environment; Q2 is dialed in with confidence, and second-half opportunity depends on how long the Middle East conflict lasts, which will be revisited next quarter.
How big is the data center opportunity and is it accretive to margins?
It is an over $1 billion addressable market; the goal is high double-digit data center growth for the year, and it is accretive to overall Watts operating income.
How should we think about margin cadence and price-cost into the back half?
Management stays ahead of price-cost and remains ahead despite tariff moves; international units added price due to greater war-related cost impact, the U.S. is being evaluated, and flattish second-half volume offers margin upside if the outlook rises.
What was price versus volume in North America and how will it pace?
Q1 price was just shy of 8%, strong enough to cover costs; international price increases will likely show by Q3, and overall price realization will come down sequentially as 2025 price increases are lapped.
Are you seeing any pockets of slowing in the order book into April and May?
Not currently; some lumpy drain business awaited BABA funding but was not material, and the order book is in line with the Q2 forecast as data centers offset residential softness.
Why is the Q2 sequential margin expansion not larger?
Sequential price declines, lapping the prior-year Q4 pull-forward, and the $5 million-$6 million Middle East margin headwind weigh on Q2 against a challenging comparison.