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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ý

 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20082011


Or


o


 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-11499

WATTS WATER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware
04-2916536
(State or Other Jurisdiction of
Incorporation or Organization)
 04-2916536
(I.R.S. Employer
Identification No.)

815 Chestnut Street, North Andover, MA


01845
(Address of Principal Executive Offices)
 

01845
(Zip Code)

Registrant's telephone number, including area code:(978) 688-1811

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class 

 

Name of Each Exchange on Which Registered
 
Class A Common Stock, par value $0.10 per share New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:None

        Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o    No ý

        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. Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. oý

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filerý

 

Accelerated filero


Non-accelerated filero
(Do not check if a
smaller reporting company)

 

Smaller reporting companyo

(Do not check if a smaller reporting company)

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        As of June 29, 2008,July 1, 2011, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $708,165,326$1,091,827,615 based on the closing sale price as reported on the New York Stock Exchange.

        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 February 20, 200921, 2012 
Class A Common Stock, $0.10 par value per share 29,407,64829,628,267 shares
Class B Common Stock, $0.10 par value per share 7,193,8806,953,680 shares

DOCUMENTS INCOPORATEDINCORPORATED BY REFERENCE

        Portions of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held on May 13, 2009,16, 2012, are incorporated by reference into Part III of this Annual Report on Form 10-K.



PART I

Item 1.    BUSINESS.

        This Annual Report on Form 10-K contains statements whichthat 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 contain projections of our future results of operations or our financial position or state other forward-looking information. In some cases you can identify these forward-looking statements by 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 they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to differ materially from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements. Some of the factors that might cause these differences are described under Item 1A—"Risk Factors." You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and, except as required by law, we undertake no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

        In this Annual Report on Form 10-K, references to "the Company," "Watts," "we," "us" or "our" refer to Watts Water Technologies, Inc. and its consolidated subsidiaries.

Overview

        Watts Regulator Co. was founded by Joseph E. Watts in 1874 in Lawrence, Massachusetts. Watts Regulator Co. started as a small machine shop supplying parts to the New England textile mills of the 19th century and grew into a global manufacturer of products and systems focused on the control, conservation and quality of water and the comfort and safety of the people using it. Watts Water Technologies, Inc. was incorporated in Delaware in 1985 and became the parent Companycompany of Watts Regulator Co.

        Our "Water by Watts" strategy is to be the leading provider of water quality, water conservation, water safety and water flow control products for the residential and commercial markets in North America and Europe and to expand ourwith a presence in Asia. Our primary objective is to grow earnings by increasing sales within existing markets, expanding into new markets, leveraging our distribution channels and customer base, making selected acquisitions, reducing manufacturing costs and advocating for the development and enforcement of industry standards.

        We intend to continue to introduce products in existing markets by enhancing our preferred brands, developing new complementary products, promoting plumbing code development to drive sales of safety and water quality products and continually improving merchandising in both the do-it-yourself (DIY) and wholesale distribution channels. We continually target selected new product and geographic markets based on growth potential, including our ability to leverage our existing distribution channels. Additionally, we continually leverage our distribution channels through the introduction of new products, as well as the integration of products of our acquired companies.

        We intend to continue to generate growth by targeting selected acquisitions, both in our core markets as well as new complementary markets. We have completed 3236 acquisitions since divesting our industrial and oil and gas business in 1999, including one acquisition in each of 2008 and 2007 and five acquisitions in 2006.1999. Our acquisition strategy focuses on businesses that manufacture preferred brand name products that address our themes of water quality, water safety,conservation, water conservation,safety, water flow control and comfort and related complementary markets. We target businesses that will provide us with one or more of the following: an entry into new markets, an increase in shelf space with existing customers, strong brand names, a new or improved technology or an expansion of the breadth of our Water by Watts offerings.


        We are committed to reducing our manufacturing and operating costs through a combination of manufacturing in lower-cost countries, using Lean Six Sigma to drive continuous improvement across all key processes, and consolidating our diverse manufacturing operations in North America, Europe and China.Asia. We have acquired a number of manufacturing facilities in lower-cost regions such as Mexico, China, Bulgaria and Tunisia. In 2007,recent years, we have announced aseveral global restructuring planplans to reduce our manufacturing footprint in order to reduce our costs and to realize additional operating efficiencies. In February 2009, we announced an additional plan to consolidate manufacturing in North America and China. See Recent Developments in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more details.

        Our products are sold to wholesale distributors and dealers, major DIY chains and original equipment manufacturers (OEMs). Most of our sales are for products that have been approved under regulatory standards incorporated into state and municipal plumbing, heating, building and fire protection codes in North America and Europe. We have consistently advocated the development and enforcement of plumbing codes and are committed to providing products to meet these standards, particularly for safety and control valve products. These codes serve as a competitive barrier to entry by requiring that products sold in select jurisdictions meet stringent criteria.

        Additionally, a majority of our manufacturing facilities are ISO 9000, 9001 or 9002 certified by the International Organization for Standardization.

        Our business is reported in three geographic segments: North America, Europe and China.Asia. The contributions of each segment to net sales, operating income and the presentation of certain other financial information by segment are reported in Note 1716 of the Notes to Consolidated Financial Statements and in Management's"Management's Discussion and Analysis of Financial Condition and Results of OperationsOperations" included elsewhere in this report.

Recent Acquisitions and Disposition

        On May 30, 2008, we purchased all of the outstanding share capital of Blücher Metal A/S (Blücher) located in Vildbjerg, Denmark, for approximately $183.5 million, which includes the assumption of $13.4 million of debt, net of cash acquired. Blücher is a leading provider of stainless steel drainage systems in Europe to the residential, commercial and industrial marketplaces and is a worldwide leader in providing stainless steel drainage products to the marine industry. Blücher's main products include push-fit stainless steel pipes and related fittings, light-duty drains for residential, commercial and marine applications, and drains for heavy-duty industrial applications including brewery and pharmaceutical applications.

        During the second quarter of 2008, we completed the acquisition of the remaining 40% ownership of our Tianjin Tanggu Watts Valve Company Ltd. joint venture in China, known as TWT, for $3.3 million in cash. TWT manufactured products to support the U.S. operations as well as to sell into the local China market. In the third quarter of 2008, we relocated the business supporting the U.S. from TWT into an existing operation in China. We then entered into an agreement to sell TWT. Under this agreement, we determined that the risks and rewards of ownership of TWT were effectively transferred to the buyer as of October 18, 2008. We further determined that we were no longer the primary beneficiary of the operating results of TWT and therefore had deconsolidated TWT as of the agreement date. As the equity transfer from us to the buyer has not yet been approved by local authorities, we deferred a $1.1 million gain from the sale. We expect to recognize the gain during 2009, upon final approval of the transfer by Chinese government authorities. The deferred gain has been recorded as a current liability in the accompanying Consolidated Balance Sheet.

        On November 9, 2007, we acquired the assets and business of Topway Global Inc. (Topway) located in Brea, California for approximately $18.4 million. Topway manufactures a wide variety of water softeners, point of entry filter units, and point of use drinking water systems for residential, commercial and industrial applications.


Products

        We believe that we have the broadesta broad range of products in terms of design distinction, size and configuration in a majority ofconfiguration. In 2011, we began classifying our principalmany products into four universal product lines. These product lines are:

Our ability to achieve savings through our restructuring plans may be impactedadversely affected by local regulations or factors beyond the control of management.

        We have implemented a number of restructuring plans, in 2007 and in 2009. Management's planswhich include a number of steps that we believe are necessary to reduce operating costs and increase efficiencies throughout our manufacturing, sales and distribution footprint. Although we have considered the impact of local regulations, negotiations with employee representatives, the timing of capital expenditures necessary to prepare facilities and the related costs associated with these activities, factors beyond the control of management may impactaffect the timing and therefore impactaffect when the savings will be achieved under the plans. Further, if we are not successful in completing the restructuring projects in the time frames contemplated or if additional issues arise during the projects that add costs or disrupt customer service, then our operating results could be negatively affected.

If we cannot continueFuture operating our manufacturing facilities at current or higher utilization levels, our results of operations could be adversely affected.

        The equipmentnegatively affected by the resolution of various uncertain tax positions and management systems necessary for the operation of our manufacturing facilities may break down, perform poorly or fail, resulting in fluctuations in our abilityby potential changes to manufacture our products and to achieve manufacturing efficiencies. We operate a number of manufacturing facilities, all of which are subject to this risk, and such fluctuations at any of these facilities could cause an increase in our production costs and a corresponding decrease in our profitability. We also have a vertically-integrated manufacturing process. Each segment is dependent upon the prior process and any breakdown in one segment will adversely affect all later components. Fluctuations in our production process may affect our ability to deliver products to our customers on a timely basis. Our inability to meet our delivery obligations could result in a loss of our customers and negatively affect our business, financial condition and results of operations.

        In addition, we have an ongoing manufacturing restructuring program to reduce our manufacturing costs. If our planned manufacturing plant consolidations in the United States, Europe and China are not successful, our results of operations and financial condition could be materially adversely affected.

If we continue to experience declines in demand, we will further reduce our production levels, resulting in lower capacity utilization that could negatively impact our results of operations.tax incentives

        In responsethe ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Significant judgment is required in determining our worldwide provision for income taxes. We periodically assess our exposures related to the current recessionary pressuresour worldwide provision for income taxes and reduced order volumes,believe that we have decreasedappropriately accrued taxes for contingencies. Any reduction of these contingent liabilities or additional assessment would increase or decrease income, respectively, in the period such determination was made. Our income tax filings are regularly under audit by tax authorities and the final determination of tax audits could be materially different than that which is reflected in historical income tax provisions and accruals. As issues arise during tax audits we adjust our production levels to conserve cash.tax accrual accordingly. Additionally, we benefit from certain tax incentives offered by various jurisdictions. If we continueare unable to experience declines in orders from customers, we will take further steps to reduce our production levels to avoid building inventory and increasing our working capital levels. While this step helps to preserve cash, a large amount of our production costs are fixed and therefore will negatively impact our ability to absorb these costs, resulting in lower gross margins for the products manufactured. Although we are expecting a certain level of decreased production volume in 2009, there can be no assurances that additional steps will not be required to reduce these levels further thereby decreasing our results from operations.

If we experience delays in introducing new products or if our existing or new products do not achieve or maintain market acceptance and regulatory approvals, our revenues and our profitability may decrease.

        Our failure to develop new and innovative products or to custom design existing products could result in the loss of existing customers to competitors or the inability to attract new business, either of which may adversely affect our revenues. Our industry is characterized by:


        We believe our future success will depend, in part, on our ability to anticipate or adapt to these factors and to offer, on a timely basis, products that meet customer demands and the requirements of plumbing codes and/or regulatory agencies. The development of new or enhanced products is a complex and uncertain process requiring the anticipation of technological and market trends. We may experience design, manufacturing, marketing or other difficulties, such as anincentives, our inability to attractuse these benefits could have a sufficient number of experienced engineers, that could delay or prevent our development, introduction, approval or marketing of new products or enhancements and result in unexpected expenses. Such difficulties could cause us to lose business from our customers and could adversely affect our competitive position; in addition, added expenses could decrease the profitability associated with those products that do not gain market acceptance. Additionally, we recently developed lead free versions of many of our plumbing products to comply with new lead content standards going intomaterial negative effect in California and Vermont. If our lead free products fail to comply with these new standards or if we encounter difficulties in the manufacturing processes for these products, we could lose a substantial amount of business from customers in California and Vermont and any other states that adopt similar standards in the future.on future earnings.

Environmental compliance costs and liabilities could increase our expenses or reduce our profitability.

        Our operations and propertiesWe are subject to extensive and increasingly stringent laws and regulations relating to environmental protection, including laws and regulations governing air emissions, water discharges, waste management and disposal and workplace safety. Such laws and regulations can impose substantial fines and sanctions for violations and require the installation of costly pollution control equipment or operational changes to limit pollution emissions and/or decrease the likelihood of accidental hazardous substance releases. We could be required to halt one or more portions of our operations untilcurrently a violation is cured. We could also be liable for the costs of property damage or personal injury to others. Although we attempt to operate in compliance with these environmental laws, we may not succeed in this effort at all times. The costs of curing violations or resolving enforcement actions that might be initiated by government authorities could be substantial.

        Underdecentralized company, which presents certain environmental laws, the current and past owners or operators of real property may be liable for the costs of cleaning up contamination, even if they did not know of or were not responsible for such contamination. These laws also impose liability on any person who arranges for the disposal or treatment of hazardous waste at any site. We have been named as a potentially responsible party or are otherwise conducting remedial activities with respect to a limited number of identified contaminated sites, including sites we currently own or operate. There can be no assurances that our ownership and operation of real property and our disposal of waste will not lead to other liabilities under these laws.

        We have incurred, and expect to continue to incur, costs relating to environmental matters. In addition, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements could require us to incur additional costs or become the basis for new or increased liabilities that could be significant. Environmental litigation, enforcement and compliance are inherently uncertain and we may experience significant costs in connection with environmental matters. For more information, see "Item 1. Business—Product Liability, Environmental and Other Litigation Matters."

Third parties may infringe our intellectual property and we may expend resources enforcing our rights or suffer competitive injury.risks.

        We rely onare currently a combinationdecentralized company, which sometimes places significant control and decision-making powers in the hands of patents, copyrights, trademarks, trade secrets, confidentiality provisions and licensing arrangementslocal management. This presents various risks such as the risk of being slower to establish and protect our proprietary rights. We may be requiredidentify or react to spend resources to monitor and police our intellectual property rights. Ifproblems affecting a key business. Additionally, we fail toare



successfully enforceimplementing in a phased approach a company-wide initiative to standardize and upgrade our intellectual property rights,enterprise resource planning (ERP) system. This initiative could be more challenging and costly to implement because divergent legacy systems currently exist. Further, if the ERP update is not successful, we could incur substantial business interruption, including our competitive position could suffer,ability to perform routine business transactions, which could harmhave a material adverse effect on our operatingfinancial results. We have been limited from selling products from time-to-time because of existing patents.

The requirements of Financial Accounting Standards Board Statement No. 142, "Goodwillto evaluate goodwill, indefinite-lived intangible assets and Other Intangible Assets" (FAS 142)long-lived assets for impairment may result in a write-off of all or a portion of our goodwill and non-amortizable intangible assets,recorded amounts, which would negatively affect our operating results and financial condition.

        As of December 31, 2008, we recorded2011, our balance sheet included goodwill, and non-amortizableindefinite-lived intangible assets, amortizable intangible assets and property, plant and equipment of $431.3$490.4 million, $35.7 million, $118.9 million, and $62.0$226.7 million, respectively. In lieu of amortization, we are required to perform an annual impairment review of both goodwill and non-amortizableindefinite-lived intangible assets. In 2008, in performing our annual goodwill review,reviews in both 2011 and 2010, we recognized a non-cash pre-tax chargecharges of approximately $22.0$1.4 million as impairments of the indefinite-lived intangible assets. During the fourth quarter of 2011, we recognized pre-tax non-cash goodwill impairment charges of $1.2 million related to our Blue Ridge Atlantic Enterprises, Inc. (BRAE) reporting unit within our North America segment. We are also required to perform an impairment review of allour long-lived assets if indicators of impairment exist. During the goodwill valuefourth quarter of 2011, we recognized pre-tax non-cash long-lived asset impairment charges of $14.8 million related to one reporting unit. Although we did not experience goodwill impairment in our remaining reporting units, thereAustroflex operations within our Europe segment. There can be no assurances that future goodwill, impairmentindefinite-lived intangible assets or long-lived asset impairments will not occur. We perform our annual test for indications of goodwill and non-amortizableindefinite-lived intangible assets impairment in the fourth quarter of our fiscal year or sooner if indicators of impairment exist.

The loss or financial instability of a major customer could have an adverse effect on our results of operations.

        In 2008,2011, our top ten customers accounted for approximately 20% of our total net sales with no one customer accounting for more than approximately 5%10% of our total net sales. Our customers generally are not obligated to purchase any minimum volume of products from us and are able to terminate their relationships with us at any time. In addition, increases in the prices of our products could result in a reduction in orders for our customers. A significant reduction in orders from, or change in terms of contracts with, any significant customers could have a material adverse effect on our future results of operations. Furthermore, some of our major customers are facing financial challenges due to market declines and heavy debt levels; should these challenges become acute, our results could be materially adversely affected due to reduced orders and/or payment delays or defaults.

Certain indebtedness may limit our ability to pay dividends, incur additional debt and make acquisitions and other investments.

        Our revolving credit facility and other senior indebtedness contain operational and financial covenants that restrict our ability to make distributions to stockholders, incur additional debt and make acquisitions and other investments unless we satisfy certain financial tests and comply with various financial ratios. If we do not maintain compliance with these covenants, our creditors could declare a default under our revolving credit facility or senior notes and our indebtedness could be declared immediately due and payable. Our ability to comply with the provisions of our indebtedness may be affected by changes in economic or business conditions beyond our control. Further, givenone of our strategies is to increase our revenues and profitability and expand our business through acquisitions. We may require capital in excess of our available cash and the unused portion of our revolving credit facility to make large acquisitions, which we would generally obtain from access to the credit markets. There can be no assurance that if a large acquisition is identified that we would have access to sufficient capital to complete such acquisition. Given the current condition of the credit markets, should we require additional debt financing above our existing credit limit, we cannot be assured such financing would be available to us or available to us on reasonable economic terms.


Investments in auction rate securitiesA break-up of the Euro Zone and rights issued by UBS are subject to risks which may cause lossesits common currency could have a material effect on our business prospects, operations, financial condition and affect the liquidity of these investments.cash flow.

        At December 31, 2008, we held $6.0 million in auction rate securities (ARS) at fair value whose underlying investments are AA rated municipal bonds and student loans and $2.3 million in rights issued by UBS, AG (UBS). AllApproximately 44% of our ARS were sold by UBS. Inannualized consolidated sales are generated in the fourth quarterEuro Zone. Sovereign debt concerns within certain European countries could precipitate a break-up of 2008, UBS issued a settlement offerthe Euro Zone. Leaders from key European countries have proposed solutions to the holderissue, but a comprehensive program addressing all pan European concerns has not yet been identified. There are a number of certain ARS including allscenarios that could occur as to which countries may leave the Euro Zone and its single currency. A sovereign country's decision to exit the Euro Zone would, among other things, trigger a redenomination of monetary assets and liabilities into a new national currency, interrupt that country's banking system and could affect various commercial contracts that were written assuming a standard Euro currency. We would be exposed to potential devaluation of our asset base and our operating results, we could experience liquidity issues within a given country and we could be subject to disputes over business transactions with various third parties over how contractual obligations should be settled. We cannot be assured that the Euro Zone will continue as presently constructed nor can we determine the breadth and scope of a potential break-up of the securities held by us. Under the terms of the settlement offer, UBS issued non-transferable rights entitling the holder to sell the underlying ARS at par to UBS at any time during the period June 30, 2010 through July 2, 2012, after which time the rights expire. UBS could elect at any time from the settlement through the expiration of the settlement agreement to purchase the ARS, in which case UBS would be required to pay par value



for the ARS. The value of the ARS and the related rights from UBS are subject to the credit risk of the underlying agencies which originally issued the bonds as well as the credit risk of UBS. If UBS is unable to perform under the terms of the rights agreements, we could incur losses to liquidate the remaining securities or hold the securities to maturity.Euro Zone.

One of our stockholders can exercise substantial influence over our Company.

        Our Class B Common Stock entitles its holders to ten votes for each share and our Class A Common Stock entitles its holders to one vote per share. As of February 1, 2009,January 31, 2012, Timothy P. Horne a member of our board of directors, beneficially owned approximately 19.8%19.1% of our outstanding shares of Class A Common Stock (assuming conversion of all shares of Class B Common Stock beneficially owned by Mr. Horne into Class A Common Stock) and approximately 99.0%99.3% of our outstanding shares of Class B Common Stock, which represents approximately 70.7%69.8% of the total outstanding voting power. As long as Mr. Horne controls shares representing at least a majority of the total voting power of our outstanding stock, Mr. Horne will be able to unilaterally determine the outcome of most stockholder votes, and other stockholders will not be able to affect the outcome of any such votes.

Conversion and sale of a significant number of shares of our Class B Common Stock could adversely affect the market price of our Class A Common Stock.

        As of February 1, 2009,January 31, 2012, there were outstanding 29,251,73929,506,814 shares of our Class A Common Stock and 7,293,8806,953,680 shares of our Class B Common Stock. Shares of our Class B Common Stock may be converted into Class A Common Stock at any time on a one for one basis. Under the terms of a registration rights agreement with respect to outstanding shares of our Class B Common Stock, the holders of our Class B Common Stock have rights with respect to the registration of the underlying Class A Common Stock. Under these registration rights, the holders of Class B Common Stock may require, on up to two occasions that we register their shares for public resale. If we are eligible to use Form S-3 or a similar short-form registration statement, the holders of Class B Common Stock may require that we register their shares for public resale up to two times per year. If we elect to register any shares of Class A Common Stock for any public offering, the holders of Class B Common Stock are entitled to include shares of Class A Common Stock into which such shares of Class B Common Stock may be converted in such registration. However, we may reduce the number of shares proposed to be registered in view of market conditions. We will pay all expenses in connection with any registration, other than underwriting discounts and commissions. If all of the available registered shares are sold into the public market the trading price of our Class A Common Stock could decline.

Our Class A Common Stock has insignificant voting power.

        Our Class B Common Stock entitles its holders to ten votes for each share and our Class A Common Stock entitles its holders to one vote per share. As of February 1, 2009, our Class B Common Stock constituted 20.0% of our total outstanding common stock and 71.4% of the total outstanding voting power and thus is able to exercise a controlling influence over our business.

Item 1B.UNRESOLVED STAFF COMMENTS.

        None.


Item 2.    PROPERTIES.

        As of December 31, 2008,2011, we maintained approximately 74 facilities31 principal manufacturing, warehouse and distribution centers worldwide, including our corporate headquarters located in North Andover, Massachusetts. The remaining facilities consist of foundries, manufacturing facilities, warehouses,Additionally, we maintain numerous sales offices and distribution centers.other smaller manufacturing facilities and warehouses. The principal properties in each of our three geographic segments and their location, principal use and ownership status are set forth below:

North America:

Location
 Principal Use Owned/Leased
North Andover, MA Corporate Headquarters Owned
Burlington, ON, CanadaManufacturing/DistributionOwned
Chesnee, SCManufacturingOwned
Export, PA Manufacturing Owned
Franklin, NH Manufacturing/Distribution Owned
Burlington, ON, CanadaManufacturing/DistributionOwned
Kansas City, KSManufacturingOwned
Fort Myers, FL Manufacturing Owned
St. Pauls, NC Manufacturing Owned
Spindale, NCSan Antonio, TX Manufacturing/Warehouse/Distribution Owned
Chesnee, SCSpindale, NC ManufacturingDistribution Center Owned
Dunnellon, FLWarehouseOwned
San Antonio, TXWarehouseOwned
Springfield,Kansas City, MO Manufacturing/Distribution Leased
Langley, BC, CanadaManufacturingLeased
Houston, TXManufacturingLeased
Brea, CAManufacturingLeased
Phoenix,Peoria, AZ WarehouseLeased
Kansas City, KSManufacturing/Distribution Center Leased
Reno, NV Distribution Center Leased
Vernon, CASpringfield, MO Manufacturing/Distribution Center Leased
Calgary, AB, CanadaWoodland, CA Distribution CenterManufacturing Leased

Europe:Europe, Middle East and Africa:

Location
 Principal Use Owned/Leased
Eerbeek, Netherlands European Headquarters/Manufacturing Owned
Biassono, Italy ManufacturingManufacturing/Distribution Owned
Brescia, ItalyHautvillers, France Manufacturing Owned
Landau, Germany ManufacturingManufacturing/Distribution Owned
Fresseneville, FranceManufacturingOwned
Hautvillers,Mery, France Manufacturing Owned
Plovdiv, Bulgaria Manufacturing Owned
Ammanford, United KingdomVildjberg, DenmarkManufacturing/DistributionOwned
Virey-Le-Grand, FranceManufacturing/DistributionOwned
Gardolo, Italy Manufacturing OwnedLeased
Vildjberg, DenmarkGödersdorf, Austria ManufacturingOwned
Rosières, FranceManufacturingManufacturing/Distribution Leased
Monastir, Tunisia Manufacturing Leased
Gardolo, ItalyRosières, France ManufacturingManufacturing/Distribution Leased
Sorgues, France ManufacturingLeased
Grenoble, FranceManufacturingLeased
Vojens, DenmarkWarehouseDistribution Center Leased

China:Asia:

Location
 Principal Use Owned/Leased
Shanghai, China Asian Headquarters Leased
Tianjin TangguNingbo, Beilun District, THMT, China ManufacturingDistribution Center OwnedLeased
Taizhou, Yuhuan, ChinaManufacturingOwned
Hunan, Changsha, ChinaManufacturingOwned
Ningbo, Beilun, China Manufacturing Owned
Ningbo, Beilun Port,Taizhou, Yuhuan, China Distribution CenterManufacturing LeasedOwned

        Certain of our facilities are subject to mortgages and collateral assignments under loan agreements with long-term lenders. In general, we believe that our properties, including machinery, tools and equipment, are in good condition, well maintained and adequate and suitable for their intended uses. Many of our manufacturing plants, especially in North America and China, are currently operating at levels that our management considers below normal capacity due to the current worldwide recession. As part of its continuous manufacturing footprint review, in 2009, management will execute a plan to further consolidate its North America and Chinese operations. See Recent Developments in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for more details.

Item 3.    LEGAL PROCEEDINGS.

        We are from time to time involved in various legal and administrative procedures. See Item 1,1. "Business—Product Liability, Environmental and Other Litigation Matters," which is incorporated herein by reference.

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.MINE SAFETY DISCLOSURES.

        There were no matters submitted during the fourth quarter of the fiscal year covered by this Annual Report to a vote of security holders through solicitation of proxies or otherwise.Not applicable.



PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

        The following table sets forth the high and low sales prices of our Class A Common Stock on the New York Stock Exchange during 20082011 and 20072010 and cash dividends paid per share.

 
 2008 2007 
 
 High Low Dividend High Low Dividend 

First Quarter

 $30.75 $24.02 $0.11 $46.71 $35.05 $0.10 

Second Quarter

  31.00  24.17  0.11  41.34  36.10  0.10 

Third Quarter

  33.00  21.89  0.11  39.96  30.40  0.10 

Fourth Quarter

  29.90  16.67  0.11  33.09  25.40  0.10 

 
 2011 2010 
 
 High Low Dividend High Low Dividend 

First Quarter

 $40.75 $34.91 $0.11 $32.94 $27.59 $0.11 

Second Quarter

  39.04  32.13  0.11  37.00  27.63  0.11 

Third Quarter

  36.95  24.49  0.11  35.48  27.51  0.11 

Fourth Quarter

  38.27  24.31  0.11  37.41  32.10  0.11 

        There is no established public trading market for our Class B Common Stock, which is held exclusively by members of the Horne family. The principal holders of such stock are subject to restrictions on transfer with respect to their shares. Each share of our Class B Common Stock (10 votes per share) is convertible into one share of Class A Common Stock (1 vote per share).

        On February 7, 2012, we declared a quarterly dividend of eleven cents ($0.11) per share on each outstanding share of Class A Common Stock and Class B Common Stock.

Aggregate common stock dividend payments for 2008 and 2007in 2011 were $16.2$16.3 million, which consisted of $13.3 million and $15.6$3.0 million for Class A shares and Class B shares, respectively. Aggregate common stock dividend payments in 2010 were $16.4 million, which consisted of $13.3 million and $3.1 million for Class A shares and Class B shares, respectively. While we presently intend to continue to pay comparable cash dividends, the payment of future cash dividends depends upon the Board of Directors' assessment of our earnings, financial condition, capital requirements and other factors.

        The number of record holders of our Class A Common Stock as of February 22, 2009January 31, 2012 was 166.183. The number of record holders of our Class B Common Stock as of February 22, 2009January 31, 2012 was 7.8.

        We satisfy the minimum withholding tax obligation due upon the vesting of shares of restricted stock and the conversion of restricted stock units into shares of Class A Common Stock by automatically withholding from the shares being issued a number of shares with an aggregate fair market value on the date of such vesting or conversion that would satisfy the withholding amount due.

        We did not withhold any Class A Common Stock for withholding tax obligations during the quarter ended December 31, 2008.

The following table includes information with respect to repurchases we madeshares of our Class A Common Stock withheld to satisfy withholding obligations during the quarter ended December 31, 2008.2011.

Issuer Purchases of Equity Securities
Period
(a) Total
Number of
Shares (or
Units)
Purchased
(b) Average
Price Paid per
Share (or Unit)
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs(1)
(d) Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs(1)

September 29, 2008 - October 26, 2008

553,615

October 27, 2008 - November 23, 2008

553,615

November 24, 2008 - December 31, 2008

553,615

Total

553,615

Issuer Purchases of Equity Securities
 
Period
 (a) Total
Number of
Shares (or
Units)
Purchased
 (b) Average
Price Paid per
Share (or Unit)
 (c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs(1)
 (d) Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs(1)
 

October 3, 2011 - October 30, 2011

  1,463 $30.07     

October 31, 2011 - November 27, 2011

         

November 28, 2011 - December 31, 2011

  196 $36.83     
          

Total

  1,659 $30.87     
          

(1)
On November 9, 2007,August 2, 2011, we announced that our Board of Directors had authorized a stock repurchase program. Under the program we may repurchasefor up to an aggregate of 3.0one million shares of ourClass A Common Stock. We also announced the discontinuance of the previous stock repurchase program, which was originally announced on November 9, 2007. During the three months ended October 2, 2011, we repurchased the entire


COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Watts Water Technologies, Inc., Thethe S&P 500 Index
and Thethe Russell 2000 Index


*
$100 invested on December 31, 200312/31/06 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.


Cumulative Total Return

 
 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 

Watts Water Technologies, Inc

  100.00  146.82  139.36  191.03  140.11  119.52 

S&P 500

  100.00  110.88  116.33  134.70  142.10  89.53 

Russell 2000

  100.00  118.33  123.72  146.44  144.15  95.44 

 
 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 

Watts Water Technologies, Inc

  100.00  73.34  62.57  78.92  94.70  89.73 

S & P 500

  100.00  105.49  66.46  84.05  96.71  98.75 

Russell 2000

  100.00  98.43  65.18  82.89  105.14  100.75 

        The above Performance Graph and related information shall not be deemed "soliciting material" or to be "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.



Item 6.    SELECTED FINANCIAL DATA.

        The selected financial data set forth below should be read in conjunction with our consolidated financial statements, related Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein.

FIVE-YEAR FINANCIAL SUMMARY

(Amounts in millions, except per share and cash dividend information)

 
 Year Ended
12/31/08(1)(8)
 Year Ended
12/31/07(2)(8)
 Year Ended
12/31/06(3)(8)
 Year Ended
12/31/05(4)(5)(8)
 Year Ended
12/31/04(6)(7)(8)
 

Statement of operations data:

                

Net sales

 $1,459.4 $1,382.3 $1,230.8 $924.3 $824.6 

Income from continuing operations

  47.3  77.6  77.1  55.0  48.7 

Loss from discontinued operations, net of taxes

  (0.7) (0.2) (3.4) (0.4) (1.9)

Net income

  46.6  77.4  73.7  54.6  46.8 

Income per share from continuing operations—diluted

  1.28  1.99  2.29  1.67  1.49 

Loss per share from discontinued operations—diluted

  (0.02) (0.01) (0.10) (0.01) (0.06)

Net income per share—diluted

  1.26  1.99  2.19  1.66  1.43 

Cash dividends declared per common share

 $0.44 $0.40 $0.36 $0.32 $0.28 

Balance sheet data (at year end):

                

Total assets

 $1,660.1 $1,729.3 $1,660.9 $1,101.0 $922.7 

Long-term debt, net of current portion

 $409.8 $432.2 $441.7 $293.4 $180.6 

 
 Year Ended
12/31/11(1)(6)
 Year Ended
12/31/10(2)(6)
 Year Ended
12/31/09(3)(6)
 Year Ended
12/31/08(4)(6)
 Year Ended
12/31/07(5)(6)
 

Statement of operations data:

                

Net sales

 $1,436.6 $1,274.6 $1,225.9 $1,431.4 $1,356.3 

Net income from continuing operations attributable to Watts Water Technologies, Inc. 

  64.7  63.1  41.0  45.2  75.7 

Income (loss) from discontinued operations, net of taxes

  1.7  (4.3) (23.6) 1.4  1.7 

Net income attributable to Watts Water Technologies, Inc. 

  66.4  58.8  17.4  46.6  77.4 

DILUTED EPS

                

Income (loss) per share attributable to Watts Water Technologies, Inc.:

                

Continuing operations

  1.73  1.69  1.10  1.23  1.94 

Discontinued operations

  0.05  (0.12) (0.63) 0.04  0.04 

NET INCOME

  1.78  1.57  0.47  1.26  1.99 

Cash dividends declared per common share

 $0.44 $0.44 $0.44 $0.44 $0.40 

Balance sheet data (at year end):

                

Total assets

 $1,697.5 $1,646.1 $1,599.2 $1,660.1 $1,729.3 

Long-term debt, net of current portion

 $397.4 $378.0 $304.0 $409.8 $432.2 

(1)
For the year ended December 31, 2011, net income includes the following net pre-tax costs: restructuring charges of $10.0 million, intangibles and goodwill impairment charges of $17.4 million, pension curtailment charges of $1.5 million, separation costs related to our former CEO of $6.3 million, and costs related to our acquisition of Danfoss Socla S.A.S (Socla) in France of $5.8 million offset by pre-tax gains of $1.2 million for an earn-out adjustment, $7.7 million related to the sale of Tianjin Watts Valve Company Ltd. (TWVC) in China and $1.1 million from legal settlements. Additionally, net income includes a tax benefit of $4.2 million relating to the sale of TWVC offset by a $1.1 million tax charge in Europe related to our France restructuring. The after-tax cost of these items was $17.0 million.

(2)
For the year ended December 31, 2010, net income includes the following net pre-tax costs: restructuring charges of $14.1 million, intangible impairment charges of $1.4 million, and costs related to acquisitions and other items of $7.1 million offset by pre-tax gains of $4.5 million primarily for product liability and workers compensation accrual adjustments. Additionally, net income includes a tax benefit of $4.3 million related to the release of a valuation allowance in Europe offset by a tax charge of $1.5 million relating to the repatriation of earnings recognized upon our decision to dispose of a China subsidiary. The after-tax cost of these items was $10.3 million.

(3)
For the year ended December 31, 2009, net income includes the following net pre-tax costs: restructuring charges of $18.9 million and intangible impairment charges of $3.3 million, offset by pre-tax gains on the sale of Tianjin Tanggu Watts Valve Co. Ltd. (TWT) in China of $1.1 million, favorable product liability and workers compensation accrual adjustments of $4.9 million and legal

(4)
For the year ended December 31, 2008, net income includes the following net pre-tax costs: restructuring charges of $5.7 million, goodwill impairment severance costs, asset write-downs and other costs in North Americacharges of $22.0 million $2.6 million, $0.4 million and $1.5 million respectively; accelerated depreciation and other costs in China of $1.0 million and $0.2 million, respectively and minority interest income of $0.2 million; severance costs in Europe of $0.2 million. The after-tax cost of these items was $21.2 million.

(2)(5)
For the year ended December 31, 2007, net income includes the following net pre-tax costs: change in estimate of workers' compensation costs of $2.9 million, severance and product line discontinuance costs in North America of $0.4 million and $3.1 million, respectively; accelerated depreciation and asset write-downs, product line discontinuance costs and severance costs in ChinaAsia of $2.9 million, $0.7 million and $0.4 million, respectively, and minority interest income of $0.9 million. The after-tax cost of these items was $6.9 million.

(3)
For the year ended December 31, 2006, net income includes the following net pre-tax gain: gain on sales of buildings of $8.2 million, restructuring costs consisting primarily of European severance of $2.2 million and amortization of $0.4 million, other costs consisting of accelerated depreciation and severance in our Chinese joint venture of $4.7 million and minority interest income of $1.5 million. The after-tax gain of these items was $1.5 million.

(4)
For the year ended December 31, 2005, net income includes the following pre-tax costs: restructuring of $0.7 million and other costs consisting of accelerated depreciation and asset write-downs of $1.8 million. The after-tax cost of these items was $1.6 million.

(5)
For the year ended December 31, 2005, net income includes a net after-tax charge of $0.9 million for a selling, general and administrative expense charge of $1.5 million related to a contingent earn-out agreement.

(6)
For the year ended December 31, 2004, net income includes a net after-tax charge of $2.3 million for certain accrued expense adjustments, which are included in selling, general and administrative expense after-tax charges of $3.5 million related to a contingent earn-out agreement and $0.7 million for various accrual adjustments and $0.5 million recorded as an income tax benefit.

(7)
For the year ended December 31, 2004, net income includes the following pre-tax costs: restructuring of $0.1 million and other costs consisting of accelerated depreciation of $2.9 million. The after-tax cost of these items was $1.8 million.

(8)
In December 2004, we decided to divest our interestSeptember 2009, the Company's Board of Directors approved the sale of its investment in our minority-owned subsidiary, Jameco International, LLC (Jameco LLC). We recordedCWV and subsequently sold CWV in discontinuedJanuary 2010. Results from operation aand estimated loss on disposal are included net of tax impairment charge of $0.7 million for the year ended December 31, 2004. Also includedCWV in discontinued operations isfor 2010, 2009, 2008 and 2007. In May 2009, the Company liquidated its TEAM Precision Pipework, Ltd. (TEAM) business. Results from operation and loss on disposal are included net of tax operating resultsfrom the deconsolidation of Jameco LLC of $0.1 million of lossTEAM in discontinued operations for 2011, 2010, 2009, 2008 and $0.1 million of income for the year ended December 31, 2004 and 2003, respectively.2007. In September 1996, we divested our Municipal Water Group of businesses, which included Henry Pratt, James Jones Company and Edward Barber and Company Ltd. Costs and expenses related to the Municipal Water Group, for 2011, 2010, 2009, 2008 2007, 2006, 2005 and 20042007 relate to legal and settlement costs associated with the James Jones Litigation. The loss,Litigation and other miscellaneous costs. Discontinued operating income (loss) for 2011 and 2010 include an estimated settlement reserve adjustment in connection with the FCPA investigation at CWV (see Note 15) and in 2010 and 2009, includes legal costs associated with the FCPA investigation. Income (loss) for total discontinued operations, net of taxes, consists of $ 0.7$1.7 million, $0.2($4.3) million, $3.4($23.6) million, $0.4$1.4 million and $1.1$1.7 million for the years ended December 31, 2011, 2010, 2009, 2008 2007, 2006, 2005 and 2004,2007, respectively.


Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

        We are a leading supplier of products for use in the water quality, water safety, water flow control and water conservation markets in both North America and Europe with an expandinga presence in Asia. For over 130137 years, we have designed and manufactured products that promote the comfort and safety of people and the quality and conservation of water used in commercial and residential applications. We earn revenue and income almost exclusively from the sale of our products. Our principal product lines include:

        Our business is reported in three geographic segments,segments: North America, Europe and China.Asia. We distribute our products through three primary distribution channels,channels: wholesale, do-it-yourself (DIY) and original equipment manufacturers (OEMs). Interest rates have an indirect effect on the demand for our products due to the effect such rates have on the number of new residential and commercial construction starts and remodeling projects. All three of these activities have an impact on our sales and earnings. An additional factor that has had an effect on our sales is fluctuation in foreign currencies, as a portion of our sales and certain portions of our costs, assets and liabilities are denominated in currencies other than the U.S. dollar.

        We believe that the factors relating to our future growth include our ability to continue to make selective acquisitions, both in our core markets as well as in new complementary markets, regulatory requirements relating to the quality and conservation of water, safe use of water, increased demand for clean water, with continued enforcement of plumbing and building codes and a healthy economic environment. We have completed 3236 acquisitions since divesting our industrial and oil and gas business in 1999. Our acquisition strategy focuses on businesses that manufacture preferred brand name products that address our themes of water quality, water conservation, water safety and water flow control and related complementary markets. We target businesses that will provide us with one or more of the following: an entry into new markets, an increase in shelf space with existing customers, a new or improved technology or an expansion of the breadth of our water quality, water conservation, water safety and water flow control products for the commercial, industrial and residential and commercial markets. In 2008 and 2007, sales from acquisitions contributed approximately 4.6% and 3.9%, to our total sales growth over the prior year.

        Products representing a majority of our sales are subject to regulatory standards and code enforcement, which typically require that these products meet stringent performance criteria. Together with our commissioned manufacturers' representatives, we have consistently advocated for the



development and enforcement of such plumbing codes. We are focused on maintaining stringent quality control and testing procedures at each of our manufacturing facilities in order to manufacture products in compliance with code requirements and take advantage of the resulting demand for compliant products. We believe that the product development, product testing capability and investment in plant and equipment needed to manufacture products in compliance with code requirements, represent a barriercompetitive advantage for us.

        In 2011, we experienced many of the same macro challenges that affected our business in the previous year. The commercial marketplace continued to entrystruggle, we saw low residential activity and commodity prices remained volatile. Despite the challenging end markets, we were able to grow sales organically by 2.3% and grow income from continuing operations by 2.5%. Organic sales growth


excludes the impacts of acquisitions, divestitures and foreign exchange from year-over-year comparisons. We believe this provides investors with a more complete understanding of underlying sales trends by providing sales growth on a consistent basis. We continued our restructuring programs to right size our manufacturing footprint and we sustained our continuous improvement initiatives to gain productivity in our operations.

        Our performance improved as 2011 progressed. During the first half of 2011, increases in the cost of copper reduced margins for competitors.our high copper content products and we encountered operational inefficiencies as a result of our French restructuring efforts. Copper costs increased during the later portion of 2010 and into early 2011, reaching an all-time high in April 2011. We were able to balance commodity costs through price increases by mid-year, providing better results during the second half of 2011. In general, we were more successful in North America than in Europe in passing on price increases to our end customers during the year. Europe has and continues to experience uncertainties regarding its economy, driven largely by sovereign debt concerns. We believe the economic uncertainty is affecting how our competitors are pricing in end markets. We believe that over the long term, there is an increasing demand among consumers for productsprice increases may continue to ensure water quality, which creates growth opportunities forbe difficult to achieve in many of our products.

        Adverse economic developmentsEuropean markets in 2008 created a challenging environment for us. The credit crisis and recessionary pressures negatively impacted the primary markets we serve. We took steps2012. Copper costs abated somewhat during the yearsecond half of 2011, but have begun to reduce coststrend upward again through early February 2012. We have announced selected price increases for 2012 in certain markets but we cannot determine whether such initiatives will be successful in the marketplace.

        We continually review our business and conserve cash. During the fourth quarter of 2008, we reduced our workforce by 10%implement restructuring plans as needed. We recently completed restructuring projects in the U.S. This step is expectedand Europe which have shut down and consolidated certain of our operations. Please see Note 4 of the Notes to save us approximately $10.0 million to $11.0 million per year.Consolidated Financial Statements for a more detailed explanation of our restructuring activities.

        In addition to the reductionMarch 2010, in force, we took several steps to help conserve cash into 2009, including suspending our stock repurchase program, first freezing U.S. wages and salaries and later implementing salary reductions, controlling capital spending levels and continuing to focus on working capital levels. We also announced a further operational restructuring program to consolidateconnection with our manufacturing footprint consolidation, we closed the operations of Tianjin Watts Valve Company Ltd. (TWVC) and relocated its manufacturing to other facilities in North America and China. We will continueOn April 12, 2010, we signed a definitive equity transfer agreement with a third party to evaluate acquisition candidates during 2009, but we expect funds to be spent on acquisitions will be less than that spentsell our equity ownership and remaining assets of TWVC. The sale was finalized in 2008. We are enhancing our focus on productivity and continuous improvement, and on managing our working capital levels as well as positioning many of our products to benefit when the market returns. We believe that we are well positioned to weather the current economic crisis due to our ability to continue to generate positive cash flows and control spending levels. We are not faced with any major liquidity events until 2010, at which time $50.0 million of our debt will come due.

        We require substantial amounts of raw materials to produce our products, including bronze, brass, cast iron, steel and plastic, and substantially all of the raw materials we require are purchased from outside sources. We have experienced volatility in the costs of certain raw materials, particularly copper. Bronze and brass are copper-based alloys. During the fourth quarter of 2008, prices2011. We received net proceeds of copper droppedapproximately $6.1 million from highs experiencedthe sale. We recognized a net pre-tax gain of $7.7 million and an after-tax gain of approximately $11.4 million, or $0.30 per share, relating mainly to a favorable cumulative translation adjustment and a tax benefit related to the reversal of the China tax clawback.

        In 2009, our Board of Directors approved the sale of our Watts Valve (Changsha) Co., Ltd. (CWV) subsidiary. We also liquidated our TEAM Precision Pipework, Ltd. (TEAM) subsidiary through an administration process under United Kingdom law, as more fully described in Note 3 of Notes to Consolidated Financial Statements. We classified CWV's and TEAM's results of operations and any related losses as discontinued operations for all periods presented in this report.

Acquisitions

        On April 29, 2011, the Company completed the acquisition of Danfoss Socla S.A.S. (Socla) and the related water controls business of certain other entities controlled by Danfoss A/S, in a share and asset purchase transaction. The aggregate consideration paid was EUR 120.0 million, less than nine months earlier.

        A risk we face is our ability to deal effectively with changesEUR 3.7 million in raw material costs. We manage this risk by monitoring related market prices, working with our suppliers to achieve the maximum level of stability in their costscapital and related pricing, seeking alternative supply sources when necessary, implementing cost reduction programsadjustments. The net purchase price of EUR 116.3 million was financed with cash on hand and passing increaseseuro-based borrowings under our Credit Agreement. The net purchase price is equal to approximately $172.4 million based on the exchange rate of Euro to U.S. dollars as of April 29, 2011.

        Socla is a manufacturer of water protection valves and flow control solutions for the water market and the heating, ventilation and air conditioning market. Its major product lines include backflow preventers, check valves and pressure reducing valves. Socla is based in costsFrance, and its products are distributed worldwide for commercial, residential, municipal and industrial use. Socla's annual revenue for 2010 was approximately $130.0 million. Socla strengthens the Company's European residential and commercial plumbing and flow control products and also adds to our customers. Additionally from time to time we may use commodity futures contracts on a limited basis to manage this risk. We are not able to predict whether or for how long this volatility will continue. If costs continue to decrease, we may experience pressure from customers to reduce product pricing. We are unable to predict the timing and impact that these pricing decreases could have to our profit margins.its HVAC products.

        Another risk we face in all areas of our business is competition. We consider brand preference, engineering specifications, code requirements, price, technological expertise, delivery times and breadth of product offerings to be the primary competitive factors. As mentioned previously, we believe that the product development, product testing capability and investment in plant and equipment needed to manufacture products in compliance with code requirements, represent a barrier to entry for competitors. We are committed to maintaining our capital equipment at a level consistent with current technologies, and thus we spent approximately $26.6 million in 2008 and $37.8 million in 2007.


Recent Developments

        On February 10, 2009,January 31, 2012, we completed the acquisition of tekmar Control Systems (tekmar) in a plan was approved by the Boardshare purchase transaction. A designer and manufacturer of Directors to expand our program to consolidate our manufacturing footprintcontrol systems used in North Americaheating, ventilation, and China. The plan provides for the closure of three plants, with the relocation of those operations to existing facilities in either North America or China or to a new central facility in the United States.


        The footprint consolidation pre-tax charge will be approximately $11.7 million, including severance charges of approximately $3.2 million, relocation costs of approximately $3.3 million and asset write-downs of approximately $5.2 million. We also expect to record a net gain on property sales of $2.4 million. One-time tax charges of approximately $7.0 million regarding the payback of prior tax holiday benefits are also expected to be incurred as part of the building relocations. Approximately 400 positions will be eliminated in connection with this consolidation. The net after tax charge for this manufacturing consolidation programair conditioning applications, tekmar is expected to be approximately $14.9enhance our hydronic systems product offerings in the U.S. and Canada. The initial purchase paid was CAD $18.0 million, ($4.4 million non cash), with costsan earn-out based on future earnings levels being incurred through December 2009. We expect to spend approximately $4.8 millionachieved. The total purchase price will not exceed CAD $26.2 million. Sales for tekmar in capital expenditures to consolidate operations. We expect this entire project will be self-funded through net proceeds from the sale of buildings and other assets being disposed of as part of the plan.2011 approximated CAD $11.0 million.

        On February 9, 2009,7, 2012, we declared a quarterly dividend of eleven cents ($0.11) per share on each outstanding share of Class A Common Stock and Class B Common Stock.

Results of Operations

Year Ended December 31, 20082011 Compared to Year Ended December 31, 20072010

        Net Sales.    Our business is reported in three geographic segments: North America, Europe and China.Asia. Our net sales in each of these segments for the years ended December 31, 20082011 and 20072010 were as follows:

 
 Year Ended
December 31, 2008
 Year Ended
December 31, 2007
  
  
 
 
  
 Change to
Consolidated
Net Sales
 
 
 Net Sales % Sales Net Sales % Sales Change 
 
 (Dollars in millions)
 

North America

 $866.2  59.4%$871.0  63.0%$(4.8) (0.4)%

Europe

  546.0  37.4  452.6  32.7  93.4  6.8 

China

  47.2  3.2  58.7  4.3  (11.5) (0.8)
              

Total

 $1,459.4  100.0%$1,382.3  100.0%$77.1  5.6%
              

 
 Year Ended
December 31, 2011
 Year Ended
December 31, 2010
  
  
 
 
  
 Change to
Consolidated
Net Sales
 
 
 Net Sales % Sales Net Sales % Sales Change 
 
 (Dollars in millions)
 

North America

 $819.4  57.0%$785.5  61.6%$33.9  2.7%

Europe

  595.5  41.5  468.3  36.8  127.2  9.9 

Asia

  21.7  1.5  20.8  1.6  0.9  0.1 
              

Total

 $1,436.6  100.0%$1,274.6  100.0%$162.0  12.7%
              

        The change in net sales iswas attributable to the following:

 
  
  
  
  
 Change As a % of
Consolidated Net Sales
 Change As a % of
Segment Net Sales
 
 
 North
America
 Europe China Total North
America
 Europe China Total North
America
 Europe China 
 
 (Dollars in millions)
 

Organic growth

 $(18.2)$11.3 $(12.1)$(19.0) (1.3)% 0.8% (0.9)% (1.4)% (2.1)% 2.5% (20.6)%

Foreign exchange

  0.5  31.3  3.8  35.6    2.3  0.3  2.6    6.9  6.5 

Acquisitions

  12.9  50.8    63.7  0.9  3.7    4.6  1.5  11.2   

Disposal

      (3.2) (3.2)     (0.2) (0.2)     (5.5)
                        

Total

 $(4.8)$93.4 $(11.5)$ 77.1  (0.4)% 6.8% (0.8)% 5.6% (0.6)% 20.6% (19.6)%
                        

 
  
  
  
  
 Change As a %
of Consolidated Net Sales
 Change As a %
of Segment Net Sales
 
 
 North
America
 Europe Asia Total North
America
 Europe Asia Total North
America
 Europe Asia 
 
 (Dollars in millions)
 

Organic

 $22.2 $8.6 $(1.8)$29.0  1.8% 0.6% (0.1)% 2.3% 2.8% 1.9% (8.7)%

Foreign exchange

  3.1  24.0  0.9  28.0  0.2  1.9  0.1  2.2  0.4  5.1  4.3 

Acquisitions

  8.6  94.6  1.8  105.0  0.7  7.4  0.1  8.2  1.1  20.2  8.7 
                        

Total

 $33.9 $127.2 $0.9 $162.0  2.7% 9.9% 0.1% 12.7% 4.3% 27.2% 4.3%
                        

        Organic net sales for 2008in 2011 into the North American wholesale market increased by $26.6 million, or 4.3%, compared to 2010. This increase was primarily due to improved recovery of commodity costs across our four principal product lines with larger increases in residential and commercial products sales of approximately $16.0 million and in drains and water re-use products of approximately $5.7 million. Organic sales into the North American DIY market in 2011 decreased in North America$4.4 million, or 2.6%, compared to 2010, primarily due to decreased product sales approximating $4.3 million, mostly in the wholesale market, where sales were 2.5% lower than in 2007. Unit sale declines, due in large part to the soft economy, were widespread across a number of product lines, with our backflow product line impacted the most. Organic sales in our North American retail market for 2008 remained relatively flat compared with 2007, decreasing 0.6%. Unit sale reductions in the retail market due to the soft economy were offset by selected price increasesresidential and new product rollouts. Given the current recession and more stringent bank lending standards, we believe that both the commercial and residential construction markets, which we sell into through our wholesale and DIY channels, will continue to be soft through 2009. As a result, we believe that our sales in North America may decline in 2009. Growth



in North America due to acquisitions is due to the inclusion of sales from Topway acquired in November 2007.products.

        Organic net sales for 2008 increased in Europe primarilythe European wholesale market by $2.8 million, or 1.0%, compared to 2010. Wholesale sales increased marginally due to an 11.0% increasestronger sales in drains and pre-insulated pipe products along with increased sales into Eastern Europe and from geographic expansion into the Middle East. Increases were offset partially by lower unit sales into southern Europe, especially the Italian marketplace. Organic sales into the European OEM market asin 2011 increased by $9.2 million, or 4.9%, compared to 2007. OEM sales were positively impacted in Germany where sales of our products into alternative energy and energy conservation markets were strong. Sales into the wholesale market for 2008 decreased by 4.5% as compared to 2007 and were negatively affected by declines in construction activity. Acquired sales growth in Europe was2010 primarily due to the inclusion of Blücher for seven months in 2008. We expectincreased sales in Europe will increase on a constant currency basis in 2009 as Blücher will be reported for a full year and we expect alternative energy products sales to grow, hydronic under-floor manifold packages


offset by unit declines in our core product lines. Core sales are expected to be impacted by the widening recession in Europe.

        Organic net sales for 2008 declined in China due to decreasedlower sales in both the Chinese domesticheat pump and export markets. China salessolar packages, which had been driven by renewable energy subsidies which either were also negatively affected as compared to 2007 from the disposal of a commodity butterfly valve business during the fourth quarter of 2008. This decrease was partially offset by an increase in sales of large diameter butterfly valves to our water infrastructure customers during 2008.reduced or had expired.

        The increasesnet increase in net sales due to foreign exchange in North America, Europe and China werewas primarily due to the appreciation of the Canadian dollar, euro and yuan, respectively,the Canadian dollar against the U.S. dollar. We cannot predict whether these currencies will continue to appreciate or depreciate against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our net sales. Recent fluctuations

        Acquired net sales in foreign currency rates portend a reductionEurope related to the Socla and Austroflex Rohr-Isoliersysteme GmbH (Austroflex) acquisitions and in those currencies against the U.S. dollar.North America was due to Socla and Blue Ridge Atlantic Enterprises, Inc. (BRAE) acquisitions.

        Gross Profit.    Gross profit and gross profit as a percent of net sales (gross margin) for 20082011 and 20072010 were as follows:

 
 Year Ended
December 31,
  
 
 
 Point
Change
 
 
 2008 2007 
 
 (dollars in millions)
  
 

Gross profit

 $488.4 $461.6    

Gross margin

  33.5% 33.4% 0.1%

 
 Year Ended
December 31,
 
 
 2011 2010 
 
 (Dollars in millions)
 

Gross profit

 $515.5 $464.9 

Gross margin

  35.9% 36.5%

        Gross margin improved by 10 basisdecreased 0.6 percentage points to 33.5% in 20082011 compared to 2007. The improvement was attributable primarily2010 for a variety of reasons. First, we were unable to margin improvements in North America and Europe offset by declines in China. North America's margin improved 70 basis points to 34.4% primarily due to the price increases implemented to offset prior raw materialcompletely recover commodity cost increases in Europe and to a lesser extent,in the mix of product sold. Further, 2007 North American gross margins were negatively impacted by approximately $6.5DIY market. Second, we incurred acquisition accounting adjustments of $4.7 million or approximately 100 basis points onin connection with the prior year gross margin, for charges associated with product discontinuances and a change in estimate for workers' compensation costs. Gross margin in Europe increased to 32.3% from 31.0% primarily due to our ability to leverage additional volume from alternative energy product sales with better factory absorption levels due to the rationalization efforts made over the last two years in Italy. China gross margin deteriorated when compared to 2007 primarily due to excess capacity due to sales declines, value added tax increases, negative impact from the increaseSocla acquisition. Third, we experienced inefficiencies in the value of the Chinese yuan against the U.S. dollar and disruptions from a plant move and labor disputes.

        During 2007, we initiated a global restructuring program that was approved by our Board of Directors on October 30, 2007. The program includes plans to shut down five manufacturing facilities, right-size a sixth facility and incur costs to relocate one of our China facilities. In addition, we performed an evaluation of certain product lines in 2007. After completing this evaluation, we initiated a plan to discontinue certain product lines. In accordance with the restructuring program and product line discontinuance commenced in 2007, we anticipated spending $12.9 million. To date, we have



incurred $8.9 million of costs associated with the plans and have successfully shut down two manufacturing facilities and right sized another facility. Management is reviewing the status of the program and the timing of charges for the Europe segment. We anticipate the restructuring program will not be completed until 2010, with the expectation that our Europe segment will incur most of its costs during 2010. As such, previous estimates of savings from the programs will likely be achieved in 2010 rather than in the secondfirst half of 2009.

        The following table presents the total estimated pre-tax charges2011 as our French plant consolidation project was being completed. Fourth, productivity initiatives were offset to be incurred for the global restructuring program and product line discontinuances initiated in 2007some extent by our reportable segments and amounts charged to date:higher inbound freight costs.

Reportable Segment
 Total Spent
to Date
 
 
 (in millions)
 

North America

 $5.7 $5.8 

Europe

  3.9  0.2 

China

  3.3  2.9 
      

Total

 $12.9 $8.9 
      

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses, or SG&A expenses, for 20082011 increased $27.5$43.2 million, or 8.3%12.8%, compared to 2007.2010. The increase in SG&A expenses iswas attributable to the following:

 
 (in millions) % Change 

Organic growth

 $3.2  1.0%

Foreign exchange

  7.7  2.3 

Acquisitions

  17.8  5.4 

Disposal

  (1.2) (0.4)
      

Total

 $27.5  8.3%
      

 
 (in millions) % Change 

Organic

 $8.4  2.5%

Foreign exchange

  6.5  1.9 

Acquisitions

  28.3  8.4 
      

Total

 $43.2  12.8%
      

        The organic increase in SG&A expenses was primarily due to increased incentive compensationseparation costs and increasedof our former CEO of $6.3 million, an increase of approximately $4.4 million in variable European selling expensescosts due to increasedthe increase in year-over-year sales, volumes partiallyand an increase in IT costs of approximately $3.0 million due primarily to the implementation of a new enterprise resource planning system (ERP system) and other licensing costs, offset by decreased shipping costs and other variable North American selling expenses due to decreased sales volumes.approximately $7.0 million in lower legal costs. The increase in SG&A expenses from foreign exchange was primarily due to the appreciation of the euro yuan and Canadian dollar against the U.S. dollar. The increase inAcquired SG&A expenses from acquisitions was duecosts related to the inclusion of BlücherSocla, Austroflex and Topway.BRAE acquisitions. Total SG&A expenses, as a percentage of sales, was 24.7%remained constant at 26.4% in 2008 compared to 24.1% 2007.both 2011 and 2010.

        Restructuring and Other (Income) Charges.    In 2008,2011, we recorded $5.6a net charge of $8.8 million primarily for severance and other costs incurred as part of our previously announced restructuring programs, as compared to $12.6 million for severance, asset write-downs2010. For a more detailed description of our current restructuring plans, see Notes 4 and accelerated depreciation5 of Notes to Consolidated Financial Statements in North America, China and Europe. In 2007, we recorded $3.2 million for asset write-downs, accelerated depreciation and severance in North America and China.this Annual Report on Form 10-K.

        Goodwill and Other Long-Lived Asset Impairment Charge.Charges.    In 2011, we recorded asset impairment charges of $17.4 million, including $14.8 million for impairment charges on long-lived assets at Austroflex, $1.4 million in goodwill and long-lived intangible asset impairments at BRAE and


$1.2 million of impairment charges in certain European trade names. The long-lived asset and goodwill impairment chargeimpairments were based on historical results being below our expectations, uncertain economic conditions in 2008 of approximately $22.0 millionEurope related to oneAustroflex, and a reduction in the expected future cash flows to be generated by these entities. In 2010, the impairment charges of our North American reporting units (Water Quality).$1.4 million relate to write-downs of certain trade names in Europe. See Note 2 of notesNotes to consolidated financial statementsConsolidated Financial Statements in this Annual Report on Form 10-K, for additional information regarding these impairments.

        Gain on Disposal of Business.    In 2011, we recorded a net gain of approximately $7.7 million relating primarily to the impairment.recognition of currency translation adjustments resulting from the sale of TWVC.


        Operating Income.    Operating income by geographic segment for 20082011 and 20072010 was as follows:

 
 Years Ended  
  
 
 
  
 % Change to
Consolidated
Operating
Income
 
 
 December 31,
2008
 December 31,
2007
 Change 
 
 (Dollars in millions)
 

North America

 $67.8 $93.3 $(25.5) (20.3)%

Europe

  65.7  53.6  12.1  9.6 

China

  (5.7) 7.9  (13.6) (10.8)

Corporate

  (27.2) (29.1) 1.9  1.5 
          

Total

 $100.6 $125.7 $(25.1) (20.0)%
          

 
 Year Ended  
  
 
 
  
 % Change to
Consolidated
Operating
Income
 
 
 December 31,
2011
 December 31,
2010
 Change 
 
 (Dollars in millions)
 

North America

 $112.0 $106.4 $5.6  4.9%

Europe

  28.7  43.7  (15.0) (13.1)

Asia

  12.2  (0.5) 12.7  11.1 

Corporate

  (35.8) (35.4) (0.4) (0.4)
          

Total

 $117.1 $114.2 $2.9  2.5%
          

        The change in operating income iswas attributable to the following:

 
  
  
  
  
  
 Change
As a % of Consolidated
Operating Income
 Change
As a % of Segment
Operating Income
 
 
 North
America
 Europe China Corp. Total North
America
 Europe China Corp. Total North
America
 Europe China Corp. 
 
 (Dollars in millions)
 

Organic growth

 $(2.1)$5.7 $(16.7)$1.9 $(11.2) (1.6)% 4.5% (13.3)% 1.5% (8.9)% (2.3)% 10.6% (211.4)% 6.5%

Foreign exchange

    3.9  (0.4)   3.5    3.1  (0.2)   2.9    7.3  (5.1)  

Acquisitions

  (0.6) 2.7      2.1  (0.4) 2.1      1.7  (0.6) 5.0     

Disposal

      0.8    0.8      0.6    0.6      10.1   

Restructuring, goodwill and other

  (22.8) (0.2) 2.7    (20.3) (18.3) (0.1) 2.1    (16.3) (24.4) (0.4) 34.2   
                              

Total

 $(25.5)$12.1 $(13.6)$1.9 $(25.1) (20.3)% 9.6% (10.8)% 1.5% (20.0)% (27.3)% 22.5% (172.2)% 6.5%
                              

 
  
  
  
  
  
 Change as a % of
Consolidated Operating Income
 Change as a % of
Segment Operating Income
 
 
 North
America
 Europe Asia Corp. Total North
America
 Europe Asia Corp. Total North
America
 Europe Asia Corp. 
 
 (Dollars in millions)
 

Organic

 $1.8 $(6.2)$4.4 $(0.4)$(0.4) 1.6% (5.4)% 3.8% (0.4)% (0.4)% 1.7% (14.2)% 880.0% (1.1)%

Foreign exchange

  0.7  2.6  0.2    3.5  0.6  2.3  0.2    3.1  0.7  6.0  40.0   

Acquisitions

  0.1  2.9  (0.2)   2.8  0.1  2.5  (0.2)   2.4  0.1  6.6  (40.0)  

Restructuring, impairment charges and other

  3.0  (14.3) 8.3    (3.0) 2.6  (12.5) 7.3    (2.6) 2.8  (32.7) 1,660.0   
                              

Total

 $5.6 $(15.0)$12.7 $(0.4)$2.9  4.9% (13.1)% 11.1% (0.4)% 2.5% 5.3% (34.3)% 2,540.0% (1.1)%
                              

        The decrease in consolidated organic operating income was due primarily to underutilization of capacity,a reduction in both Chinagross margins and to a lesser extent,an increase in North America caused by recessionary unit volume declines and one-off events in China such as the labor strike, a plant move and natural disasters. Also, SG&A expenses, such as salaries, product liabilityfor reasons discussed above. Acquired operating income relates to the Socla, Austroflex and other fixed spending increased. These items were partially offset by higher sales and better productivity in Europe and reductions in certain SG&A expenses such as shipping, pension costs and bad debts. Corporate costs decreased as the result of lower benefit costs, including lower stock based compensation and reduced costs from our nonqualified deferred compensation plan, and lower costs related to our Sarbanes Oxley compliance efforts and reduced legal costs.

        The Blücher acquisition accounts for the net increase in operating profits fromBRAE acquisitions.

        The net increase in operating income from foreign exchange was primarily due to the appreciation of the euro and Canadian dollar against the U.S. dollar. We cannot predict whether these currencies will continue to appreciate or depreciate against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our operating income.

        Interest Income.    Interest income decreased $9.4 million, or 64.8%, in 2008 compared to 2007, primarily due to cash used to fund the Blücher acquisition and the stock buy-back program initiated in November 2007, as well as, a lower interest rate environment in 2008 as compared to 2007.

        Interest Expense.    Interest expense decreased $0.7increased $3.0 million, or 2.6%13.2%, in 20082011 compared to 2007,2010, primarily due to lower outstanding balances on the revolving credit facility partially offset by an increase in the average variable rates chargedamounts outstanding during the year on theour revolving credit facility.facility that was used to partially finance the Socla acquisition and interest incurred for all 2011 from the June 2010 issuance of $75.0 million of senior notes. See Note 11 of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, for additional information regarding financing arrangements.

        Other, (Income) Expense.net.    Other, expensenet increased $6.8$2.9 million or 295.7%, in 20082011 compared to 2007,2010, primarily due tobecause foreign currency transactiontransactions resulted in net losses losses on metal commodity transactions and negative changes in asset valuation of our nonqualified deferred compensation plan. Foreign currency transaction losses increased2011, while in China, Europe and Canada in 2008 as compared to 2007.2010 net gains were recognized.


        Income Taxes.    Our effective tax rate for continuing operations increaseddecreased to 34.6% for 200829.3% in 2011 from 31.8% for 2007.33.2% in 2010. The main driverprimary cause of the increasedecrease was goodwill impairment. A portion of the goodwill relates to stock acquisitions, which when impaired is not tax deductible. Our European effective rate declined due to provision releases and favorablethe tax treatments related tobenefit realized in connection with the Blücher acquisition financing.disposition of our TWVC facility in China.

        Net Income From Continuing Operations.Operation.    IncomeNet income from continuing operations in 2008 decreased $30.3for 2011 was $64.7 million, or 39.0%, to $47.3 million, or $1.28$1.73 per common share, from $77.6compared to $63.1 million, or $1.99$1.69 per common share, for 2007, in each case, on a diluted basis. Repurchased shares had an accretive impact of $0.07 per common share in 2008. Income from continuing operations included2010. Results for 2011 include an after-tax goodwill impairment charge of $17.3$6.6 million, or $0.47$0.18 per common share, for 2008. Income from continuing operations for 2007 includes a tax refundrestructuring and other charges compared to an after-tax restructuring and other charge of $1.9$11.2 million, or $0.05$0.29 per common share. Income from continuing operationsshare, for 2008 and 2007 included costs, net of tax, from our restructuring plan, reduction-in-force and product line discontinuances2010. Additionally, 2011 results include an after-tax charge of $3.9 million, or $0.10$0.11 per common share, and $5.1related to our former Chief Executive Officer's separation agreement. Results for 2011 include an after-tax charge of $13.0 million, or $0.13$0.35 per common share, respectively.for goodwill and asset impairment charges compared to an after-tax asset impairment charge of $1.2 million, or $0.03 per common share, for 2010. Results for 2011 include an after-tax gain related to the sale of TWVC of $11.4 million, or $0.30 per common share. The appreciation of the euro Chinese yuan and Canadian dollar against the U.S. dollar in 2011 resulted in a positive impact on income from continuingour operations of $0.07 per common share for 20082011 compared to the comparable period last year.2010. We cannot predict whether the euro, Canadian dollar or Chinese yuan will appreciate or depreciate against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our net income.

        LossIncome (Loss) From Discontinued Operations.    LossIncome from discontinued operations in 2008 and 20072011 was $0.7primarily attributable to a reserve adjustment of $1.7 million, or $0.02$0.05 per common share, related to the FCPA investigation originally recorded in 2010. The adjustment reflects the final disposition of the FCPA investigation. See Notes 3 and $0.2 million, or $0.01 per common share, on a diluted basis14 of Notes to Consolidated Financial Statements for the comparable period. The losses for 2008 and 2007 were primarily attributable to increased legal fees associated with the James Jones Litigation, as described in Part I, Item 1, "Business-Product Liability, Environmental and Other Litigation Matters." The 2007 loss was partially offset by reserve adjustments.additional discussion of this matter.

Year Ended December 31, 20072010 Compared to Year Ended December 31, 20062009

        Net Sales.    Our net sales in each of our three geographicthese segments for the years ended December 31, 20072010 and 20062009 were as follows:

 
 Year Ended
December 31, 2007
 Year Ended
December 31, 2006
  
  
 
 
  
 Change to
Consolidated
Net Sales
 
 
 Net Sales % Sales Net Sales % Sales Change 
 
 (Dollars in millions)
 

North America

 $871.0  63.0%$821.3  66.7%$49.7  4.0%

Europe

  452.6  32.7  367.5  29.9  85.1  6.9 

China

  58.7  4.3  42.0  3.4  16.7  1.4 
              

Total

 $1,382.3  100.0%$1,230.8  100.0%$151.5  12.3%
              

 
 Year Ended
December 31, 2010
 Year Ended
December 31, 2009
  
  
 
 
  
 Change to
Consolidated
Net Sales
 
 
 Net Sales % Sales Net Sales % Sales Change 
 
 (Dollars in millions)
 

North America

 $785.5  61.6%$738.5  60.2%$47.0  3.8%

Europe

  468.3  36.8  466.5  38.1  1.8  0.2 

Asia

  20.8  1.6  20.9  1.7  (0.1)  
              

Total

 $1,274.6  100.0%$1,225.9  100.0%$48.7  4.0%
              

        The increasechange in net sales iswas attributable to the following:

 
  
  
  
  
 Change
As a % of Consolidated
Net Sales
 Change
As a % of Segment
Net Sales
 
 
 North
America
 Europe China Total North
America
 Europe China Total North
America
 Europe China 
 
 (Dollars in millions)
 

Organic growth

 $41.0 $13.7 $8.5 $63.2  3.3% 1.1% 0.7% 5.1% 5.0% 3.7% 20.3%

Foreign exchange

  3.9  34.1  2.4  40.4  0.3  2.8  0.2  3.3  0.5  9.3  5.8 

Acquisitions

  4.8  37.3  5.8  47.9  0.4  3.0  0.5  3.9  0.6  10.2  13.8 
                        

Total

 $49.7 $85.1 $16.7 $151.5  4.0% 6.9% 1.4% 12.3% 6.1% 23.2% 39.9%
                        


 
  
  
  
  
 Change As a % of
Consolidated Net Sales
 Change As a % of
Segment Net Sales
 
 
 North
America
 Europe Asia Total North
America
 Europe Asia Total North
America
 Europe Asia 
 
 (Dollars in millions)
 

Organic

 $38.8 $11.7 $(0.2)$50.3  3.2% 1.0% % 4.2% 5.3% 2.5% (1.0)%

Foreign exchange

  7.0  (20.5) 0.1  (13.4) 0.6  (1.7)   (1.1) 0.9  (4.4) 0.5 

Acquisitions

  1.2  10.6    11.8    0.9    0.9  0.2  2.3   
                        

Total

 $47.0 $1.8 $(0.1)$48.7  3.8% 0.2% % 4.0% 6.4% 0.4% (0.5)%
                        

        The organic growth inOrganic net sales in 2010 into the North AmericaAmerican wholesale market increased by $34.6 million or 6.1% compared to 2009. This increase was primarily due to increased unit selling prices and increased unit sales of certain product lines into the wholesale market. Our sales into the wholesale market in 2007, excluding the sales from the acquisition of Calflex Manufacturing, Inc. (Calflex) and Topway, grew by 7.7% compared to 2006. This was primarily due to increased sales of our plumbing and heating and backflow products. Ourproduct lines. Organic sales into the North American DIY market in 2007 decreased by 4.4%2010


increased $4.2 million or 2.5% compared to 20062009, primarily from increased product sales volume associated with repair and remodeling activity and new product introductions.

        Organic net sales increased in the European wholesale market by $12.9 million or 5.3% compared to 2009. This increase was primarily due to a stronger repair and remodeling market, strong sales in our discontinuing certaindrain product line and higher sales into Eastern Europe. Organic sales into the European OEM market in 2010 were essentially flat with 2009 primarily due to increased sales in hydronic under-floor manifold packages offset by heat pump and solar packages whose lower margin product lines,sales were driven by renewable energy subsidies which had expired. Organic sales into the European DIY market in 2010 increased $1.5 million or 6.4% compared to 2009, primarily from initial new store sales to a major retail customer.

        The net decrease in sales due to foreign exchange was primarily due to the depreciation of the euro, partially offset by price increases and new product rollouts.the appreciation of the Canadian dollar against the U.S. dollar.

        The acquiredAcquired net sales growth in net sales inEurope and North America was due to the inclusion of net sales of Calflex, acquired on June 2, 2006,Austroflex and Topway, acquired on November 9, 2007.

        The organic sales growth in Europe was broad-based, especially in Eastern Europe and in the OEM market, which was partially offset by a weak German market. Our sales into the wholesale and OEM markets in 2007, excluding the sales from the acquisitions of ATS Expansion Group (ATS), Kim Olofsson Safe Corporation (Kimsafe) and Black Teknigas, Limited (Teknigas), grew by 3.1% and 4.4%, respectively, compared to 2006.

        The acquired growth in net sales in Europe was due to the inclusion of the net sales of ATS, acquired on May 19, 2006, Kimsafe, acquired on June 7, 2006, and Teknigas, acquired on August 14, 2006.

        The organic sales growth in China was primarily due to increased export sales to Europe, increased sales into the domestic Chinese markets and the elimination of the one-month reporting lag in two of our Chinese entities.

        The acquired growth in net sales in China was due to the inclusion of net sales of Changsha Valve Works (Changsha), acquired on April 26, 2006.

        The increases in net sales due to foreign exchange in North America, Europe and China were primarily due to the appreciation of the Canadian dollar, euro and yuan, respectively, against the U.S. dollar.BRAE, respectively.

        Gross Profit.    Gross profit and gross profit as a percent of net sales (gross margin)margin for 20072010 and 20062009 were as follows:

 
 Year Ended
December 31,
  
 
 
 Point
Change
 
 
 2007 2006 
 
 (dollars in millions)
  
 

Gross profit

 $461.6 $425.0    

Gross margin

  33.4% 34.5% (1.1%)

 
 Year Ended
December 31,
 
 
 2010 2009 
 
 (Dollars in millions)
 

Gross profit

 $464.9 $435.1 

Gross margin

  36.5% 35.5%

        Gross margin decreasedincreased 1.0 percentage point in 20072010 compared to 20062009. North America's gross margin improvement was primarily dueattributable to increased material costs,sales volumes, better absorption at the write-off of inventory related to the discontinuance of certain product linesfactories and an increase inproductivity gains from our workers' compensation reserve primarily due to a change in estimate. The North American margin for 2007 was affected by a charge related to our discontinuance of certain product linesLean and forSix Sigma cost increases for copper-based alloys and stainless steel products, which exceeded realized sales price increases for most of the year. The European margin remained relatively flat primarily due to higher margins contributed by price increases that weresavings initiatives, partially offset by increased materialraw materials costs and a shift in sales to lower margin products primarily in the OEM market. Our China segment's gross margin decreased primarily due to higher material costs, underutilized capacity in certain locations primarilyinefficiencies due to the relocation of our joint venture facility, a chargemanufacturing operations related to our restructuring program in the U.S. Europe's gross margin remained relatively flat as a result of better product mix, with the discontinuance of certain product lines, value added tax increasesvarious low-margin products, increased sales volumes and a shiftbetter absorption at the factories was offset by increased commodity costs and inefficiencies from our restructuring program in product mix.France.


        Selling, General and Administrative Expenses.    SG&A expenses for 20072010 increased $32.5$13.2 million, or 10.8%4.1%, compared to 2006.2009. The increase in SG&A expenses iswas attributable to the following:

 
 (in millions) % Change 

Organic growth

 $13.1  4.4%

Foreign exchange

  7.9  2.6 

Acquisitions

  11.5  3.8 
      

Total

 $32.5  10.8%
      

 
 (in millions) % Change 

Organic

 $12.4  3.8%

Foreign exchange

  (3.3) (1.0)

Acquisitions

  4.1  1.3 
      

Total

 $13.2  4.1%
      

        The organic increase in SG&A expenses was primarily due to legal, due diligence and other acquisition costs of $8.1 million, increased product liabilitypersonnel-related costs increased stock-based compensation costsof $4.4 million and increased variable selling expenses due to increasedhigher sales volumes of $3.4 million, partially offset by decreased incentive compensation costs.reduced product liability costs of $3.5 million. Legal costs were higher in 2010 as a result of a legal settlement we entered into in 2009 pursuant to which we received $4.1 million, which reduced legal expense. The increasedecrease in SG&A expenses from foreign exchange was primarily due to the appreciationdepreciation of the euro Canadian dollar and the yuan against the U.S. dollar. The increase in SG&A expenses from acquisitions was due to the inclusion of Changsha, ATS, Calflex, Watts Valve (Ningbo) Co, Ltd. (Ningbo), Kimsafe, Teknigas and Topway. Total SG&A expenses, as a percentage of sales, were 24.1%remained constant at 26.4% in 2007 compared to 24.4% 2006.each of 2010 and 2009.

        Restructuring and Other (Income) Charges.    In 2007,2010, we recorded $3.2a charge of $12.6 million primarily for severance and other costs incurred as part of our previously announced restructuring programs, as


compared to $17.2 million for asset write-downs, accelerated depreciation2009. Included in the 2009 restructuring and severance in North Americaother charges was a $1.1 million gain from the 2008 disposition of Tianjin Tanggu Watts Valve Co. Ltd. (TWT). The gain was deferred until all legal and China. In 2006, we recorded income of $5.7 million primarily due to a gain of approximately $8.2 million relatedregulatory matters relating to the sale of two buildingsTWT were resolved. For a more detailed description of our current restructuring plans, see Notes 4 and 5 of Notes to Consolidated Financial Statements in Italy partially offset by a charge of $2.5this Annual Report on Form 10-K.

        Goodwill and Other Long-Lived Asset Impairment Charges.    We recorded $1.4 million primarilyand $3.3 million in 2010 and 2009, respectively, for severance costsintangible impairment charges related to our European restructuring programs.certain trademarks and technology. See Note 2 of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, for additional information regarding these impairments.

        Operating Income.    Operating income by geographic segment for 20072010 and 20062009 was as follows:

 
 Years Ended  
  
 
 
  
 % Change to
Consolidated
Operating
Income
 
 
 December 31,
2007
 December 31,
2006
 Change 
 
 (Dollars in millions)
 

North America

 $93.3 $98.5 $(5.2) (4.0)%

Europe

  53.6  50.0  3.6  2.8 

China

  7.9  7.2  0.7  0.5 

Corporate

  (29.1) (25.2) (3.9) (3.0)
          

Total

 $125.7 $130.5 $(4.8) (3.7)%
          

 
 Years Ended  
  
 
 
  
 % Change to
Consolidated
Operating
Income
 
 
 December 31,
2010
 December 31,
2009
 Change 
 
 (Dollars in millions)
 

North America

 $106.4 $78.6 $27.8  30.2%

Europe

  43.7  51.0  (7.3) (7.9)

Asia

  (0.5) (6.6) 6.1  6.6 

Corporate

  (35.4) (30.8) (4.6) (5.0)
          

Total

 $114.2 $92.2 $22.0  23.9%
          

        The change in operating income iswas attributable to the following:

 
  
  
  
  
  
 Change
As a % of Consolidated
Operating Income
 Change
As a % of Segment
Operating Income
 
 
 North
America
 Europe China Corp. Total North
America
 Europe China Corp. Total North
America
 Europe China Corp. 
 
 (Dollars in millions)
 

Organic growth

 $(1.3)$0.9 $(1.5)$(3.9)$(5.8) (1.0)% 0.7% (1.3)% (3.0)% (4.6)% (1.4)% 1.8% (20.8)% (15.5)%

Foreign exchange

  0.9  4.0  0.4    5.3  0.7  3.1  0.3    4.1  0.9  8.0  5.5   

Acquisitions

  (1.3) 4.8  0.8    4.3  (1.0) 3.6  0.7    3.3  (1.3) 9.6  11.1   

Restructuring/other

  (3.5) (6.1) 1.0    (8.6) (2.7) (4.6) 0.8    (6.5) (3.5) (12.2) 13.9   
                              

Total

 $(5.2)$3.6 $0.7 $(3.9)$(4.8) (4.0)% 2.8% 0.5% (3.0)% (3.7)% (5.3)% 7.2% 9.7% (15.5)%
                              

 
  
  
  
  
  
 Change as a % of
Consolidated Operating Income
 Change as a % of
Segment Operating Income
 
 
 North
America
 Europe Asia Corp. Total North
America
 Europe Asia Corp. Total North
America
 Europe Asia Corp. 
 
 (Dollars in millions)
 

Organic

 $24.7 $0.5 $(0.7)$(4.8)$19.7  26.8% 0.5% (0.7)% (5.2)% 21.4% 31.4% 1.0% (10.6)% 15.6%

Foreign exchange

  1.4  (2.6)     (1.2) 1.5  (2.8)     (1.3) 1.8  (5.1)    

Acquisitions

  (0.6) (1.4)     (2.0) (0.7) (1.5)     (2.2) (0.7) (2.7)    

Restructuring, impairment charges, and other

  2.3  (3.8) 6.8  0.2  5.5  2.6  (4.1) 7.3  0.2  6.0  2.9  (7.5) 103.0  (0.7)
                              

Total

 $27.8 $(7.3)$6.1 $(4.6)$22.0  30.2% (7.9)% 6.6% (5.0)% 23.9% 35.4% (14.3)% 92.4% 14.9%
                              

        The decreaseincrease in consolidated organic operating income inwas due primarily to increased unit volume sales and stronger gross margins, partially offset by increased SG&A expenses. The North America margin increase was primarily due to increased material costs partially offset by unit price increases, a net increase insales volumes, better factory absorption levels and the impact of cost savings initiatives. In 2009, our workers' compensation reserve primarily due to a change in estimate and increased product liability costs, partially offset by decreased incentive compensation costs. In 2007, wecorporate segment recorded a chargethe recovery of $3.1 million related to our discontinuance of certain product lines and $0.4 million for primarily for severance costs related to our global restructuring program.


        The acquired decrease was primarily due to the amortization of certain costs associated with the acquisition of Topway.

        Europe's organic growth in operating income was due to our ability to leverage SG&Apast legal expenses, increased selling prices partially offset by increased material costs and a shift in sales to lower margin products primarily in the OEM market. In 2007, wewhich did not record any costs associated with restructuring compared to a gain of $6.0 million for the same periodrecur in 2006. We recorded a gain of $8.2 million for the building sales in Italy partially offset by $2.2 million of primarily severance costs.

        The acquired growth in Europe was due to the inclusion of the operating income from ATS, Kimsafe and Teknigas.

        The decrease in organic operating income in China was primarily attributable to decreased production levels at our wholly owned manufacturing plants. The acquired growth in China was due to the inclusion of the operating income of Changsha and Ningbo. In 2007, we recorded $3.3 million for asset write-downs, accelerated depreciation and severance related to our global restructuring program and $0.7 million related to our discontinuance of certain product lines. The elimination of a one-month reporting lag in two of our Chinese entities did not have a material impact on China's operating income.

        The decrease in organic operating income in Corporate was primarily attributable to increased stock-based compensation costs and legal costs, partially offset by decreased incentive compensation costs.2010.

        The net increasedecrease in operating income from foreign exchange was primarily due to the depreciation of the euro against the U.S. dollar, partially offset by the appreciation of the euro, Canadian dollar and yuan against the U.S. dollar.

        Interest Income.    Interest income increased $9.5 million, or 190.0%, in 2007 compared to 2006, primarily due to the investment of the net proceeds of approximately $219.0 million from the public offering of 5.75 million shares of our Class A Common Stock in November 2006.

        Interest Expense.    Interest expense increased $4.8$0.8 million, or 21.7%3.6%, in 20072010 compared to 2006,2009, primarily due to our April 27, 2006the issuance of $225.0$75.0 million 5.85%of senior notes due in 2016 and an increase in the average variable rates charged on the revolving credithigher facility partially offset by decreased debt levels for acquisitions.

        Effective July 1, 2005, we entered into an interest rate swap for a notional amount of €25.0 million outstandingfees on our revolving credit facility. We swapped an adjustable rateagreement partially offset by the payment of three month EURIBOR plus 0.6%$50.0 million of outstanding notes. See Note 10 of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, for a fixed rate of 3.02%. We recorded a reduction to interest expense of approximately $0.7 million to recognize the fair value of the swap for 2006. The swap was terminated on October 3, 2006.additional information regarding financing arrangements.


        Other, (Income) Expense.net.    Other, (income) expensenet increased $3.2$0.9 million, or 355.6%75.0%, in 20072010 compared to 2006,2009, primarily due tobecause foreign currency movements and losses on forward currency contracts. Foreign currencytransactions resulted in net gains in 2010, while in 2009 net losses were recorded in Europe, Canada and China in 2007, whereas foreign currency gains were recorded in 2006.

        Minority interest.    Minority interest increased $1.0 million, or 55.6%, for 2007 compared to 2006, primarily due to the credit recorded for the 40% liability of our joint venture partner's share in the recording of the $2.4 million TWT restructuring costs.recognized.

        Income Taxes.    Our effective tax rate for continuing operations decreased to 31.8%33.2% in 20072010 from 33.6%43.3% in 2006.2009. The decrease was primarily due to reversal of a one-time benefit associated withvaluation allowance in Europe recorded during 2010. Also, in 2009 we had a refundsignificant write-down of withholding taxesassets at one of our China facilities on which we derived no tax benefit. Additionally, we recorded the reversal of previously recognized tax benefits in Italy andChina in 2006 the recording of higher taxes on the sale of two buildings.2009. These China-related items did not recur in 2010. This decreasefavorable impact was partially offset by higher European taxes due to mix of income by country and recognition of tax expense for the recordingrepatriation of a $3.2 million valuation allowance onearnings of TWVC in China upon our decision to dispose of the deferred tax assets of our 60% owned Chinese joint venture.entity.

        Net Income From Continuing Operations.    Income from continuing operations in 2007 increased $0.5 million, or 0.6%, to $77.6 million, or $1.99 per common share, from $77.1 million, or $2.29 per



common share, for 2006, in each case, on a diluted basis. IncomeNet income from continuing operations for 2007 included a tax refund of $1.92010 was $63.1 million, or $0.05 per common share. Income from continuing operations for 2007 and 2006 included costs, net of tax, from our restructuring plan and product line discontinuances of $5.1 million, or $0.13$1.69 per common share, and included income, net of tax, of $1.5compared to $41.0 million, or $0.04$1.10 per common share, for 2009. Results for 2010 include an after-tax charge of $11.2 million, or $0.29 per common share, for restructuring and other charges related primarily to severance and accelerated depreciation compared to an after-tax restructuring and other charge of $18.1 million, or $0.49 per common share, for 2009. The release of the valuation allowance on net operating losses in Europe as noted above contributed a tax benefit of $0.08 per common share to 2010. Results for 2010 and 2009 included a non-cash net after-tax charge of $0.9 million, or $0.03 per share, respectively. In 2006, the gains on the sales of our buildings in Italy resulted in an after-tax gain of $5.1and $2.6 million, or $0.15$0.07 per share.share, respectively, to write off certain intangible assets. The appreciationdepreciation of the euro, Chinese yuan andpartially offset by the appreciation of Canadian dollar against the U.S. dollar, resulted in a positivenegative impact on income from continuingour operations of $0.09$0.04 per common share for 20072010 compared to the comparable period last year.

        Additionally, 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 interest earned on the net proceeds provided approximately $7.1 million in after-tax income in 2007. The issuance of an additional 5.75 million shares had a dilutive impact on earnings per share of $0.11 per share in 2007, after considering the interest income from the net proceeds.2009.

        LossIncome (Loss) From Discontinued Operations.    LossThe loss from discontinued operations in 2007 and 20062010 was $0.2 million, or $0.01 per common share, and $3.4 million, or $0.10 per common share, on a diluted basis for the comparable period. The losses for 2007 and 2006 were primarily attributable to increased deductible costs in 2006estimated profits disgorgement and legal fees associated withcosts related to the FCPA investigation of our former subsidiary in China. The loss from discontinued operations in 2009 was primarily attributable to the deconsolidation of TEAM and the loss on the disposal and loss from operations of CWV offset by the resolution of the James Jones Litigation as described in Part I, Item 1, "Business-Product Liability, Environmental and Other Litigation Matters." The 2007 loss was partially offset by reserve adjustments.Note 3 of Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

        We believe that effectively managing cash is necessary given the uncertainty in the current credit markets. To achieve our cash management goals and manage any potential downside liquidity events, we have taken steps to control spending, increase productivity, reduce net working capital levels, control capital expenditures and to spend more conservatively on acquisitions. With available cash of $165.6 million at December 31, 2008, available capacity on our line of credit as discussed below, continued working capital management focus, no large debt payments due until 2010, and with spending and cost-cutting programs in place, we believe that we are well positioned to transition through what will be a challenging 2009. There are two recent negative developments related to inventory that could affect 2009 cash flows. We have recently experienced de-stocking issues within our customer base, which delay our ability to sell inventory. Further, more of our customers are adopting just-in-time inventory techniques to minimize their inventory investment, which puts pressure on our plants to hold inventory to meet expected near-term customer demand. Both these developments could affect our ability to reduce inventory levels during 2009 and, therefore could reduce our cash flows. Also, we may have to consider external sources of financing for any large future acquisitions.2011 Cash Flows

        In 2008,2011, we generated $146.4$128.2 million of cash from operating activities as compared to $91.7$113.4 million in 2007. With management's enhanced focus in 2008 on working2010. We generated approximately $106.3 million of free cash flow (a non-GAAP financial measure, which we reconcile below, defined as net cash provided by continuing operating activities minus capital management, net working capitalexpenditures plus proceeds from sale of assets), compared to free cash outflows have decreased from $25.1flow of $91.0 million in 2007, to2010. Free cash flow as a net working capital cash inflowpercentage of $43.4 million in 2008, a $68.5 million positive change. Better overall management of our inventory, accounts receivable and accounts payable drove the improvement in working capital. This change was offset to some extent by lowernet income from continuing operations.operations was 164.3% in 2011 as compared to 144.2% in 2010.

        WeIn 2011, we used $172.2$188.3 million of net cash forfrom investing activities in 2008.primarily for the purchase of Socla and for capital equipment. We usedanticipate investing approximately $167.9 million of net cash to fund a current year acquisition and spent $9.3 million for acquisition costs related to prior years acquisitions. We received proceeds of $33.3 million from the sale of auction rate securities. We invested $26.6$36.0 million in capital equipment as part of our ongoing commitmentin 2012 to improve our manufacturing capabilities. We expect to invest approximately $27.0 in capital equipment in 2009.

        As of December 31, 2008,In 2011, we held $6.0 million in investments with an auction reset feature, or auction rate securities. Since December 31, 2007, we have reduced our exposure to auction rate



securities by $30.6 million. We recorded an impairment of approximately $2.4 million on the remaining securities in other expense in the Consolidated Statement of Operations, as the decline in fair value is no longer considered to be temporary. At the time of purchase, all the auction rate securities carried an AAA credit rating. The auction rate securities we currently hold are all long-term debt obligations secured by municipal bonds and student loans, and carry an AA or better credit rating.

        Liquidity for these auction rate securities (ARS) is typically provided by an auction process, which allows holders to sell their notes, and resets the applicable interest rate at pre-determined intervals, usually every 7 to 35 days. Each of the auction rate securities in our investment portfolio as of December 31, 2008 has experienced failed auctions. There is no assurance that future auctions for these securities will succeed. During the fourth quarter of 2008, the Company and its broker elected to participate in a settlement offer by UBS AG (UBS). Under the terms of the settlement, the Company and its broker were issued rights by UBS. Each right entitles the holder to sell the underlying ARS at par to UBS at any time during the period June 30, 2010, through July 2, 2012. UBS could elect at any time from the settlement through the expiration of the settlement agreement to purchase the ARS, in which case UBS would be required to pay par value for the ARS. We have determined that the rights are a separate investment and have recorded the value of approximately $2.3 million in other income in our Consolidated Statement of Operations. We have classified the investment in ARS and the UBS rights as long-term investments as we can not predict if UBS will purchase or sell the ARS before the earliest date at which we can require UBS to purchase the ARS at par.

        We used $92.4$23.9 million of net cash from financing activities in 2008. This wasactivities. Borrowings and repayments primarily duerelated to payments for our stock repurchase program, payments of debt and dividend payments, partially offset by increased borrowingsfunds borrowed under our credit agreement for the purchase of Socla and then partially repaid. Other cash outflows included $27.2 million used to repurchase one million shares of Class A common stock during 2011 and for $16.3 million of dividend payments.

        On June 18, 2010, we entered into a credit agreement (the Credit Agreement) among the Company, certain subsidiaries of the Company who become borrowers under the Credit Agreement, Bank of America, N.A., as Administrative Agent, swing line lender and letter of credit issuer, and the other lenders referred to therein. The Credit Agreement provides for a $300 million, five-year, senior unsecured revolving credit facility which may be increased by an additional $150 million under certain


circumstances and subject to the terms of the Credit Agreement. The Credit Agreement has a sublimit of up to $75 million in letters of credit.

        Our $350.0 million revolving credit facility with a syndicate of banks is being used to support our acquisition program, working capital requirements and for general corporate purposes. Outstanding indebtednessBorrowings outstanding under the revolving credit facility bearsCredit Agreement bear interest at a fluctuating rate determined byper annum equal to (i) in the typecase of loanEurocurrency rate loans, the British Bankers Association LIBOR rate plus an applicable marginpercentage, ranging from 1.70% to 2.30%, determined by reference to our debt rating, depending onconsolidated leverage ratio plus, in the applicablecase of certain lenders, a mandatory cost calculated in accordance with the terms of the Credit Agreement, or (ii) in the case of base rate loans and swing line loans, the highest of (a) the federal funds rate plus 0.5%, (b) the rate of interest in effect for such day as announced by Bank of America, N.A. as its "prime rate," and (c) the British Bankers Association LIBOR rate plus 1.0%, plus an applicable percentage, ranging from 0.70% to 1.30%, determined by reference to our bond rating. For 2008, the averageconsolidated leverage ratio. In addition to paying interest rate under the revolvingCredit Agreement, we are also required to pay certain fees in connection with the credit facility, for euro-based borrowings was approximately 5.2%. There were no U.S. dollar borrowings at December 31, 2008.including, but not limited to, a facility fee and letter of credit fees.

        The revolving credit facility includes operationalCredit Agreement matures on June 18, 2015. We may repay loans outstanding under the Credit Agreement from time to time without premium or penalty, other than customary breakage costs, if any, and financial covenants customary for facilitiessubject to the terms of this type, including, among others, restrictions on additional indebtedness, liens and investments and maintenance of certain leverage ratios.the Credit Agreement.

        As of December 31, 2008,2011, we held $250.6 million in cash and cash equivalents. Our ability to fund operations from this balance could be limited by the liquidity in the market as well as possible tax implications of moving proceeds across jurisdictions. Of this amount, approximately $99.3 million of cash and cash equivalents were held by foreign subsidiaries. Our U.S. operations currently generate sufficient cash flows to meet our domestic obligations. We also have the ability to borrow funds at reasonable interest rates, utilize the committed funds under our Credit Agreement or recall intercompany loans. However, if amounts held by foreign subsidiaries were needed to fund operations in the United States, we could be required to accrue and pay taxes to repatriate these funds. Such charges may include a federal tax of up to 35.0% on dividends received in the U.S., potential state income taxes and an additional withholding tax payable to foreign jurisdictions of up to 10.0%. However, our intent is to permanently reinvest undistributed earnings of foreign subsidiaries and we do not have any current plans to repatriate them to fund operations in the United States.

Covenant compliance

        Under the Credit Agreement, we are required to satisfy and maintain specified financial ratios and other financial condition tests. The financial ratios include a consolidated interest coverage ratio based on consolidated earnings before income taxes, interest expense, depreciation, and amortization (Consolidated EBITDA) to consolidated interest expense, as defined in the Credit Agreement. Our Credit Agreement defines Consolidated EBITDA to exclude unusual or non-recurring charges and gains. We are also required to maintain a consolidated leverage ratio of consolidated funded debt to Consolidated EBITDA. Consolidated funded debt, as defined in the Credit Agreement, includes all long and short-term debt, capital lease obligations and any trade letters of credit that are outstanding. Finally, we are required to maintain a consolidated net worth that exceeds a minimum net worth calculation. Consolidated net worth is defined as the total stockholders' equity as reported adjusted for any cumulative translation adjustments and goodwill impairments.


        As of December 31, 2011, our actual financial ratios calculated in accordance with our Credit Agreement compared to the required levels under the Credit Agreement were as follows:


Actual RatioRequired Level

Minimum level

Interest Charge Coverage Ratio

7.13 to 1.003.50 to 1.00

Maximum level

Leverage Ratio

1.06 to 1.003.25 to 1.00

Minimum level

Consolidated Net Worth

$940.8 million$750.0 million

        As of December 31, 2011, our actual financial ratio calculated in accordance with our senior note agreements compared to the required ratios therein was as follows:


Actual RatioRequired Level

Minimum level

Fixed Charge Coverage Ratio

5.47 to 1.002.00 to 1.00

        In addition to the above financial ratios, the Credit Agreement and senior note agreements contain affirmative and negative covenants that include limitations on disposition or sale of assets, prohibitions on assuming or incurring any liens on assets with limited exceptions and limitations on making investments other than those permitted by the agreements.

        We have several note agreements as further detailed in Note 10 of Notes to Consolidated Financial Statements. These note agreements require us to maintain a fixed charge coverage ratio of consolidated EBITDA plus consolidated rent expense during the period to consolidated fixed charges. Consolidated fixed charges are the sum of consolidated interest expense for the period and consolidated rent expense.

        As of December 31, 2011, we were in compliance with all covenants related to the revolving credit facility,Credit Agreement and had $260.0$252.4 million of unused and potentially available credit under the revolving credit facilityCredit Agreement and had $55.0$34.6 million of euro-based borrowings outstanding and $35.0 million for stand-by letters of credit outstanding on our revolving credit facility.the Credit Agreement and $13.0 million in euro based borrowings under the Credit Agreement at December 31, 2011.

        We used $0.6$1.9 million of net cash from operating activities of discontinued operations in 2008. We paid approximately $1.2 million for defense and other legal costs we incurred in2011 primarily to settle the James Jones Litigation. We also received $1.3 million for reimbursements of defense costs.FCPA investigation.

        Working capital (defined as current assets less current liabilities) as of December 31, 20082011 was $504.7$531.0 million compared to $667.0$578.4 million as of December 31, 2007. This2010. The decrease was primarily due to decreasescash used to fund the Socla acquisition offset partially by increases in cashaccounts receivable and investment securities. Cash and cash equivalents decreased to $165.6 million as of December 31, 2008 compared to $290.3 million as of December 31, 2007 primarily due to funding of acquisitions and for payments for our stock repurchase program.inventories. The ratio of current assets to current liabilities was 2.72.9 to 1 as of December 31, 20082011 compared to 3.33.1 to 1 as of December 31, 2007.2010.

2010 Cash Flows

        WeIn 2010, we generated $91.7$113.4 million of cash from operating activities as compared to $204.6 million in 2009. We generated approximately $91.0 million of free cash flow, compared to free cash flow of $181.2 million in 2009. Free cash flow as a percentage of net income from continuing operations was 144.2% in 2007. We experienced increases2010 as compared to 442.0% in inventory in North America and China.2009. The increases2009 free cash flow results were primarily due to increased raw material costs. There was also a decreaseaffected by the reduction of investment in accounts payable, accrued expensesreceivable and other liabilities, primarily in Europe and North America.inventory driven by the worldwide recession.

        In Europe, accounts payable declined in 2007 due to a decline in inventory. In North America, payments for cash compensation increased in 2007. Also, cash payments to cover income tax obligations were greater during 2007. Accounts receivable decreased in all three segments.


        We2010, we used $87.4$57.2 million of net cash forfrom investing activities primarily for the purchase of Austroflex and for capital equipment. We elected to participate in 2007. We invested $37.8 million in capital equipment as parta settlement offer from UBS, AG


(UBS) for all of our ongoing commitment to improve our manufacturing capabilities. We invested $27.5 million in investment gradeoutstanding auction rate securities.securities (ARS) investments. Under the terms of the settlement offer, we were issued rights by UBS entitling the holder to require UBS to purchase the underlying ARS at par value during the period from June 30, 2010, through July 2, 2012. We used $18.1elected to exercise this right in 2010 and received $6.5 million to fund the acquisitionsfrom UBS in settlement of Topway. We paid $4.5 million for additional acquisition costs related to prior years acquisitions.all outstanding ARS investments. In addition, during 2010, we invested in nine-month certificates of deposits totaling approximately $4.0 million.

        We used $66.5In 2010, we generated $6.9 million of net cash from financing activities primarily from issuing $75.0 million, 10-year private placement notes in 2007.June (the Notes), partially offset by the repayment of $50.0 million in private placement notes and $16.4 million of dividend payments.

        The Notes were issued pursuant to a Note Purchase Agreement (the 2010 Note Purchase Agreement). We will pay interest on the outstanding balance of the Notes at the rate of 5.05% per annum, payable semi-annually on June 18 and December 18 until the principal on the Notes shall become due and payable. We may, at our option, upon notice, subject to the terms of the 2010 Note Purchase Agreement, prepay at any time all or part of the Notes in an amount not less than $1 million by paying the principal amount plus a make-whole amount (as defined in the 2010 Note Purchase Agreement).

        The 2010 Note Purchase Agreement includes operational and financial covenants, with which we are required to comply, including, among others, maintenance of certain financial ratios and restrictions on additional indebtedness, liens and dispositions. Events of defaults under the 2010 Note Purchase Agreement include failure to comply with the financial and operational covenants, as well as bankruptcy and other insolvency events. If an event of default occurs and is continuing, then a majority of the note holders have the right to accelerate and require us to repay all the outstanding notes under the 2010 Note Purchase Agreement. In limited circumstances, such acceleration is automatic. As of December 31, 2010 we were in compliance with all covenants related to the 2010 Note Purchase Agreement.

2009 Cash Flows

        In 2009, we generated $204.6 million of cash from operating activities as compared to $145.0 million in 2008. We generated approximately $181.2 million of free cash flow, which compares favorably to free cash flow of $119.9 million in 2008. Free cash flow as a percentage of net income from continuing operations was 442.0% in 2009 as compared to 265.3% in 2008 primarily due to better working capital management, temporary decreases in commodity costs, cost containment measures and careful monitoring of our capital spending.

        In 2009, we used $21.3 million of net cash from investing activities primarily for purchases of capital equipment. We received proceeds of $1.7 million from the sale of auction rate securities. We received $1.1 million of cash for a purchase price settlement related to a prior-year acquisition. We paid $0.4 million for earn-out payments related to an acquisition from prior years.

        As of December 31, 2009, we held $5.4 million in investments in ARS with a total par value of $6.6 million. These auction rate securities were all long-term debt obligations secured by municipal bonds and student loans. During the fourth quarter of 2008, we elected to participate in a settlement offer by UBS. We exercised our rights under the settlement in June 2010.

        We used $77.2 million of net cash from financing activities during 2009. This was primarily due to payments of debt payments for our stock repurchase program and dividend payments, partially offset by increased borrowings under our line of credit and tax benefits from the exercise of stock awards.payments.

        We generated $0.1used $21.2 million of net cash from operating activities of discontinued operations in 2007. We paid approximately $0.5 million for defense costs and approximately $0.5 million for other legal costs we incurred in the James Jones Litigation. We also received $1.0 million for indemnity payments.

        We generated $83.0 million of cash from continuing operations for 2006. We experienced an increase in inventory and accounts receivable in North America, Europe and China. The increase in accounts receivable of $17.0 million was2009 primarily due to increased sales volume and selling prices. The increase in inventorythe settlement of $37.3 million was primarily due to increased cost of raw materials and planned increases in European safety stocks. The increase in inventory and accounts receivable was partially offset by increased accounts payable, accrued expenses and other liabilities of $29.5 million.

        We used $119.2 million of net cash for investing activities in 2006. We used $91.1 million to fund the acquisitions of Changsha, ATS, Calflex and Ningbo, Kimsafe and Teknigas, $1.9 million in additional costs related to 2005 acquisitions and $0.4 million to complete the planned increase of our ownership in Stern. We invested $11.8 million in investment grade auction rate securities and $44.7 million in capital equipment. Capital expenditures consisted of approximately $26.7 million for manufacturing machinery and equipment and approximately $18.0 million for the purchase of land and a building and for infrastructure improvements for a site in Italy. We subsequently entered into a sale-leaseback transaction with respect to the building. We received proceeds of $31.9 million, which primarily included $16.0$15.3 million related to the sale-leaseback in Italy and $13.4 millionJames Jones litigation. In addition, separate from the sales of two facilitiessettlement, we paid our outside counsel an additional $5.0 million for services rendered in northern Italy. We also received proceeds from two buildings held for sale, totaling approximately $2.5 million during 2006.connection with the litigation.

        We generated $331.3used $0.3 million of net cash from financinginvesting activities for 2006. On November 21, 2006, we completed a public offering of 5.75 million shares of newly issued Class A Common Stock at $40.00 per share. Net proceeds were approximately $218.6 million after taking into account underwriting discounts and expenses associated with the transaction. Additionally, we generated cash through the completion of our $225.0 million private placement of 5.85% notes in April 2006, increased borrowings under our line of credit for use in Europe and proceeds from the exercise of stock options, partially offset by payments of debt, dividend payments and debt issue costs.

        We generated $0.9 million of net cash by operations from discontinued operations in 2006. We also received approximately $2.8 million in cash for reimbursement of defense costs related to the James Jones Litigation. During 2006, we paid approximately $0.6 million for defense costs and approximately $0.5 million for indemnity costs we incurred in the James Jones Litigation.

        We had free cash flow of $120.9 million (a non-GAAP financial measure defined as net cash provided by continuing operations minus capital expenditures plus proceeds from sale of assets) during the year ended December 31, 2008 versus free cash flow of $54.5 million in 2007. This increase in 2008 compared to 2007 was2009 primarily due to growth in cash generated by operations from more focused workingpurchasing capital management. Our net debt to capitalization ratio (a non-GAAP financial measure defined as short and long-term interest-bearing liabilities less cash and cash equivalents as a percentage of the sum of short and long term interest-bearing liabilities less cash and cash equivalents plus total stockholders' equity) increased to 22.8% for 2008 from 13.5% for 2007. The increase resulted from the use of cash to purchase Blücher and for funds used in our stock repurchase program.equipment.


        We had free cash flow of $54.5 million during the year ended December 31, 2007 versus free cash flow of $70.2 million in 2006. This decrease in 2007 compared to 2006 was primarily due to the proceeds from the sale of property, plant and equipment in 2006 partially offset by growth in cash generated by operations.Non-GAAP Financial Measures

        We believe free cash flow to be an appropriate supplemental measure of our operating performance because it provides investors with a measure of our ability to generate cash, to repay debt and to fund acquisitions. We may not be comparable to otherOther companies that may define free cash flow differently. Free cash flow does not represent cash generated from operating activities in accordance with GAAP. Therefore it should not be considered an alternative to net cash provided by operations as an indication of our performance. Free cash flow should also not be considered an alternative to net cash provided by operations as defined by GAAP. The cash conversion rate of free cash flow to net income from continuing operations is also a measure of our performance in cash flow generation.

        A reconciliation of net cash provided by continuing operations to free cash flow and calculation of our cash conversion rate is provided below:

 
 Years Ended December 31, 
 
 2008 2007 2006 
 
 (in millions)
 

Net cash provided by continuing operations

 $146.4 $91.7 $83.0 

Less: additions to property, plant, and equipment

  (26.6) (37.8) (44.7)

Plus: proceeds from the sale of property, plant, and equipment

  1.1  0.6  31.9 
        

Free cash flow

 $120.9 $54.5 $70.2 
        

 
 Years Ended December 31, 
 
 2011 2010 2009 
 
 (in millions)
 

Net cash provided by continuing operations

 $128.2 $113.4 $204.6 

Less: additions to property, plant, and equipment

  (22.7) (24.6) (24.2)

Plus: proceeds from the sale of property, plant, and equipment

  0.8  2.2  0.8 
        

Free cash flow

 $106.3 $91.0 $181.2 
        

Net income from continuing operations—as reported

 $64.7 $63.1 $41.0 
        

Cash conversion rate of free cash flow to net income from continuing operations

  164.3% 144.2% 442.0%
        

        Our net debt to capitalization ratio, is also a non-GAAP financial measure used by management.management, increased to 13.9% for 2011 from 5.2% for 2010. The increase resulted from cash used for and debt incurred, as part of the Socla acquisition. Management believes it to be an appropriate supplemental measure because it helps investors understand our ability to meet our financing needs and as a basis to evaluate our financial structure. Our computation may not be comparable to other companies that may define net debt to capitalization differently.

        A reconciliation of long-term debt (including current portion) to net debt and our net debt to capitalization ratio is provided below:

 
 December 31, 
 
 2008 2007 
 
 (in millions)
 

Current portion of long-term debt

 $4.5 $1.3 

Plus: long-term debt, net of current portion

  409.8  432.2 

Less: cash and cash equivalents

  (165.6) (290.3)
      

Net debt

 $248.7 $143.2 
      

 
 December 31, 
 
 2011 2010 
 
 (in millions)
 

Current portion of long-term debt

 $2.0 $0.7 

Plus: long-term debt, net of current portion

  397.4  378.0 

Less: cash and cash equivalents

  (250.6) (329.2)
      

Net debt

 $148.8 $49.5 
      

        A reconciliation of capitalization is provided below:

 
 December 31, 
 
 2008 2007 
 
 (in millions)
 

Net debt

 $248.7 $143.2 

Total stockholders' equity

  842.4  915.5 
      

Capitalization

 $1,091.1 $1,058.7 
      

Net debt to capitalization ratio

  22.8% 13.5%
      

 
 December 31, 
 
 2011 2010 
 
 (in millions)
 

Net debt

 $148.8 $49.5 

Total stockholders' equity

  919.8  901.5 
      

Capitalization

 $1,068.6 $951.0 
      

Net debt to capitalization ratio

  13.9% 5.2%
      

Contractual Obligations

        Our contractual obligations as of December 31, 20082011 are presented in the following table:

 
 Payments Due by Period 
Contractual Obligations
 Total Less than
1 year
 1–3 years 3–5 years More than
5 years
 
 
 (in millions)
 

Long-term debt obligations, including current maturities(a)

 $414.3 $4.5 $106.5 $76.5 $226.8 

Operating lease obligations

  26.0  7.7  7.9  4.3  6.1 

Capital lease obligations(a)

  14.6  1.3  2.8  2.5  8.0 

Pension contributions

  23.8  6.3  6.1  3.1  8.3 

Interest(b)

  129.6  22.6  39.5  33.4  34.1 

Earnout payments(a)

  0.4  0.4       

Other(c)

  29.7  25.3  2.0  1.2  1.2 
            

Total

 $638.4 $68.1 $164.8 $121.0 $284.5 
            

 
 Payments Due by Period 
Contractual Obligations
 Total Less than
1 year
 1-3 years 3-5 years More than
5 years
 
 
 (in millions)
 

Long-term debt obligations, including current maturities(a)

 $399.4 $2.0 $79.3 $243.1 $75.0 

Operating lease obligations

  30.6  9.3  13.3  4.8  3.2 

Capital lease obligations(a)

  10.2  1.1  2.2  2.2  4.7 

Pension contributions

  15.0  1.0  2.0  2.2  9.8 

Interest(b)

  104.6  23.0  38.0  28.1  15.5 

Earnout payments(a)

  1.1      1.1   

Other(c)

  51.2  41.0  6.9  2.7  0.6 
            

Total

 $612.1 $77.4 $141.7 $284.2 $108.8 
            

(a)
as recognized in the consolidated balance sheet

(b)
assumes the balance on the revolving credit facility remains at $55.0$13.0 million and the interest rate remains at approximately 3.6%3.0% for the presented periods

(c)
includes commodity and capital expenditure commitments, acquisition of tekmar, CEO separation costs and other benefits at December 31, 20082011

        We maintain letters of credit that guarantee our performance or payment to third parties in accordance with specified terms and conditions. Amounts outstanding were approximately $39.3$34.9 million as of December 31, 20082011 and $45.0 million as of December 31, 2007.2010. Our letters of credit are primarily associated with insurance coverage and, to a lesser extent, foreign purchases and generally expire within one year of issuance. These instruments may exist or expire without being drawn down, therefore they do not necessarily represent future cash flow obligations.

Off-Balance Sheet Arrangements

        Except for operating lease commitments, we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Application of Critical Accounting Policies and Key Estimates

        The preparation of our consolidated financial statements in accordance with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported. A critical accounting estimate is an assumption about highly uncertain matters and could have a material effect on the consolidated financial statements if another, also reasonable, amount were used, or, a change in the estimate is reasonably likely from period to period. We base our assumptions on historical experience and on other estimates that we believe are reasonable under the circumstances. Actual results could differ significantly from these estimates. There were no changes in our accounting policies or significant changes in our accounting estimates during 2008.2011 except for a change in the amortization period of pension gains and losses as discussed below under the caption "Pension benefits".

        We periodically discuss the development, selection and disclosure of the estimates with our Audit Committee. Management believes the following critical accounting policies reflect its more significant estimates and assumptions.


Revenue recognition

        We recognize revenue when all of the following criteria are met: (1) we have entered into a binding agreement, (2) the product has shipped and title has passed, (3) the sales price to the customer



is fixed or is determinable and (4) collectibilitycollectability is reasonably assured. We recognize revenue based upon a determination that all criteria for revenue recognition have been met, which, based on the majority of our shipping terms, is considered to have occurred upon shipment of the finished product. Some shipping terms require the goods to be received by the customer before title passes. In those instances, revenues are not recognized until the customer has received the goods. We record estimated reductions to revenue for customer returns and allowances and for customer programs. Provisions for returns and allowances are made at the time of sale, derived from historical trends and form a portion of the allowance for doubtful accounts. Customer programs, which are primarily annual volume incentive plans, allow customers to earn credit for attaining agreed upon purchase targets from us. We record estimated reductions to revenue, made at the time of sale, for customer programs based on estimated purchase targets.

Allowance for doubtful accounts

        The allowance for doubtful accounts is established to represent our best estimate of the net realizable value of the outstanding accounts receivable. The development of our allowance for doubtful accounts varies by region but in general is based on a review of past due amounts, historical write-off experience, as well as aging trends affecting specific accounts and general operational factors affecting all accounts. In North America, management specifically analyzes individual accounts receivable and establishes specific reserves against financially troubled customers. In addition, factors are developed in certain regions utilizing historical trends in bad debts,of sales and returns and allowances. The ratio of these factorsallowances and cash discount activities to sales onderive a rolling twelve-month basis is applied to total outstanding receivables (net of accounts specifically identified) to establish a reserve. In Europe, management develops their bad debt allowance through an aging analysis of all their accounts. In China, management specifically analyzes individual accounts receivablereserve for returns and establishes specific reserves as needed. In addition, for waterworks customers, whose payment terms are generally extended, we reserve the majority of accounts receivable in excess of one year from the invoice date.allowances and cash discounts.

        We uniformly consider current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. We also aggressively monitor the creditworthiness of our largest customers, and periodically review customer credit limits to reduce risk. If circumstances relating to specific customers change or unanticipated changes occur in the general business environment, our estimates of the recoverability of receivables could be further adjusted.

Inventory valuation

        Inventories are stated at the lower of cost or market with costs determined primarily on a first-in first-out basis. We utilize both specific product identification and historical product demand as the basis for determining our excess or obsolete inventory reserve. We identify all inventories that exceed a range of one to four years in sales. This is determined by comparing the current inventory balance against unit sales for the trailing twelve months. New products added to inventory within the past twelve months are excluded from this analysis. A portion of our products contain recoverable materials, therefore the excess and obsolete reserve is established net of any recoverable amounts. Changes in market conditions, lower than expectedlower-than-expected customer demand or changes in technology or features could result in additional obsolete inventory that is not saleable and could require additional inventory reserve provisions.

        In certain countries, additional inventory reserves are maintained for potential shrinkage experienced in the manufacturing process. The reserve is established based on the prior year's inventory losses adjusted for any change in the gross inventory balance.

Goodwill and other intangibles

        We have made numerous acquisitions over the years which included the recognition of a significant amount of goodwill. Goodwill and intangible assets with indefinite lives areis tested annually for impairment in accordance withannually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Application of the provisionsgoodwill impairment test requires judgment, including the identification of Financial Accounting Standards Board Statement No. 142 "Goodwillreporting units, assignment of assets and liabilities to reporting units, and determination of the fair value of each reporting unit. We



and Other Intangible Assets" (FAS 142). We use our judgment in assessing whether assets may have become impaired between annual impairment tests. Due toestimate the current economic conditions as well as other business factors, we concluded that the goodwillfair value of our Water Quality reporting unit was impairedunits using an income approach based on October 26, 2008, the timepresent value of estimated future cash flows. We believe this approach yields the most appropriate evidence of fair value as our latest annual review. We recorded a charge of $22.0 millionreporting units are not easily compared to other corporations involved in the fourth quarter in accordance with FAS 142. We perform our annual test for indicators of goodwill and non-amortizable intangible assets impairment in the fourth quarter of our fiscal year or sooner if indicators of impairment exist.similar businesses.

        Intangible assets such as purchased technology are generally recorded in connection with a business acquisition. Values assigned to intangible assets are determined by an independent valuation firm based on our estimates and judgments regarding expectations of the success and life cycle of products and technology acquired. During 2011, 2010 and 2009, we recognized non-cash pre-tax charges of approximately $1.4 million, $1.4 million and $3.3 million, respectively, as an impairment of some of our indefinite-lived intangible assets. In addition, during 2011, we recognized non-cash pretax charges of $13.5 million as an impairment of certain amortizable intangible assets in our Europe segment.

        In 2011, the Company determined that the prospects for Austroflex Rohr-Isoliersysteme GmbH (Austroflex), part of our Europe segment, were lower than originally estimated due to current operating profits below forecast and tempered future growth expectations. Accordingly, the Company performed a fair value assessment and, as a result, wrote down the long-lived assets by $14.8 million, or approximately 78%, including customer relationships of $12.1 million, trade names of $1.4 million, and property, plant and equipment of $1.3 million. Fair value was based on discounted cash flows using market participant assumptions and utilized an estimated weighted average cost of capital.

        Revised accounting guidance issued in September 2011 allows us to review goodwill for impairment utilizing either qualitative or quantitative analyses. We have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the two-step (quantitative) impairment test is unnecessary.

        We usefirst identify those reporting units that we believe could pass a discounted cash flow methodqualitative assessment to determine whether further impairment testing is necessary. For each reporting unit identified, our qualitative analysis includes:

        We then compile this information and make our assessment of whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we determine it is not more likely than not, then no further quantitative analysis is required. We determined we have eight reporting units in continuing operations, one of which, Water Quality, has no goodwill. In 2011, we performed a qualitative analysis for the Residential and Commercial (formerly Regulator), Dormont and Asia reporting units and concluded further impairment testing was not required.

        The second analysis for goodwill impairment involves a quantitative two-step process. We performed a quantitative impairment analysis for our Drains and water re-use (formerly Orion), BRAE, Europe and Blücher reporting units. The first step of the impairment test requires a comparison of the fair value of each reporting unit. We have eightof our reporting units based onto the guidance containedrespective carrying value. If the carrying value of a reporting unit is less than its fair value, no indication of impairment exists and a second step is not performed. If the carrying amount of a reporting unit is higher than its fair value, there is an indication that impairment may exist and a second step must be performed. In the second step, the impairment is computed by comparing the implied fair value of the reporting unit's goodwill with the carrying amount


of the goodwill. If the carrying amount of the reporting unit's goodwill is greater than the implied fair value of its goodwill, an impairment loss must be recognized for the excess and charged to operations.

        Inherent in FAS 142 and related literature. The discounted cash flow model includes a numberour development of estimatesthe present value of future cash flows.flow projections are assumptions and estimates derived from a review of our operating results, business plans, expected growth rates, cost of capital and tax rates. We also make certain assumptions about future economic conditions and other market data. We develop our assumptions based on our historical results including sales growth, operating profits, working capital levels and tax rates. In our 2008 testing, we also incorporated assumptions regarding the current economic environment, including expectations regarding when the recession would end and at what point we would see orders return to historical levels.

        We believe that the discounted cash flow model is sensitive to the selected discount rate. We use third-party expertsvaluation specialists to help develop appropriate discount rates for each reporting unit. We use standard valuation practices to arrive at a weighted average cost of capital based on the market and guideline public companies. The higher the discount rate, the lower the discounted cash flows. While we believe that our estimates of future cash flows are reasonable, different assumptions could significantly affect our valuations and result in impairments in the future.

        Other changesDuring the fourth quarter of 2011, we recognized apre-tax non-cash goodwill impairment charge of $1.2 million related to our BRAE reporting unit within our North America segment.

        As of our October 30, 2011 testing date, we had approximately $513.7 million of goodwill on our balance sheet. Our impairment testing indicated that may affectthe fair values of the reporting units, except for BRAE, exceeded the carrying values, thereby resulting in no impairment. The results of this impairment analysis are summarized in the table below:

 
 Goodwill balance at
October 30, 2011
 Book value of equity
of reporting unit at
October 30, 2011
 Estimated fair value
(implied value of equity)
at October 30, 2011
 
 
 (in millions)
 

Reporting unit

          

Europe

 $223.0 $427.2 $464.3 

Blücher

  81.8  157.9  186.7 

Drains & water re-use

  34.6  57.6  106.7 

BRAE

  2.6  2.4  1.2 

        The underlying analyses supporting our valuations include, but are not limitedfair value assessment related to product acceptancesour outlook of the business' long-term performance, which included key assumptions as to the appropriate discount rate and regulatory approval. If actual product acceptance differs significantlylong-term growth rate. In connection with our October 30, 2011 impairment test, we utilized discount rates ranging from 12.5% to 28.5%, growth rates beyond our estimates, weplanning periods ranging from 3% to 7% and long-term terminal growth rates from 3% to 4%.

        Operating results for our Europe segment have been hindered by the downturn in the economic environment in Europe. Should Europe's sales decline because the European marketplace deteriorates beyond our current expectations, then the reporting unit's goodwill may be required to record an impairment charge to write down the assets to their realizable value. A severe decline in market value could result in an unexpected impairment charge to goodwill, which could have a material impact on the results of operations and financial position. Although we have not experienced goodwillat risk for impairment in the future. Europe's goodwill balance as of December 31, 2011 was $210.5 million. As of October 30, 2011, our remaininglast impairment analysis date, the fair value of Europe's reporting units, there canunit exceeded the carrying value by 9%.

        The Blücher reporting unit's operating results have also been hindered by the downturn in the economic environment in Europe. Should Blücher's sales decline because the European marketplace deteriorates beyond our current expectations, then the reporting unit's goodwill may be no assurances that futureat risk for impairment in the future. Blücher's goodwill balance as of December 31, 2011 was $74.8 million. As of October 30, 2011, our last impairment will not occur.analysis date, the fair value of Blücher's reporting unit exceeded the carrying value by 18%.

Product liability and workers' compensation costs

        Because of retention requirements associated with our insurance policies, we are generally self-insured for potential product liability claims and for workers' compensation costs associated with


workplace accidents. We are subject to a variety of potential liabilities in connection with product liability cases and we maintain product liability and other insurance coverage, which we believe to be generally in accordance with industry practices. For product liability cases in the U.S., management estimates expected settlement costsestablishes its product liability accrual by utilizing third party actuarial valuations which incorporates historical trend factors and our specific claims experience derived from loss reports provided by our third-party administrators as well as developing internal historical trend factors based on our specific claims experience. Management utilizes the internal trend factors that reflect final expected settlement costs.administrators. In other countries, we maintain insurance coverage with relatively high deductible payments, as product liability claims tend to be smaller than those experienced in the U.S. Changes in the nature of claims or the actual settlement amounts could affect the adequacy of this estimate and require changes to the provisions. Because the liability is an estimate, the ultimate liability may be more or less than reported.

        Workers' compensation liabilities in the U.S. are recognized for claims incurred (including claims incurred but not reported) and for changes in the status of individual case reserves. At the time a workers' compensation claim is filed, a liability is estimated to settle the claim. The liability for workers' compensation claims is determined based on management's estimates of the nature and severity of the claims and based on analysis provided by third partythird-party administrators and by various state statutes and reserve requirements. We have developed our own trend factors based on our specific claims experience.experience, discounted based on risk-free interest rates. We employ third party actuarial valuations to help us estimate our workers' compensation accrual. In other countries where workers' compensation costs are applicable, we maintain



insurance coverage with limited deductible payments. Because the liability is an estimate, the ultimate liability may be more or less than reported.reported and is subject to changes in discount rates.

        We determine the trend factors for product liability and workers' compensation liabilities based on consultation with outside actuaries.

        We maintain excess liability insurance with outside insurance carriers to minimize our risks related to catastrophic claims in excess of all self-insured positions. Any material change in the aforementioned factors could have an adverse impact on our operating results.

Legal contingencies

        We are a defendant in numerous legal matters including those involving environmental law and product liability as discussed furtherin more detail in Part I, Item 1,1. "Business—Product Liability, Environmental and Other Litigation Matters." As required by Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies" (FAS 5),GAAP, we determine whether an estimated loss from a loss contingency should be accrued by assessing whether a loss is deemed probable and the loss amount can be reasonably estimated, net of any applicable insurance proceeds. When it is possible to estimate reasonably possible loss or range of loss above the amount accrued, that estimate is aggregated and disclosed. Estimates of potential outcomes of these contingencies are developed in consultation with outside counsel. While this assessment is based upon all available information, litigation is inherently uncertain and the actual liability to fully resolve this litigation cannot be predicted with any assurance of accuracy. Final resolutionIn the event of thesean unfavorable outcome in one or more legal matters, could possibly resultthe ultimate liability may be in significant effectsexcess of amounts currently accrued, if any, and may be material to our operating results or cash flows for a particular quarterly or annual period. However, based on information currently known to us, management believes that the ultimate outcome of all legal contingencies, as they are resolved over time, is not likely to have a material effect on our financial position, results of operations, cash flows and financial position.or liquidity.

Pension benefits

        We account for our pension plans in accordance with StatementGAAP, which involves recording a liability or asset based on the projected benefit obligation and the fair value of Financial Accounting Standards No. 87 "Employers Accounting for Pensions" (FAS 87) and Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)," (FAS 158). In applying FAS 87 and FAS 158, assumptionsplan assets. Assumptions are made


regarding the valuation of benefit obligations and the performance of plan assets. The primary assumptions are as follows:

        We determine these assumptions based on consultation with outside actuaries and investment advisors. Any variance in these assumptions could have a significant impact on future recognized pension costs, assets and liabilities.

        On October 31, 2011, our Board of Directors voted to cease accruals effective December 31, 2011 under both the Pension Plan and Supplemental Employees Retirement Plan. We recorded a curtailment charge of approximately $1.5 million in the fourth quarter of 2011 in connection with this action. Effective November 1, 2011, we began amortizing the unamortized gains and losses over the remaining life expectancy of the participants instead of our former policy of average remaining service period.

Income taxes

        We estimate and use our expected annual effective income tax rates to accrue income taxes. Effective tax rates are determined based on budgeted earnings before taxes, including our best estimate of permanent items that will affect the effective rate for the year. Management periodically reviews these rates with outside tax advisors and changes are made if material variances from expectations are identified.


        We recognize deferred taxes for the expected future consequences of events that have been reflected in the consolidated financial statements in accordance with the rules of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (FAS 109). Under FAS 109, deferredstatements. Deferred tax assets and liabilities are determined based on differences between the book values and tax bases of particular assets and liabilities, using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We consider estimated future taxable income and ongoing prudent tax planning strategies in assessing the need for a valuation allowance.

        On January 1, 2007, we adopted the provisions of Financial Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). The purpose of FIN 48 is to increase the comparability in financial reporting of income taxes. FIN 48 requires that in order for a tax benefit to be booked in the income statement, the item in question must meet the more-likely-than-not (greater than 50% likelihood of being sustained upon examination by the taxing authorities) threshold. The adoption of FIN 48 did not have a material effect on our financial statements. No cumulative effect was booked through beginning retained earnings.

        During 2008, we reduced our unrecognized tax benefits by approximately $2.2 million as a result of finalizing federal and state income tax audits. We estimate that it is reasonably possible that a portion of the currently remaining unrecognized tax benefit may be recognized by the end of 2009 as a result of the conclusion of the federal income tax audit. The amount of expense accrued for penalties and interest is $1.1 million worldwide.

        As of December 31, 2008, we had gross unrecognized tax benefits of approximately $2.3 million of which, approximately $1.9 million if recognized, would affect the effective tax rate. The difference between the amount of unrecognized tax benefits and the amount that would impact the effective tax rate consists of the federal tax benefit of state income tax items.

New Accounting Standards

        In June 2008,2011, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) EITF Issue No. 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" (FSP EITF 03-6-1). FSP EITF 03-6-1 requires that unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents to be included in the two-class method of computing earnings per share as described in Statement of Financial Accounting Standards (FAS)Update (ASU) No. 128, "Earnings per Share.2011-05, "Comprehensive Income." This FSP is effectiveASU intends to enhance comparability and transparency of other comprehensive income components. The guidance provides an option to present total comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement or two separate but consecutive statements. This ASU eliminates the option to present other comprehensive income components as part of the statement of changes in stockholders' equity. The provisions of this ASU will be applied retrospectively for financial statements issued for fiscal yearsinterim and annual periods beginning after December 15, 2008, and interim periods within those years. Accordingly, we will adopt FSP EITF 03-6-1 in fiscal year 2009. The adoption of FSP EITF 03-6-12011. Early application is not expected to have a material impact on our consolidated financial statements.

        In May 2008, the FASB issued FAS No. 162, "The Hierarchy of Generally Accepted Principles," (FAS 162), which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). FAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." The adoption of FAS 162 is not expected to have an impact on our consolidated financial statements.

        In April 2008, the FASB issued FSP No. FAS 142-3, "Determination of the Useful Life of Intangible Assets." This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS No. 142, "Goodwill and Other Intangible Assets" (FAS 142). The objective of this FSP is to improve the consistency between the useful life of a recognized intangible asset under FAS 142 and the period



of expected cash flows used to measure the fair value of the asset under FAS 141(R), and other principles of GAAP. This FSP applies to all intangible assets, whether acquired in a business combination or otherwise, and shall bepermitted. We early adopted ASU 2011-05 effective for financial statements issued for fiscal years beginning afterthe year ended December 15, 2008, and interim periods within those fiscal years and applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. The adoption of this FSP will not have a significant impact on our consolidated financial statements.

        In March 2008, the FASB issued FAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133," (FAS 161), which expands the current disclosure requirements of FAS 133, "Accounting for Derivative Instruments and Hedging Activities," such that entities must now provide enhanced disclosures on a quarterly basis regarding how and why the entity uses derivatives; how derivatives and related hedged items are accounted for under FAS 133 and how derivatives and related hedged items affect the entity's financial position, performance and cash flow. FAS 161 is effective prospectively for annual and interim periods beginning on or after November 15, 2008. Accordingly, we will adopt FAS 161 in 2009.

        In December 2007, the FASB issued FAS No. 141 (R)," Business Combinations," (FAS 141R), which requires most identifiable assets, liabilities, non-controlling interests, and goodwill acquired in a business combination to be recorded at "full fair value." Under FAS 141R, all business combinations will be accounted for under the acquisition method. Significant changes, among others, from current guidance resulting from FAS 141R includes the requirement that contingent assets and liabilities and contingent consideration shall be recorded at estimated fair value as of the acquisition date, with any subsequent changes in fair value charged or credited to earnings. Further, acquisition-related costs will be expensed rather than treated as part of the acquisition. FAS 141R is effective for periods beginning on or after December 15, 2008. We expect the adoption of FAS 141R will increase costs charged to operations made after January 1, 2009.

        In December 2007, the FASB issued FAS No. 160, "Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB NO. 151," (FAS 160), which requires non-controlling interests (previously referred to as minority interest) to be treated as a separate component of equity, not outside of equity as is current practice. FAS 160 applies to non-controlling interests and transactions with non-controlling interest holders in consolidated financial statements. FAS 160 is effective for periods beginning on or after December 15, 2008. We do not expect the adoption of FAS 160 will have a material impact on its consolidated financial statements.

        In February 2007, the FASB issued FAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities—including an Amendment to FAS No. 115," (FAS 159), which permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Earlier application is encouraged. We have elected not to measure our eligible financial instruments at fair value and therefore the adoption of FAS 159 did not have an impact on our consolidated financial statements.31, 2011.

        In September 2006,2011, accounting guidance was issued by FASB in Accounting Standards Codification (ASC) Topic 350, "Intangibles—Goodwill and Other". This guidance amends the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements" (SAB 108), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effectiverequirements for fiscal years ending after November 15, 2006. The impact of SAB 108 was not material to our consolidated financial statements.

        In September 2006, the FASB issued FAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)" (FAS 158), which requires an employer to: (a) recognize in its statement of financial position an asset for a plan's overfunded status or a liability for a plan's underfunded status; (b) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year; and (c) recognize changes in the funded status of a defined benefit postretirement plan in the



year in which the changes occur. Those changes are reported in other comprehensive income. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006 for companies with publicly traded equity securities. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008, although earlier adoption is permitted. As a result of the requirement to recognize the funded status of our benefit plans as of December 31, 2006, we recorded an increase in our pension liability of approximately $8.3 million, a decrease of approximately $1.3 million in other assets: other, net and a decrease in accumulated other comprehensive income of approximately $5.8 million, net of tax. We have early-adopted the measurement date provisions of FAS 158 effective January 1, 2007. Our pension plans previously used a September 30 measurement date. All plans are now measured as of December 31, consistent with our fiscal year end. The non-cash effect of the adoption of the measurement date provisions of FAS 158 was not material and there was no effect on our results of operations.

        In September 2006, the FASB issued FAS No. 157, "Fair Value Measurements," (FAS 157), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. FAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements and was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB FSP 157-2 which delayed the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed intesting. The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a business combination. Effective January 1, 2008, we adopted FAS 157 for financial assets and liabilities recognized at fair value on a recurring basis. The partial adoption of FAS 157 for financial assets and liabilities did not have a material impact on our consolidated financial position, results of operations or cash flows.

        In July 2006, the FASB issued Financial Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 providesdetermination that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, based on the technical merits. This interpretation also provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We adopted the provisions of FIN 48 as of January 1, 2007 and the impact was not material to our consolidated financial statements.

        In March 2006, the FASB issued FAS No. 156, "Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140" (FAS 156). FAS 156 amends FAS Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," with respect to the accounting for separately recognized servicing assets and servicing liabilities. FAS 156 addresses the recognition and measurement of separately recognized servicing assets and liabilities and provides an approach to simplify efforts to obtain hedge-like (offset) accounting. We adopted FAS 156 as of January 1, 2007 and the impact was not material to our consolidated financial statements.

        In February 2006, the FASB issued FAS No. 155, "Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140" (FAS 155). FAS 155 amends FAS 133, "Accounting for Derivatives and Hedging Activities," and FAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and allows an entity to remeasure at fair value of a hybrid financial instrumentreporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is more likely than not that contains an embedded derivative that otherwise would require bifurcation from the host, if the holder irrevocably elects to account for the whole instrument on a fair value basis. Subsequent changes in the fair value of a reporting unit is greater than its carrying amount, then performing the instrument would be recognized intwo-step impairment test is unnecessary. We early adopted this standard for the year ended December 31, 2011.



earnings. We adopted FAS 155 as of January 1, 2007 and the impact was not material to our consolidated financial statements.

Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

        We use derivative financial instruments primarily to reduce exposure to adverse fluctuations in foreign exchange rates, interest rates and costs of certain raw materials used in the manufacturing process. We do not enter into derivative financial instruments for trading purposes. As a matter of policy, all derivative positions are used to reduce risk by hedging underlying economic exposure. The derivatives we use are instruments with liquid markets. See Note 15 of Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2011.

        Our consolidated earnings, which are reported in United States dollars, are subject to translation risks due to changes in foreign currency exchange rates. This risk is concentrated in the exchange rate between the U.S. dollar and the euro; the U.S. dollar and the Canadian dollar; and the U.S. dollar and the Chinese yuan.

        Our foreign subsidiaries transact most business, including certain intercompany transactions, in foreign currencies. Such transactions are principally purchases or sales of materials and are denominated in European currencies or the U.S. or Canadian dollar. We use foreign currency forward exchange contracts to manage the risk related to intercompany purchases that occur during the course of a year and certain open foreign currency denominated commitments to sell products to third parties. For 2008, the amounts2011, we recorded a $0.6 million gain in other income forassociated with the change in the fair value of such contracts was immaterial.contracts.

        We have historically had a low exposure on the cost of our debt to changes in interest rates. Information about our long-term debt including principal amounts and related interest rates appears in Note 11 of notesNotes to the consolidated financial statementsConsolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2008.2011.

        We purchase significant amounts of bronze ingot, brass rod, cast iron, steel and plastic, which are utilized in manufacturing our many product lines. Our operating results can be adversely affected by changes in commodity prices if we are unable to pass on related price increases to our customers. We manage this risk by monitoring related market prices, working with our suppliers to achieve the maximum level of stability in their costs and related pricing, seeking alternative supply sources when necessary and passing increases in commodity costs to our customers, to the maximum extent possible, when they occur.

        During 2008, we entered into a series of copper swap contracts to fix the price per pound of copper for one customer. These swaps are classified as economic hedges, as more fully explained in Note 16 of notes to the consolidated financial statements. For the period ended December 31, 2008, we recorded $1.8 million in losses associated with the copper swaps in other expense. We believe that if copper prices continue to decrease that the open copper swap contracts will result in additional losses that may occur in a period different from when that cost is recovered from the customer.

        The Company used a discounted cash flow model for determining the value of the ARS and the UBS rights. As there is no active market for the ARS and the rights are non-transferable, we believe that the discounted cash flow model gives the best estimate of fair value at December 31, 2008. The model includes assumptions that are more fully explained in Note 16 of notes to the consolidated financial statements. The most sensitive of these assumptions is the illiquidity spread. We engaged valuation experts to develop the models. The illiquidity spread increases the discount rate, thereby decreasing the estimated fair value. To value the rights issued by UBS, we used a discounted cash flow model to estimate the fair value of the ARS with the rights. The value of the rights was determined by looking at the difference between the ARS as determined compared to the ARS with the rights. While we believe the assumptions used are consistent with the current market view on the ARS and are reasonable, different assumptions could significantly affect our valuation of ARS.



Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

        The financial statements listed in section (a) (1) of "Part IV, Item 15. Exhibits and Financial Statement Schedules" of this annual report are incorporated herein by reference.

Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

        None.

Item 9A.CONTROLS AND PROCEDURES.

        As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, or Exchange Act, as of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily applies its judgment in evaluating and implementing possible controls and procedures. The effectiveness of our disclosure controls and procedures is also necessarily limited by the staff and other resources available to us and the geographic diversity of our operations. Based upon that evaluation, the Chief Executive Officer and


Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

        There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2008,2011, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In connection with these rules, we will continue to review and document our disclosure controls and procedures, including our internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.



Management's Annual Report on Internal Control Over Financial Reporting

        Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that:

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        Management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2008.2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.

        Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2008.2011.

        On April 29, 2011, the Company completed its acquisition of Danfoss Socla S.A.S. and the related water controls business of certain other entities controlled by Danfoss A/S in a share and asset purchase transaction (collectively, "Socla"). The audited consolidated financial statements of the Company include the results of Blücher Metal A/SSocla, including total assets of $206 million and its subsidiaries, which the Company acquired on May 30, 2008,total revenues of $95 million, but management's assessment does not include an assessment of the internal controlcontrols over financial reporting of these entities.Socla.

        The independent registered public accounting firm that audited the Company's consolidated financial statements included elsewhere in this Annual Report on Form 10-K has issued an attestationaudit report on the Company's internal control over financial reporting. That report appears immediately following this report.



Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Watts Water Technologies, Inc.:

        We have audited Watts Water Technologies, Inc.'s internal control over financial reporting as of December 31, 2008,2011, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Watts Water Technologies, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, Watts Water Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,2011, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

        Watts Water Technologies, Inc. acquired Blücher MetalDanfoss Socla S.A.S and the related water controls business of certain other entities controlled by Danfoss A/S and subsidiaries(collectively Socla) during 2008,2011, and management excluded from its assessment of the effectiveness of Watts Water Technologies, Inc.'s internal control over financial reporting as of December 31, 2008, Blücher Metal A/S and subsidiaries'2011, Socla's internal control over financial reporting associated with total assets of $190.3$206 million and total revenues of $50.8$95 million included in the consolidated financial statements of Watts Water Technologies, Inc. and subsidiaries as of and for the year ended December 31, 2008.2011. Our audit of internal control over financial reporting of Watts Water Technologies, Inc. also excluded an evaluation of the internal control over financial reporting of Blücher Metal A/S and subsidiaries.Socla.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Watts Water Technologies, Inc. and subsidiaries as of December 31, 20082011 and 2007,2010, and the related consolidated statements of operations,



comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2008,2011, and our report dated February 27, 200928, 2012 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP


Boston, Massachusetts
February 27, 200928, 2012

Item 9B.OTHER INFORMATION.

        None.



PART III

Item 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

        Information with respect to the executive officers of the Company is set forth in Part I, Item 1 of this Report under the caption "Executive Officers and Directors" and is incorporated herein by reference. The information provided under the captions "Information as to Nominees for Director," "Corporate Governance," and "Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive Proxy Statement for our 20092012 Annual Meeting of Stockholders to be held on May 13, 200916, 2012 is incorporated herein by reference.

        We have adopted a Code of Business Conduct and Ethics applicable to all officers, employees and Board members. The Code of Business Conduct and Ethics is posted in the Investor Relations section of our website,www.wattswater.com. We will provide you with a print copy of our Code of Business Conduct and Ethics free of charge on written request to Kenneth R. Lepage, Secretary, Watts Water Technologies, Inc., 815 Chestnut Street, North Andover, MA 01845. Any amendments to, or waivers of, the Code of Business Conduct and Ethics which apply to our chief executive officer, chief financial officer, corporate controller or any person performing similar functions will be disclosed on our website promptly following the date of such amendment or waiver.

Item 11.EXECUTIVE COMPENSATION.

        The information provided under the captions "Director Compensation," "Corporate Governance," "Compensation Discussion and Analysis," "Executive Compensation," "Compensation Committee Interlocks and Insider Participation," and "Compensation Committee Report" in our definitive Proxy Statement for our 20092012 Annual Meeting of Stockholders to be held on May 13, 200916, 2012 is incorporated herein by reference.

        The "Compensation Committee Report" contained in our Proxy Statement shall not be deemed "soliciting material" or "filed" with the Securities and Exchange Commission or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed under the Securities Act or Exchange Act.

Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

        The information appearing under the caption "Principal Stockholders" in the Registrant'sour definitive Proxy Statement relating to the 2009for our 2012 Annual Meeting of Stockholders to be held on May 13, 200916, 2012 is incorporated herein by reference.

Securities Authorized for Issuance Under Equity Compensation Plans

        The following table provides information as of December 31, 2008,2011, about the shares of Class A Common Stock that may be issued upon the exercise of stock options issued under the Company's 2004 Stock Incentive Plan, 1991 Directors' Non-Qualified Stock Option Plan, 1996 Stock Option Plan and 2003 Non-Employee Directors' Stock Option Plan and the settlement of restricted stock units granted



granted under our Management Stock Purchase Plan as well as the number of shares remaining for future issuance under our 2004 Stock Incentive Plan and Management Stock Purchase Plan.

 
 Equity Compensation Plan Information  
 
 
 Number of securities remaining
available for future issuance under
equity compensation plan
(excluding securities reflected in
column (a))
(c)
 

 
 Equity Compensation Plan Information 
Plan Category
 Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
 Weighted-average exercise
price of outstanding options,
warrants and rights
(b)
 Number of securities remaining
available for future issuance
under equity compensation
plan (excluding securities
reflected in column (a))
(c)

Equity compensation plans approved by security holders

  1,513,1061,664,237(1)$25.2427.67  2,827,2181,596,082(2)

Equity compensation plans not approved by security holders

  None  None  None 

Total

  1,513,1061,664,237(1)$25.2427.67  2,827,2181,596,082(2)

(1)
Represents 1,216,4711,271,892 outstanding options under the 1991 Directors' Non-Qualified Stock Option Plan, 1996 Incentive Stock Option Plan, 2003 Non-Employee Directors' Stock Option Plan and 2004 Stock Incentive Plan, and 296,635392,345 outstanding restricted stock units under the Management Stock Purchase Plan.

(2)
Includes 1,864,393999,610 shares available for future issuance under the 2004 Stock Incentive Plan, and 962,825596,472 shares available for future issuance under the Management Stock Purchase Plan.

Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

        The information provided under the captions "Corporate Governance" and "Policies"Certain Relationships and Procedures for Related Person Transactions" in our definitive Proxy Statement for our 20092012 Annual Meeting of Stockholders to be held on May 13, 200916, 2012 is incorporated herein by reference.

Item 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES.

        The information provided under the caption "Ratification of Independent Registered Public Accounting Firm" in our definitive Proxy Statement for our 20092012 Annual Meeting of Stockholders to be held on May 13, 200916, 2012 is incorporated herein by reference.



PART IV

Item 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)(1) Financial Statements

        The following financial statements are included in a separate section of this Report commencing on the page numbers specified below:

Report of Independent Registered Public Accounting Firm

 5952

Consolidated Statements of Operations for the years ended December 31, 2008, 20072011, 2010 and 20062009

 53
60

Consolidated Statements of Comprehensive Income for the years ended December 31, 2011, 2010 and 2009

 54

Consolidated Balance Sheets as of December 31, 20082011 and 20072010

 6155

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2008, 20072011, 2010 and 20062009

 6256

Consolidated Statements of Cash Flows for the years ended December 31, 2008, 20072011, 2010 and 20062009

 6357

Notes to Consolidated Financial Statements

 64–10258-98

(a)(2) Schedules

Schedule II—Valuation and Qualifying Accounts for the years ended December 31, 2008, 20072011, 2010 and 20062009

 10399

        All other required schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are included in the Notes to the Consolidated Financial Statements.

(a)(3) Exhibits

        The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Annual Report on Form 10-K.



SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  WATTS WATER TECHNOLOGIES, INC.

 

 

By:

 

/S/ PATRICK S. O'KEEFEDAVID J. COGHLAN

Patrick S. O'KeefeDavid J. Coghlan
Chief Executive Officer
President and Director

DATED: February 27, 200928, 2012

 

 

 

 

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title
Date






/S/ PATRICK S. O'KEEFE


Patrick S. O'Keefe

Chief Executive Officer,
President and Director

February 27, 2009

/S/ WILLIAM C. MCCARTNEY


William C. McCartney

Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)

February 27, 2009

/S/ ROBERT L. AYERS


Robert L. Ayers

Director

February 27, 2009

/S/ KENNETT F. BURNES


Kennett F. Burnes

Director

February 27, 2009

/S/ RICHARD J. CATHCART


Richard J. Cathcart

Director

February 27, 2009

/S/ TIMOTHY P. HORNE


Timothy P. Horne

Director

February 27, 2009

/S/ RALPH E. JACKSON, JR.


Ralph E. Jackson, Jr.

Director

February 27, 2009


Signature
 
Title
 
Date

 

 

 

 

 


/S/ KENNETHDAVID J. MCAVOYCOGHLAN


KennethDavid J. McAvoyCoghlan

 

Chief Executive Officer, President and Director

 

February 27, 2009

28, 2012

/S/ WILLIAM C. MCCARTNEY

William C. McCartney


Chief Financial Officer (Principal Financial Officer)


February 28, 2012

/S/ TIMOTHY M. MACPHEE

Timothy M. MacPhee


Treasurer and Chief Accounting Officer (Principal Accounting Officer)


February 28, 2012

/S/ ROBERT L. AYERS

Robert L. Ayers


Director


February 28, 2012

/S/ BERNARD BAERT

Bernard Baert


Director


February 28, 2012

/S/ KENNETT F. BURNES

Kennett F. Burnes


Director


February 28, 2012

/S/ RICHARD J. CATHCART

Richard J. Cathcart


Director


February 28, 2012

Signature
Title
Date





/S/ RALPH E. JACKSON, JR.

Ralph E. Jackson, Jr.
DirectorFebruary 28, 2012

/S/ W. CRAIG KISSEL

W. Craig Kissel


Director


February 28, 2012

/S/ JOHN K. MCGILLICUDDY

John K. McGillicuddy


 

Director

February 27, 2009

/S/ GORDON W. MORAN


Gordon W. Moran

Chairman of the Board


 


February 27, 200928, 2012


/S/ DANIEL J. MURPHY, IIIMERILEE RAINES


Daniel J. Murphy, IIIMerilee Raines


 


Director


 


February 27, 200928, 2012



Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Watts Water Technologies, Inc.:

        We have audited the accompanying consolidated balance sheets of Watts Water Technologies, Inc. and subsidiaries as of December 31, 20082011 and 2007,2010, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2008.2011. In connection with our audits of the consolidated financial statements, we also have also audited the financial statement schedule.Schedule II—Valuation and Qualifying Accounts. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Watts Water Technologies, Inc. and subsidiaries as of December 31, 20082011 and 2007,2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008,2011, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presentspresent fairly, in all material respects, the information set forth therein.

        As discussed in Note 2 to the consolidated financial statements, the Company adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158,Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R) effective December 31, 2006 and its measurement date provisions on January 1, 2007.

        Also, as discussed in Note 2 to the consolidated financial statements, the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 effective January 1, 2007.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Watts Water Technologies, Inc.'s internal control over financial reporting as of December 31, 2008,2011, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 200928, 2012 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ KPMG LLP


Boston, Massachusetts
February 27, 200928, 2012



Watts Water Technologies, Inc. and Subsidiaries

Consolidated Statements of Operations

(Amounts in millions, except per share information)

 
 Years Ended December 31, 
 
 2008 2007 2006 

Net sales

 $1,459.4 $1,382.3 $1,230.8 

Cost of goods sold

  971.0  920.7  805.8 
        
 

GROSS PROFIT

  488.4  461.6  425.0 

Selling, general and administrative expenses

  360.2  332.7  300.2 

Restructuring and other (income) charges

  5.6  3.2  (5.7)

Goodwill impairment charge

  22.0     
        
 

OPERATING INCOME

  100.6  125.7  130.5 
        

Other (income) expense:

          
 

Interest income

  (5.1) (14.5) (5.0)
 

Interest expense

  26.2  26.9  22.1 
 

Minority interest

  (1.9) (2.8) (1.8)
 

Other

  9.1  2.3  (.9)
        

  28.3  11.9  14.4 
        

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

  72.3  113.8  116.1 

Provision for income taxes

  25.0  36.2  39.0 
        
 

INCOME FROM CONTINUING OPERATIONS

  47.3  77.6  77.1 

Loss from discontinued operations, net of taxes of $0.4 in 2008, $0.2 in 2007 and $2.1 in 2006

  (0.7) (0.2) (3.4)
        
 

NET INCOME

 $46.6 $77.4 $73.7 
        

Basic EPS

          

Income (loss) per share:

          
 

Continuing operations

 $1.29 $2.01 $2.32 
 

Discontinued operations

  (0.02) (0.01) (0.10)
        
 

NET INCOME

 $1.27 $2.00 $2.21 
        

Weighted average number of shares

  36.6  38.6  33.3 
        

Diluted EPS

          

Income (loss) per share:

          
 

Continuing operations

 $1.28 $1.99 $2.29 
 

Discontinued operations

  (0.02) (0.01) (0.10)
        
 

NET INCOME

 $1.26 $1.99 $2.19 
        

Weighted average number of shares

  36.8  39.0  33.7 
        

Dividends per share

 $0.44 $0.40 $0.36 
        

 
 Years Ended December 31, 
 
 2011 2010 2009 

Net sales

 $1,436.6 $1,274.6 $1,225.9 

Cost of goods sold

  921.1  809.7  790.8 
        

GROSS PROFIT

  515.5  464.9  435.1 

Selling, general and administrative expenses

  379.9  336.7  323.5 

Restructuring and other charges, net

  8.8  12.6  17.2 

Goodwill and other long-lived asset impairment charges

  17.4  1.4  3.3 

Gain on disposal of businesses

  (7.7)   (1.1)
        

OPERATING INCOME

  117.1  114.2  92.2 
        

Other (income) expense:

          

Interest income

  (1.0) (1.0) (0.9)

Interest expense

  25.8  22.8�� 22.0 

Other

  0.8  (2.1) (1.2)
        

Total other expense

  25.6  19.7  19.9 
        

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

  91.5  94.5  72.3 

Provision for income taxes

  26.8  31.4  31.3 
        

NET INCOME FROM CONTINUING OPERATIONS

  64.7  63.1  41.0 

Income (loss) from discontinued operations, net of taxes

  1.7  (4.3) (23.6)
        

NET INCOME

 $66.4 $58.8 $17.4 
        

Basic EPS

          

Income (loss) per share:

          

Continuing operations

 $1.73 $1.69 $1.11 

Discontinued operations

  0.05  (0.12) (0.64)
        

NET INCOME

 $1.78 $1.58 $0.47 
        

Weighted average number of shares

  37.3  37.3  37.0 
        

Diluted EPS

          

Income (loss) per share:

          

Continuing operations

 $1.73 $1.69 $1.10 

Discontinued operations

  0.05  (0.12) (0.63)
        

NET INCOME

 $1.78 $1.57 $0.47 
        

Weighted average number of shares

  37.5  37.4  37.1 
        

Dividends per share

 $0.44 $0.44 $0.44 
        

The accompanying notes are an integral part of these consolidated financial statements.



Watts Water Technologies, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Amounts in millions)

 
 Years Ended December 31, 
 
 2011 2010 2009 

Net income

 $66.4 $58.8 $17.4 

Other comprehensive income (loss), net of tax:

          

Foreign currency translation adjustments

  (16.4) (26.7) 26.2 

Foreign currency adjustment for sale of foreign entity

  (8.6)    

Defined benefit pension plans:

          

Net gain (loss) for the period

  (4.2) (5.3) 1.7 

Amortization of prior service cost included in net periodic pension cost

  0.2  0.2  0.2 

Amortization of net losses included in net periodic pension cost

  1.7  1.4  1.8 

Reduction in obligation related to pension curtailment

  8.6     
        

Defined benefit pension plan

  6.3  (3.7) 3.7 
        

Other comprehensive income (loss), net of tax

  (18.7) (30.4) 29.9 
        

Comprehensive income

 $47.7 $28.4 $47.3 
        

The accompanying notes are an integral part of these consolidated financial statements.



Watts Water Technologies, Inc. and Subsidiaries

Consolidated Balance Sheets

(Amounts in millions, except share information)

 
 December 31, 
 
 2008 2007 

ASSETS

       

CURRENT ASSETS:

       
 

Cash and cash equivalents

 $165.6 $290.3 
 

Short-term investment securities

    22.0 
 

Trade accounts receivable, less allowance for doubtful accounts of $12.2 million in 2008 and $14.9 million in 2007

  221.3  235.7 
 

Inventories, net

  339.0  341.6 
 

Prepaid expenses and other assets

  14.6  18.6 
 

Deferred income taxes

  47.5  38.1 
 

Assets of discontinued operations

  11.6  10.4 
      
  

Total Current Assets

  799.6  956.7 

PROPERTY, PLANT AND EQUIPMENT, NET

  237.4  223.7 

OTHER ASSETS:

       
 

Goodwill

  431.3  385.8 
 

Long-term investment securities

  8.3  17.0 
 

Intangible assets, net

  174.6  134.0 
 

Other, net

  8.9  12.1 
      

TOTAL ASSETS

 $1,660.1 $1,729.3 
      

LIABILITIES AND STOCKHOLDERS' EQUITY

       

CURRENT LIABILITIES:

       
 

Accounts payable

 $115.2 $108.0 
 

Accrued expenses and other liabilities

  103.9  113.6 
 

Accrued compensation and benefits

  41.6  38.2 
 

Current portion of long-term debt

  4.5  1.3 
 

Liabilities of discontinued operations

  29.7  28.6 
      
  

Total Current Liabilities

  294.9  289.7 

LONG-TERM DEBT, NET OF CURRENT PORTION

  409.8  432.2 

DEFERRED INCOME TAXES

  42.4  42.9 

OTHER NONCURRENT LIABILITIES

  70.6  45.6 

MINORITY INTEREST

    3.4 

STOCKHOLDERS' EQUITY:

       
 

Preferred Stock, $0.10 par value; 5,000,000 shares authorized; no shares issued or outstanding

     
 

Class A Common Stock, $0.10 par value; 80,000,000 shares authorized; 1 vote per share; issued and outstanding, 29,250,175 shares in 2008 and 30,600,056 shares in 2007

  2.9  3.1 
 

Class B Common Stock, $0.10 par value; 25,000,000 shares authorized; 10 votes per share; issued and outstanding, 7,293,880 shares in 2008 and in 2007

  0.7  0.7 
 

Additional paid-in capital

  386.9  377.6 
 

Retained earnings

  451.7  465.4 
 

Accumulated other comprehensive income

  0.2  68.7 
      
  

Total Stockholders' Equity

  842.4  915.5 
      

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $1,660.1 $1,729.3 
      

 
 December 31, 
 
 2011 2010 

ASSETS

       

CURRENT ASSETS:

       

Cash and cash equivalents

 $250.6 $329.2 

Short-term investment securities

  4.1  4.0 

Trade accounts receivable, less allowance for doubtful accounts of $9.1 million in 2011 and $8.9 million in 2010

  207.1  186.9 

Inventories, net

  284.2  265.6 

Prepaid expenses and other assets

  26.6  18.4 

Deferred income taxes

  37.4  41.1 

Assets held for sale

  4.6  10.0 

Assets of discontinued operations

    1.8 
      

Total Current Assets

  814.6  857.0 

PROPERTY, PLANT AND EQUIPMENT, NET

  226.7  197.5 

OTHER ASSETS:

       

Goodwill

  490.4  428.0 

Intangible assets, net

  154.6  152.6 

Deferred income taxes

  1.1  0.9 

Other, net

  10.1  10.1 
      

TOTAL ASSETS

 $1,697.5 $1,646.1 
      

LIABILITIES AND STOCKHOLDERS' EQUITY

       

CURRENT LIABILITIES:

       

Accounts payable

 $126.5 $113.9 

Accrued expenses and other liabilities

  109.2  115.6 

Accrued compensation and benefits

  45.9  42.6 

Current portion of long-term debt

  2.0  0.7 

Liabilities of discontinued operations

    5.8 
      

Total Current Liabilities

  283.6  278.6 

LONG-TERM DEBT, NET OF CURRENT PORTION

  397.4  378.0 

DEFERRED INCOME TAXES

  58.2  40.1 

OTHER NONCURRENT LIABILITIES

  38.5  47.9 

STOCKHOLDERS' EQUITY:

       

Preferred Stock, $0.10 par value; 5,000,000 shares authorized; no shares issued or outstanding

     

Class A Common Stock, $0.10 par value; 80,000,000 shares authorized; 1 vote per share; issued and outstanding, 29,471,414 shares in 2011 and 30,102,677 shares in 2010

  2.9  3.0 

Class B Common Stock, $0.10 par value; 25,000,000 shares authorized; 10 votes per share; issued and outstanding, 6,953,680 shares in each of 2011 and 2010

  0.7  0.7 

Additional paid-in capital

  420.1  405.2 

Retained earnings

  515.1  492.9 

Accumulated other comprehensive loss

  (19.0) (0.3)
      

Total Stockholders' Equity

  919.8  901.5 
      

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $1,697.5 $1,646.1 
      

The accompanying notes are an integral part of these consolidated financial statements.



Watts Water Technologies, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(Amounts in millions, except share information)

 
 Class A
Common Stock
 Class B
Common Stock
  
  
  
  
 
 
  
  
 Accumulated
Other
Comprehensive
Income (Loss)
  
 
 
 Additional
Paid-In
Capital
 Retained
Earnings
 Total
Stockholders'
Equity
 
 
 Shares Amount Shares Amount 

Balance at December 31, 2005

  25,205,210 $2.5  7,343,880 $.7 $142.7 $368.3 $5.3 $519.5 
 

Comprehensive income:

                         
  

Net income

                 73.7     73.7 
  

Cumulative translation adjustment and other

                    25.0  25.0 
  

Pension plan additional liability, net of tax of $0.6 million

                    0.9  0.9 
                         
  

Comprehensive income

                   ��   99.6 
                         
 

Initial impact upon adoption of FAS 158, net of tax of ($3.8m)

                    (5.8) (5.8)
 

Shares of Class A Common Stock issued upon the exercise of stock options

  106,499          1.9        1.9 
 

Tax benefit for stock options exercised

              1.4        1.4 
 

Stock-based compensation

              3.0        3.0 
 

Shares of Class B Common Stock converted to Class A Common Stock

  50,000    (50,000)             
 

Issuance of shares of restricted Class A Common Stock

  59,008                   
 

Net change in restricted stock units

  68,394          0.8        0.8 
 

Shares of Class A Common Stock issued in Stock Offering, net of offering costs of $11.4 million

  5,750,000  0.6        218.0        218.6 
 

Common Stock dividends

                 (12.4)    (12.4)
                  

Balance at December 31, 2006

  31,239,111 $3.1  7,293,880 $0.7 $367.8 $429.6 $25.4 $826.6 
 

Comprehensive income:

                         
  

Net income

                 77.4     77.4 
  

Cumulative translation adjustment and other

                    39.1  39.1 
  

Pension plan gain arising during the year, net of tax of $3.0 million

                    4.2  4.2 
                         
  

Comprehensive income

                       120.7 
                         
 

Impact upon adoption of measurement date provisions of FAS158

                 (0.8)    (0.8)
 

Shares of Class A Common Stock issued upon the exercise of stock options

  66,658          1.1        1.1 
 

Tax benefit for stock awards exercised

              1.0        1.0 
 

Stock-based compensation

              6.0        6.0 
 

Issuance of shares of restricted Class A Common Stock

  58,726                   
 

Net change in restricted stock units

  109,977          1.7        1.7 
 

Repurchase and retirement of Class A Common Stock

  (874,416)            (25.2)    (25.2)
 

Common Stock dividends

                 (15.6)    (15.6)
                  

Balance at December 31, 2007

  30,600,056 $3.1  7,293,880 $0.7 $377.6 $465.4 $68.7 $915.5 
 

Comprehensive income:

                         
  

Net income

                 46.6     46.6 
  

Cumulative translation adjustment and other

                    (51.8) (51.8)
  

Pension plan loss arising during the year, net of tax of $9.7 million

                    (16.7) (16.7)
                         
  

Comprehensive loss

                       (21.9)
                         
 

Shares of Class A Common Stock issued upon the exercise of stock options

  85,512           1.6        1.6 
 

Stock-based compensation

              5.3        5.3 
 

Issuance of shares of restricted Class A Common Stock

  73,542                      
 

Net change in restricted stock units

  109,689           2.4        2.4 
 

Repurchase and retirement of Class A Common Stock

  (1,618,624) (0.2)     ��    (44.1)    (44.3)
 

Common Stock dividends

                 (16.2)    (16.2)
                  

Balance at December 31, 2008

  29,250,175 $2.9  7,293,880 $0.7 $386.9 $451.7 $0.2 $842.4 
                  

 
 Class A
Common Stock
 Class B
Common Stock
  
  
  
  
 
 
  
  
 Accumulated
Other
Comprehensive
Income (Loss)
  
 
 
 Additional
Paid-In
Capital
 Retained
Earnings
 Total
Stockholders'
Equity
 
 
 Shares Amount Shares Amount 

Balance at December 31, 2008

  29,250,175 $2.9  7,293,880 $0.7 $386.9 $451.7 $0.2 $842.4 

Comprehensive income

                 17.4  29.9  47.3 

Shares of Class B Common Stock converted to Class A Common Stock

  100,000     (100,000)               

Shares of Class A Common Stock issued upon the exercise of stock options

  30,194  0.1        0.4        0.5 

Stock-based compensation

              4.9        4.9 

Issuance of shares of restricted Class A Common Stock

  58,454              (0.4)    (0.4)

Net change in restricted stock units

  67,700           1.5  (0.4)    1.1 

Common Stock dividends

                 (16.2)    (16.2)
                  

Balance at December 31, 2009

  29,506,523 $3.0  7,193,880 $0.7 $393.7 $452.1 $30.1 $879.6 

Comprehensive income (loss)

                 58.8  (30.4) 28.4 

Shares of Class B Common Stock converted to Class A Common Stock

  240,200     (240,200)               

Shares of Class A Common Stock issued upon the exercise of stock options

  185,470           3.4        3.4 

Stock-based compensation

              4.7        4.7 

Issuance of net shares of restricted Class A Common Stock

  93,601              (0.5)    (0.5)

Net change in restricted stock units

  76,883           3.4  (1.1)    2.3 

Common Stock dividends

                 (16.4)    (16.4)
                  

Balance at December 31, 2010

  30,102,677 $3.0  6,953,680 $0.7 $405.2 $492.9 $(0.3)$901.5 

Comprehensive income (loss)

                 66.4  (18.7) 47.7 

Shares of Class A Common Stock issued upon the exercise of stock options

  247,870           5.4        5.4 

Stock-based compensation

              8.3        8.3 

Stock repurchase

  (1,000,000) (0.1)          (27.1)    (27.2)

Issuance of net shares of restricted Class A Common Stock

  79,438              (0.5)    (0.5)

Net change in restricted stock units

  41,429           1.2  (0.3)    0.9 

Common Stock dividends

                 (16.3)    (16.3)
                  

Balance at December 31, 2011

  29,471,414 $2.9  6,953,680 $0.7 $420.1 $515.1 $(19.0)$919.8 
                  

The accompanying notes are an integral part of these consolidated financial statements.



Watts Water Technologies, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Amounts in millions)

 
 Years Ended December 31, 
 
 2008 2007 2006 

OPERATING ACTIVITIES

          
 

Net income

 $46.6 $77.4  73.7 
 

Less: loss from discontinued operations

  (0.7) (0.2) (3.4)
        
 

Income from continuing operations

  47.3  77.6  77.1 
 

Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities:

          
   

Depreciation

  31.8  28.9  26.7 
   

Amortization

  13.3  10.5  8.6 
   

(Gain) loss on disposal and impairment of goodwill, property, plant and equipment and other

  24.0  2.0  (8.3)
   

Stock-based compensation

  5.3  6.0  3.0 
   

Deferred income tax benefit

  (18.7) (8.2) (2.1)
   

Changes in operating assets and liabilities, net of effects from business acquisitions and divestures:

          
    

Accounts receivable

  24.8  6.5  (17.0)
    

Inventories

  14.1  (8.1) (37.3)
    

Prepaid expenses and other assets

  8.3  (1.2) 2.0 
    

Accounts payable, accrued expenses and other liabilities

  (3.8) (22.3) 30.3 
        
  

Net cash provided by continuing operations

  146.4  91.7  83.0 
        

INVESTING ACTIVITIES

          
 

Additions to property, plant and equipment

  (26.6) (37.8) (44.7)
 

Proceeds from the sale of property, plant and equipment

  1.1  0.6  31.9 
 

Investments in securities

  (2.7) (27.5) (11.8)
 

Proceeds from sale of securities

  33.3  0.4   
 

Increase in other assets

    (0.5) (1.2)
 

Business acquisitions, net of cash acquired

  (177.3) (22.6) (93.4)
        
  

Net cash used in investing activities

  (172.2) (87.4) (119.2)
        

FINANCING ACTIVITIES

          
 

Proceeds from long-term debt

  22.9  43.8  356.6 
 

Payments of long-term debt

  (54.9) (71.5) (228.3)
 

Payment of capital leases

  (1.3) (1.7) (4.1)
 

Proceeds from share transactions under employee stock plans

  1.6  1.1  1.9 
 

Tax benefit of stock awards exercised

    1.0  1.4 
 

Debt issue costs

      (2.4)
 

Proceeds from stock offering, net

      218.6 
 

Payments to repurchase common stock

  (44.5) (23.6)  
 

Dividends

  (16.2) (15.6) (12.4)
        
  

Net cash provided by (used in) financing activities

  (92.4) (66.5) 331.3 
        

Effect of exchange rate changes on cash and cash equivalents

  (5.9) 9.4  1.2 

Net cash provided by (used in) operating activities of discontinued operations

  (0.6) 0.1  0.9 
        

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  (124.7) (52.7) 297.2 

Cash and cash equivalents at beginning of year

  290.3  343.0  45.8 
        

CASH AND CASH EQUIVALENTS AT END OF YEAR

 $165.6 $290.3 $343.0 
        

NON CASH INVESTING AND FINANCING ACTIVITIES

          

Acquisition of businesses:

          

Fair value of assets acquired

 $231.5 $23.7 $161.5 

Cash paid, net of cash acquired

  176.8  22.7  93.4 
        

Liabilities assumed

 $54.7 $1.0 $68.1 
        

Acquisitions of property, plant and equipment under capital lease

   $1.4 $16.0 
        

Issuance of stock under management stock purchase plan

 $1.6 $1.7 $0.8 
        

Liability for shares repurchased

 $ $1.4 $ 
        

Retirement of variable rate demand bonds with cash collateral

 $ $ $(8.9)
        

CASH PAID FOR:

          
 

Interest

 $26.9 $27.1 $21.7 
        
 

Taxes

 $45.1 $48.0 $35.3 
        

 
 Years Ended December 31, 
 
 2011 2010 2009 

OPERATING ACTIVITIES

          

Net income

 $66.4 $58.8 $17.4 

Income (loss) from discontinued operations, net of taxes

  1.7  (4.3) (23.6)
        

Net income from continuing operations. 

  64.7  63.1  41.0 

Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities:

          

Depreciation

  33.3  30.5  33.7 

Amortization

  18.1  14.3  13.1 

Loss on disposal and impairment of goodwill, property, plant and equipment and other

  5.2  2.6  12.1 

Stock-based compensation

  8.3  4.7  4.9 

Deferred income tax benefit

  (0.6) (6.9) 9.4 

Changes in operating assets and liabilities, net of effects from business acquisitions and divestures:

          

Accounts receivable

  3.5  (8.2) 38.3 

Inventories

  3.1  0.8  71.5 

Prepaid expenses and other assets

  (8.0) 9.0  (7.6)

Accounts payable, accrued expenses and other liabilities

  0.6  3.5  (11.8)
        

Net cash provided by continuing operations

  128.2  113.4  204.6 
        

INVESTING ACTIVITIES

          

Additions to property, plant and equipment

  (22.7) (24.6) (24.2)

Proceeds from the sale of property, plant and equipment

  0.8  2.2  0.8 

Investments in securities

  (8.1) (4.0)  

Proceeds from sale of securities

  8.1  6.5  1.7 

Purchase of intangible assets and other

  (0.9) (1.0) 0.7 

Business acquisitions, net of cash acquired

  (165.5) (36.3) (0.3)
        

Net cash used in investing activities

  (188.3) (57.2) (21.3)
        

FINANCING ACTIVITIES

          

Proceeds from long-term debt

  184.0  75.0  1.7 

Payments of long-term debt

  (168.0) (50.9) (61.5)

Payment of capital leases and other

  (2.6) (1.2) (1.3)

Proceeds from share transactions under employee stock plans

  5.4  3.4  0.4 

Tax expense (benefit) of stock awards exercised

  0.8  0.2  (0.3)

Debt issuance cost

    (3.2)  

Payments to repurchase common stock

  (27.2)    

Dividends

  (16.3) (16.4) (16.2)
        

Net cash provided by (used in) financing activities

  (23.9) 6.9  (77.2)
        

Effect of exchange rate changes on cash and cash equivalents

  7.3  (2.7) 8.0 

Net cash provided by (used in) operating activities of discontinued operations

  (1.9) 5.5  (21.2)

Net cash provided by (used in) investing activities of discontinued operations

    5.1  (0.3)
        

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  (78.6) 71.0  92.6 
        

Cash and cash equivalents at beginning of year

  329.2  258.2  165.6 
        

CASH AND CASH EQUIVALENTS AT END OF YEAR

 $250.6 $329.2 $258.2 
        

NON CASH INVESTING AND FINANCING ACTIVITIES

          

Acquisition of businesses:

          

Fair value of assets acquired

 $225.5 $47.6 $ 

Cash paid, net of cash acquired

  165.5  36.3   
        

Liabilities assumed

 $60.0 $11.3 $ 
        

Acquisitions of fixed assets under financing agreement

 $4.3 $ $ 
        

Issuance of stock under management stock purchase plan

 $0.4 $2.1 $1.5 
        

CASH PAID FOR:

          

Interest

 $24.7 $21.4 $22.0 
        

Taxes

 $35.5 $20.3 $36.6 
        

The accompanying notes are an integral part of these consolidated financial statements.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(1) Description of Business

        Watts Water Technologies, Inc. (the Company) designs, manufactures and sells an extensive line of water safety and flow control products primarily for the water quality, water conservation, water safety and water flow control markets located predominantly in North America and Europe and China.with a presence in Asia.

(2) Accounting Policies

Principles of Consolidation

        The consolidated financial statements include the accounts of the Company and its majority and wholly owned subsidiaries. Upon consolidation, all significant intercompany accounts and transactions are eliminated.

Cash Equivalents

        Cash equivalents consist of highly liquid investmentsinstruments with remaining maturities of three months or less at the date of original issuance.purchase and consist primarily of certificates of deposit and money market funds, for which the carrying amount is a reasonable estimate of fair value.

Investment Securities

        Investment securities at December 31, 20082011 and 20072010 consisted primarily of auction rate securities (ARS) whose underlying investments were in municipal bonds and student loans and, in 2008, investments in rights issued by UBS. The securities were purchased at par value. The rights issued by UBS were received in connectioncertificates of deposit with a settlement agreement. See Note 16 for additional information regarding the rights issued by UBS. At December 31, 2008, the Company classified its debt securities and investment in rights from UBS as trading securities.original maturities of greater than three months.

        Trading securities are recorded at fair value. The Company determines the fair value by obtaining market value when available from quoted prices in active markets. In the absence of quoted prices, the Company uses other inputs to determine the fair value of the investments. All changes in the fair value as well as any realized gains and losses from the sale of the securities are recorded when incurred to the Consolidated Statementsconsolidated statements of Operationsoperations as other income or expense.

        At December 31, 2007, the Company had classified the ARS as available-for-sale and recorded the ARS at fair value.

Allowance for Doubtful Accounts

        Allowance for doubtful accounts includes reserves for bad debts, and sales returns and allowances.allowances and cash discounts. The Company analyzes the aging of accounts receivable, individual accounts receivable, historical bad debts, concentration of receivables by customer, customer credit worthiness, current economic trends, and changes in customer payment terms. The Company specifically analyzes individual accounts receivable and establishes specific reserves against financially troubled customers. In addition, factors are developed in certain regions utilizing historical trends of sales and returns and allowances and cash discount activities to derive a reserve for returns and allowances.allowances and cash discounts.

Concentration of Credit

        The Company sells products to a diversified customer base and, therefore, has no significant concentrations of credit risk, except that approximately 10.0% of the Company's total sales in 2006 were to one customer. These sales were transacted within the North America geographic segment.risk. In 20082011 and 2007,2010, no one customer accounted for 10.0%10% or more of the Company's total sales.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(2) Accounting Policies (Continued)

Inventories

        Inventories are stated at the lower of cost (using primarily the first-in, first-out method) or market. Market value is determined by replacement cost or net realizable value. Historical experienceusage is used as the basis for determining the reserve for excess or obsolete inventories.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(2) Accounting Policies (Continued)

Assets Held for Sale

        The Company accounts for assets held for sale when management has committed to a plan to sell the asset or group of assets, is actively marketing the asset or group of assets, the asset or group of assets can be sold in its current condition in a reasonable period of time and the plan is not expected to change. As of December 31, 2011, the Company was actively marketing two properties. In 2010, the Company recorded estimated losses of $1.0 million to reduce these assets to their estimated fair value, less any costs to sell. These amounts are recorded as a component of restructuring and other costs in the consolidated statements of operations. See Note 4 for additional information associated with the Company's restructuring charges.

Goodwill and Other Intangible Assets

        Goodwill is recorded when the consideration paid for acquisitions exceeds the fair value of net tangible and intangible assets acquired. Goodwill and other intangible assets with indefinite useful lives are not amortized, but rather are tested annually for impairment. The test was performed as of October 26, 2008.30, 2011.

Impairment of Goodwill and Long-Lived Assets

        The changes in the carrying amount of goodwill by geographic segment are as follows:

 
 Gross Balance Accumulated Impairment Losses Net Goodwill 
 
 Balance
January 1,
2010
 Acquired
During
the
Period
 Foreign
Currency
Translation
and Other
 Balance
December 31,
2010
 Balance
January 1,
2010
 Impairment
Loss During
the Period
 Balance
December 31,
2010
 December 31,
2010
 
 
 (in millions)
 

North America

 $210.4 $2.7 $0.7 $213.8 $(22.0)$ $(22.0)$191.8 

Europe

  228.8  12.3  (13.0) 228.1        228.1 

Asia

  7.9    0.2  8.1        8.1 
                  

Total

 $447.1 $15.0 $(12.1)$450.0 $(22.0)$ $(22.0)$428.0 
                  


 
 Gross Balance Accumulated Impairment Losses Net Goodwill 
 
 Balance
January 1,
2011
 Acquired
During
the
Period
 Foreign
Currency
Translation
and Other
 Balance
December 31,
2011
 Balance
January 1,
2011
 Impairment
Loss During
the Period
 Balance
December 31,
2011
 December 31,
2011
 
 
  
 (in millions)
  
 

North America

 $213.8 $1.8 $ $215.6 $(22.0)$(1.2)$(23.2)$192.4 

Europe

  228.1  72.8  (15.6) 285.3        285.3 

Asia

  8.1  4.2  0.4  12.7        12.7 
                  

Total

 $450.0 $78.8 $(15.2)$513.6 $(22.0)$(1.2)$(23.2)$490.4 
                  

Goodwill and intangible assets with indefinite lives areis tested annually for impairment at least annually or more frequently if events or circumstances indicate that it is "more likely than not" that goodwill might be impaired, such as a change in accordance withbusiness conditions. The Company performs its annual goodwill impairment assessment in the provisionsfourth quarter of each year.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(2) Accounting Standards Board Statement No. 142 "Goodwill and Other Intangible Assets" (FAS 142).Policies (Continued)

        The Company'sCompany determined that the future prospects for its Blue Ridge Atlantic Enterprises, Inc. (BRAE) reporting unit in North America were lower than originally estimated as future sales growth expectations have been reduced since the 2010 acquisition of BRAE. The Company recorded a pre-tax goodwill impairment review is based on a discounted cash flow approach atcharge of $1.2 million for that reporting unit. The impairment charge was offset by the reduction in anticipated earnout payment of $1.2 million. The Company estimated the fair value of the reporting unit level that requires management judgment with respect to revenue and expense growth rates, changes in working capital andusing the selection and useexpected present value of an appropriate discount rate. The Company uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as unexpected adverse business conditions, economic factors, unanticipated technological change or competitive activities, loss of key personnel and acts by governments and courts, may signal that an asset has become impaired.future cash flows.

        Intangible assets with estimable lives and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable in accordance with Financial Accounting Standards Board Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144).recoverable. Recoverability of intangible assets with estimable lives and other long-lived assets is measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted pretax cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the impairment loss recognized is the amount by which the carrying amount of the asset or asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future pretax operating cash flows or appraised values, depending on the nature of the asset. The Company determines the discount rate for this analysis based on the expected internal rateweighted average cost of returncapital based on the market and guideline public companies for the related businessbusinesses and does not allocate interest charges to the asset or asset group being measured. Judgment is required to estimate future operating cash flows.

        As a result of the recent economic downturn and other business developments, goodwill in the Company's Water Quality reporting unit was impaired during the fourth quarter of 2008. The Water Quality reporting unit includes a number of businesses that were purchased over time. Most recently, the Company acquired substantially all the assets of Topway Global Inc. (Topway) in November 2007. With the recent decline in commercial and residential projects and threatened legislation in the state of California against water softeners, a principal market for Topway, sales declined from prior year levels and from the Company's expectations. Although the Company continues to see positive results from other businesses within the Water Quality reporting unit, the decline in sales in the fourth quarter of 2008 coupled with the current economic outlook negatively impacted the expected cash flows of the reporting unit. The Company completed an assessment of the fair value of the net assets of the



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(2) Accounting Policies (Continued)


reporting unit and recorded a pre-tax impairment of $22.0 million in the fourth quarter of 2008. The Company estimated the fair value of the reporting unit using the expected present value of future cash flows.

        The changes in the carrying amount of goodwill are as follows:

 
 North
America
 Europe China Total 
 
 (in millions)
 

Carrying amount at December 31, 2006

 $198.9 $147.9 $9.3 $356.1 

Goodwill acquired during the period

  7.6      7.6 

Adjustments to goodwill during the period

  3.8  1.1  2.4  7.3 

Effect of change in exchange rates used for translation

  0.7  13.4  0.7  14.8 
          

Carrying amount at December 31, 2007

 $211.0 $162.4 $12.4 $385.8 

Goodwill acquired during the period

    89.5  3.3  92.8 

Adjustments to goodwill during the period

  0.4    (2.6) (2.2)

Goodwill impairment charge

  (22.0)     (22.0)

Effect of change in exchange rates used for translation

  (1.1) (22.9) 0.9  (23.1)
          

Carrying amount at December 31, 2008

 $188.3 $229.0 $14.0 $431.3 
          

        The adjustments to North American goodwill during the year ended December 31, 2008 relate to approximately $0.4 million for an earn-out provision. The adjustment to China goodwill during the year ended December 31, 2008 includes the write-off of goodwill relating to the disposition of Tianjin Tanggu Watts Valve Company, Ltd. (TWT) and the finalization of the Changsha Valve Works purchase price allocation.

        The adjustments to North American goodwill during the year ended December 31, 2007 relate to an accrual of approximately $3.8 million in earn-out provisions. The adjustment to European goodwill during the year ended December 31, 2007 includes the finalization of the ATS Expansion Group purchase price allocation. ATS Expansion Group was acquired in May 2006. The adjustment to China goodwill during the year ended December 31, 2007 includes the finalization of the Changsha Valve Works purchase price allocation. Changsha Valve Works was acquired in April 2006.

Intangible assets include the following:

 
 December 31, 
 
 2008 2007 
 
 Gross
Carrying
Amount
 Accumulated
Amortization
 Gross
Carrying
Amount
 Accumulated
Amortization
 
 
 (in millions)
 

Patents

 $18.0 $(7.3)$13.8 $(6.1)

Customer relationships

  109.7  (24.6) 70.0  (14.3)

Technology

  7.5  (3.3) 7.5  (2.3)

Other

  19.1  (6.5) 19.0  (5.8)
          
 

Total amortizable intangible assets

  154.3  (41.7) 110.3  (28.5)
          

Intangible assets not subject to amortization

  62.0    52.2   
          
 

Total

 $216.3 $(41.7)$162.5 $(28.5)
          


 
 December 31, 
 
 2011 2010 
 
 Gross
Carrying
Amount
 Accumulated
Amortization
 Net
Carrying
Amount
 Gross
Carrying
Amount
 Accumulated
Amortization
 Net
Carrying
Amount
 
 
 (in millions)
 

Patents

 $16.5 $(10.8)$5.7 $16.6 $(9.6)$7.0 

Customer relationships

  135.8  (57.7) 78.1  120.5  (43.1) 77.4 

Technology

  19.8  (7.1) 12.7  19.8  (5.6) 14.2 

Trade names

  13.4  (0.8) 12.6  4.4    4.4 

Other

  8.5  (5.4) 3.1  8.7  (5.7) 3.0 
              

Total amortizable intangibles

  194.0  (81.8) 112.2  170.0  (64.0) 106.0 

Indefinite-lived intangible assets

  42.4    42.4  46.6    46.6 
              

Total

 $236.4 $(81.8)$154.6 $216.6 $(64.0)$152.6 
              


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(2) Accounting Policies (Continued)

        Aggregate amortization expense for amortized intangible assets for the years ended December 31, 2008, 20072011, 2010 and 20062009 was $13.3$18.1 million, $10.5$14.3 million and $8.6$13.1 million, respectively. Additionally, future amortization expense on amortizable intangible assets approximates $14.4is expected to be $15.4 million for 2009, $14.22012, $14.3 million for 2010,2013, $14.3 million for 2014, $14.0 million for 2011, $12.52015, and $13.5 million for 2012 and $11.3 million for 2013.2016. Amortization expense is provided on a straight-line basis over the estimated useful lives of the intangible assets. The weighted-average remaining life of total amortizable intangible assets is 10.810.6 years. Patents, customer relationships, technology, trade names and other amortizable intangibles have weighted-average remaining lives of 8.27.2 years, 10.27.4 years, 5.214.2 years, 12.7 years and 19.143.2 years, respectively. IntangibleIndefinite-lived intangible assets not subject to amortization primarily include trademarkstrade names and unpatented technology.trademarks.

        In 2011, the Company determined that the prospects for Austroflex Rohr-Isoliersysteme GmbH (Austroflex), part of our Europe segment, were lower than originally estimated due to current



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(2) Accounting Policies (Continued)

operating profits being below plan and tempered future growth expectations. Accordingly, the Company performed an evaluation of the asset group utilizing the undiscounted cash flows and determined the carrying value of the assets were no longer recoverable. The Company performed a fair value assessment and, as a result, wrote down the long-lived assets, including customer relationships, trade names, and property, plant and equipment, by $14.8 million. Fair value was based on discounted cash flows using market participant assumptions and utilized an estimated weighted average cost of capital.

        Adjustments to indefinite-lived intangible assets during the year ended December 31, 2011 relate primarily to recording the value of an additional trade name in connection with the acquisition of Danfoss Socla S.A.S (Socla) offset by an impairment of certain trade names in our European and North America segments and a reassessment of $6.1 million of trade names in our North America and Europe segments to amortizable intangibles.

Property, Plant and Equipment

        Property, plant and equipment are recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, which range from 10 to 40 years for buildings and improvements and 3 to 15 years for machinery and equipment.

Taxes, Other than Income Taxes

        Taxes assessed by governmental authorities on sale transactions are recorded on a net basis and excluded from sales, in the Company's consolidated statements of operations.

Income Taxes

        Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

        On January 1, 2007, theThe Company adopted the provisions of Financial Interpretation No. 48, "Accountingaccounts for Uncertainty in Income Taxes" (FIN 48). The purpose of FIN 48 is to increase the comparability in financial reporting of income taxes. FIN 48 requires that in order for a tax benefit to be booked in the income statement,benefits when the item in question must meetmeets the more-likely-than-not (greater than 50% likelihood of being sustained upon examination by the taxing authorities) threshold. The adoption of FIN 48 did not have a material effect on the Company's financial statements. No cumulative effect was booked through beginning retained earnings.

        During 2008, the Company reduced its unrecognized tax benefits during 2011 by approximately $2.2$2.0 million, as a result of finalizingwhich $1.0 million related to federal, state and state income tax audits.foreign audit settlements and $1.0 million to reduced exposures in Europe. The Company estimates that it is reasonably possible that a portion of the currently remaining unrecognized tax benefit may be recognized by the end of 20092012 as a result of the conclusion of the federalforeign income tax audit.audits. The amount of expense accrued for penalties and interest is $1.1$0.7 million worldwide.

        As of December 31, 2008,2011, the Company had gross unrecognized tax benefits of approximately $2.3$1.8 million, approximately $1.6 million of which, approximately $1.9 million, if recognized, would affect the effective tax rate. The difference between the amount of unrecognized tax benefits and the amount that would impactaffect the effective tax rate consists of the federal tax benefit of state income tax items. A reconciliation of the



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(2) Accounting Policies (Continued)


        A reconciliation of the beginning and ending amount of unrecognized tax benefits and a separate analysis of accrued interest related to the unrecognized tax benefits is as follows:


(in millions)

Balance at January 1, 2008

$3.7

Increases related to prior year tax positions

0.9

Decreases related to prior year tax positions

(1.6)

Increases related to current year tax positions

Decreases related to statute expirations

(0.1)

Settlements

(0.6)

Balance at December 31, 2008

$2.3

 
 (in millions) 

Balance at January 1, 2011

 $3.8 

Decreases related to prior year tax positions

  (1.0)

Settlements

  (1.0)
    

Balance at December 31, 2011

 $1.8 
    

        The Company is currently under audit byIn February 2012, the United States Internal Revenue Service forcommenced an audit of the 2005Company's 2009 and 20062010 tax years. The expected completion date for this audit is November 2009. The Company does not anticipate any significantmaterial adjustments at this time. Wattsto arise as a result of the audit. The Company conducts business in a variety of locations throughout the world resulting in tax filings in numerous domestic and foreign jurisdictions. The Company is subject to tax examinations regularly as part of the normal course of business. The Company's major jurisdictions are the U.S., Canada, China, Netherlands, U.K., Germany, Italy and France. With few exceptions the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2003.2005.

        The Company accounts for interest and penalties related to uncertain tax positions as a component of income tax expense.

        The statute of limitations in our major jurisdictions is open in the U.S. for the year 20052008 and later; in Canada for 20042007 and later; and in the Netherlands for 20042006 and later.

Foreign Currency Translation

        The financial statements of subsidiaries located outside the United States generally are measured using the local currency as the functional currency. Balance sheet accounts, including goodwill, of foreign subsidiaries are translated into United States dollars at year-end exchange rates. Income and expense items are translated at weighted average exchange rates for each period. Net translation gains or losses are included in other comprehensive income, a separate component of stockholders' equity. The Company does not provide for U.S. income taxes on foreign currency translation adjustments since it does not provide for such taxes on undistributed earnings of foreign subsidiaries. Gains and losses from foreign currency transactions of these subsidiaries are included in net earnings.

Stock-Based Compensation and Chief Executive Officer Separation Costs

        Effective January 1, 2006,The Company records compensation expense in the Company adopted Financial Accounting Standards Board Statement No. 123R, "Share-Based Payment"(FAS 123R) utilizingfinancial statements for share-based awards based on the "modified prospective" method as described in FAS 123R. Under the "modified prospective" method,grant date fair value of those awards. Stock-based compensation costexpense includes an estimate for pre-vesting forfeitures and is recognized for all share-based payments granted afterover the effective date and for all unvestedrequisite service periods of the awards granted prior toon a straight-line basis, which is generally commensurate with the effective date. In accordance with FAS 123R, prior period amounts were not restated. FAS 123R also requires the excess taxvesting term. The benefits associated with these share-based paymentstax deductions in excess of recognized compensation cost are reported as a financing cash flow.

        At December 31, 2011, the Company had three stock-based compensation plans with total unrecognized compensation costs related to be classified as financing activitiesunvested stock-based compensation arrangements of approximately $10.6 million and a total weighted average remaining term of 2.4 years. For 2011, 2010 and 2009, the Company recognized compensation costs related to stock-based programs of approximately $5.3 million, $4.7 million and $4.9 million, respectively, in the Statementsselling, general and administrative expenses. The Company recorded approximately $0.6 million of Consolidated Cash Flows, rather than as operating cash flows as required under previous regulations.tax benefits during 2011,



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(2) Accounting Policies (Continued)

        At December 31, 2008, the Company had three stock-based compensation plans with total unrecognized compensation costs related to unvested stock-based compensation arrangements of approximately $7.6 million2010 and a total weighted average remaining term of 2.1 years. For 2008, 2007 and 2006 the Company recognized compensation costs related to stock-based programs of approximately $5.3 million, $6.0 million and $3.0 million respectively, in selling, general and administrative expenses. The Company recorded approximately $0.7 million, $0.7 million and $0.4 million of tax benefit during 2008, 2007 and 2006, respectively,2009 for the compensation expense relating to its stock options. For 2008, 20072011, 2010 and 2006,2009, the Company recorded approximately $1.1$1.5 million, $1.3$1.2 million and $0.6$1.2 million, respectively, of tax benefit for its other stock-based plans. For 2008, 20072011, 2010 and 2006,2009, the recognition of total stock-based compensation expense impacted both basic and diluted net income per common share by $0.10, $0.10$0.09, $0.08 and $0.06,$0.08, respectively.

        On January 26, 2011, Patrick S. O'Keefe resigned from his positions as Chief Executive Officer, President and Director. Pursuant to a separation agreement, the Company recorded a charge of $6.3 million consisting of $3.3 million in expected cash severance and a non-cash charge of $3.0 million for the modification of stock options and restricted stock awards.

Net Income Per Common Share

        Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding. The calculation of diluted income per share assumes the conversion of all dilutive securities (see Note 13).

        Net income and number of shares used to compute net income per share, basic and assuming full dilution, are reconciled below:

 
 Years Ended December 31, 
 
 2008 2007 2006 
 
 Net Income Shares Per
Share
Amount
 Net Income Shares Per
Share
Amount
 Net Income Shares Per
Share
Amount
 
 
 (Amounts in millions, except per share information)
 

Basic EPS

 $46.6  36.6 $1.27 $77.4  38.6 $2.00 $73.7  33.3 $2.21 

Dilutive securities principally common stock options

    0.2  (0.1)   0.4  (0.01)   0.4  (0.02)
                    

Diluted EPS

 $46.6  36.8 $1.26 $77.4  39.0 $1.99 $73.7  33.7 $2.19 
                    

 
 Years Ended December 31, 
 
 2011 2010 2009 
 
 Net
Income
 Shares Per
Share
Amount
 Net
Income
 Shares Per
Share
Amount
 Net
Income
 Shares Per
Share
Amount
 
 
 (Amounts in millions, except per share information)
 

Basic EPS

 $66.4  37.3 $1.78 $58.8  37.3 $1.58 $17.4  37.0 $0.47 

Dilutive securities, principally common stock options

    0.2      0.1  (0.1)   0.1   
                    

Diluted EPS

 $66.4  37.5 $1.78 $58.8  37.4 $1.57 $17.4  37.1 $0.47 
                    

        The computation of diluted net income per share for the years ended December 31, 20082011, 2010 and 20072009 excludes the effect of the potential exercise of options to purchase approximately 1.00.7 million, 0.5 million and 0.50.9 million shares, respectively, because the exercise price of the option was greater than the average market price of the Class A Common Stock asand the effect would have been anti-dilutive.

        On August 2, 2011 the Board of Directors authorized a stock repurchase program. Under the program, the Company was authorized to repurchase up to one million shares of our Class A Common Stock. During the yearthree months ended December 31, 2008,October 2, 2011, the Company repurchased approximately 1.6the entire one million shares at a cost of its Class A Common Stock.$27.2 million.

Derivative Financial Instruments

        In the normal course of business, the Company manages risks associated with commodity prices, foreign exchange rates and interest rates through a variety of strategies, including the use of hedging transactions, executed in accordance with the Company's policies. The Company's hedging transactions include, but are not limited to, the use of various derivative financial and commodity instruments. As a matter of policy, the Company does not use derivative instruments unless there is an underlying exposure. Any change in value of the derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items. The Company does not use derivative instruments for trading or speculative purposes.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(2) Accounting Policies (Continued)


opposite change in the value of the underlying hedged items. The Company does not use derivative        Derivative instruments for trading or speculative purposes.

        Using qualifying criteria defined in Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133), derivative instruments aremay be designated and accounted for as either a hedge of a recognized asset or liability (fair value hedge) or a hedge of a forecasted transaction (cash flow hedge). For a fair value hedge, both the effective and ineffective portions of the change in fair value of the derivative instrument, along with an adjustment to the carrying amount of the hedged item for fair value changes attributable to the hedged risk, are recognized in earnings. For a cash flow hedge, changes in the fair value of the derivative instrument that are highly effective are deferred in accumulated other comprehensive income or loss until the underlying hedged item is recognized in earnings. There were no cash flow hedges as of December 31, 2011.

        If a fair value or cash flow hedge were to cease to qualify for hedge accounting or be terminated, it would continue to be carried on the balance sheet at fair value until settled, but hedge accounting would be discontinued prospectively. If a forecasted transaction waswere no longer probable of occurring, amounts previously deferred in accumulated other comprehensive income would be recognized immediately in earnings. On occasion, the Company may enter into a derivative instrument that does not qualify for hedge accounting because it is entered into to offset changes in the fair value of an underlying transaction which is required to be recognized in earnings (natural hedge). These instruments are reflected in the Consolidated Balance Sheets at fair value with changes in fair value recognized in earnings.

        Foreign currency derivatives include forward foreign exchange contracts primarily for Canadian dollars. Metal derivatives includeincluded commodity swaps for copper. During 2008,2009, the Company used a copper swap as a means of hedging exposure to metal prices (see Note 16)15).

        Portions of the Company's outstanding debt are exposed to interest rate risks. The Company monitors its interest rate exposures on an ongoing basis to maximize the overall effectiveness of its interest rates. During 2006,

Fair Value Measurements

        Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.

        The Company used an interest rate swaphas certain financial assets and liabilities that are measured at fair value on a recurring basis and certain nonfinancial assets and liabilities that may be measured at fair value on a nonrecurring basis. The fair value disclosures of these assets and liabilities are based on a three-level hierarchy, which is defined as a meansfollows:

Level 1Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2


Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3


Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(2) Accounting Policies (Continued)

        Assets and liabilities subject to this hierarchy are classified in their entirety based on the lowest level of hedging exposureinput that is significant to interest rate risks.the fair value measurement. The Company's interest rate swap did not qualify asassessment of the significance of a cash flow hedge underparticular input to the criteria of FAS 133. The swap was terminated on October 3, 2006.fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Shipping and Handling

        Shipping and handling costs included in selling, general and administrative expense amounted to $39.6$38.1 million, $39.1$33.5 million and $37.3$31.4 million for the years ended December 31, 2008, 20072011, 2010 and 2006,2009, respectively.

Research and Development

        Research and development costs included in selling, general, and administrative expense amounted to $17.5$21.2 million, $15.1$18.6 million and $12.7$17.8 million for the years ended December 31, 2008, 20072011, 2010 and 2006,2009, respectively.

Revenue Recognition

        The Company recognizes revenue when all of the following criteria have been met: the Company has entered into a binding agreement, the product has been shipped and title passes, the sales price to the customer is fixed or is determinable, and collectability is reasonably assured. Provisions for



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(2) Accounting Policies (Continued)


estimated returns and allowances are made at the time of sale, and are recorded as a reduction of sales and included in the allowance for doubtful accounts in the Consolidated Balance Sheets. The Company records provisions for sales incentives (primarily volume rebates), as an adjustment to net sales, at the time of sale based on estimated purchase targets.

Basis of Presentation

        Certain amounts in accordancethe 2010 and 2009 consolidated financial statements have been reclassified to permit comparison with the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) Issue 00-14, "Accounting for Certain Sales Incentives" (EITF 00-14) and EITF Issue No 01-9, "Accounting for Consideration Given by a Vendor to a Customer2011 presentation. These reclassifications had no effect on reported results of operations or a Reseller of the Vendor's Products".stockholders' equity.

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. Actual results could differ from those estimates.

New Accounting Standards

        In June 2008,2011, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) EITF Issue No. 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" (FSP EITF 03-6-1). FSP EITF 03-6-1 requires that unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents to be included in the two-class method of computing earnings per share as described in Statement of Financial Accounting Standards (FAS)Update (ASU) No. 128, "Earnings per Share.2011-05, "Comprehensive Income." This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008,ASU intends to enhance comparability and interim periods within those years. Accordingly, we will adopt FSP EITF 03-6-1 in fiscal year 2009.transparency of other comprehensive income components. The adoptionguidance provides an option to present total comprehensive income, the components of FSP EITF 03-6-1 is not expected to have a material impact on the consolidated financial statements.

        In May 2008, the FASB issued FAS No. 162, "The Hierarchy of Generally Accepted Principles," (FAS 162), which identifies the sources of accounting principlesnet income and the framework for selectingcomponents of other comprehensive income in a single continuous statement or two separate but consecutive statements. This ASU eliminates the principlesoption to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). FAS 162 is effective 60 days following the SEC's approvalpresent other comprehensive income components as part of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaningstatement of Present Fairlychanges in Conformity With Generally Accepted Accounting Principles."stockholders' equity. The adoption of FAS 162 is not expected to have an impact on the Company's consolidated financial statements.

        In April 2008, the FASB issued FSP No. FAS 142-3, "Determination of the Useful Life of Intangible Assets." This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS No. 142, "Goodwill and Other Intangible Assets" (FAS 142). The objectiveprovisions of this FSP is to improve the consistency between the useful life of a recognized intangible asset under FAS 142 and the period of expected cash flows used to measure the fair value of the asset under FAS 141(R), and other principles of GAAP. This FSP applies to all intangible assets, whether acquired in a business combination or otherwise, and shallASU will be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. Theretrospectively



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(2) Accounting Policies (Continued)


adoptionfor interim and annual periods beginning after December 15, 2011. Early application is permitted. The Company early adopted the provisions of ASU 2011-05 and opted to present a separate statement of comprehensive income.

        In September 2011, accounting guidance was issued by FASB in ASC Topic 350, "Intangibles—Goodwill and Other". This guidance amends the requirements for goodwill impairment testing. The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the two-step impairment test is unnecessary. The Company early adopted this FSP willnew standard effective with its annual goodwill impairment testing date of October 30, for the year ended December 31, 2011.

(3) Discontinued Operations

        In the first quarter of 2010, the Company recorded an estimated reserve of $5.3 million in discontinued operations in connection with its investigation of potential violations of the Foreign Corrupt Practices Act (FCPA) at Watts Valve (Changsha) Co., Ltd. (CWV), a former indirect wholly-owned subsidiary of the Company in China. On October 13, 2011, the Company entered into a settlement for $3.8 million with the Securities and Exchange Commission to resolve allegations concerning potential violations of the FCPA at CWV. (See Note 14)

        In May 2009, the Company liquidated its TEAM business, located in Ammanford, U.K. TEAM custom designed and manufactured manipulated pipe and hose tubing assemblies and served the heating, ventilation and air conditioning and automotive markets in Western Europe. Management determined the business no longer fit strategically with the Company and that a sale of TEAM was not feasible. On May 22, 2009, the Company appointed an administrator for TEAM under the United Kingdom Insolvency Act of 1986. During the administration process, the administrator had sole control over, and responsibility for, TEAM's operations, assets and liabilities. The Company deconsolidated TEAM when the administrator obtained control of TEAM. The deconsolidation resulted in the recognition of a $18.1 million pre-tax non-cash loss. The Company evaluated the operations of TEAM and determined that it would not have a significant impact on the Company's consolidated financial statements.

        In March 2008, the FASB issued FAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133," (FAS 161), which expands the current disclosure requirements of FAS 133, "Accounting for Derivative Instruments and Hedging Activities," such that entities must now provide enhanced disclosures on a quarterly basis regarding how and why the entity uses derivatives; how derivatives and related hedged items are accounted for under FAS 133 and how derivatives and related hedged items affect the entity's financial position, performancecontinuing involvement in TEAM's operations and cash flow. FAS 161 is effective prospectively for annualflows. As a result of the loss of control, TEAM's cash flows and interim periods beginning on or after November 15, 2008. Accordingly,operations were eliminated from the continuing operations of the Company. As such, the Company will adopt FAS 161 in 2009.

        In December 2007,classified TEAM's results of operations and the FASB issued FAS No. 141 (R)," Business Combinations," (FAS 141R), which requires most identifiable assets, liabilities, non-controlling interests, and goodwill acquired in a business combination to be recorded at "full fair value." Under FAS 141R, all business combinations will be accounted for under the acquisition method. Significant changes, among others,loss from current guidance resulting from FAS 141R includes the requirement that contingent assets and liabilities and contingent consideration shall be recorded at estimated fair valuedeconsolidation as of the acquisition date, with any subsequent changes in fair value charged or credited to earnings. Further, acquisition-related costs will be expensed rather than treated as part of the acquisition. FAS 141R is effective for periods beginning on or after December 15, 2008. The Company expects the adoption of FAS 141R will increase costs charged to itsdiscontinued operations for acquisitions made after January 1, 2009.

        In December 2007, the FASB issued FAS No. 160, "Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB NO. 151," (FAS 160), which requires non-controlling interests (previously referred to as minority interest) to be treated as a separate component of equity, not outside of equity as is current practice. FAS 160 applies to non-controlling interests and transactions with non-controlling interest holders in consolidated financial statements. FAS 160 is effective forall periods beginning on or after December 15, 2008. The Company does not expect the adoption of FAS 160 will have a material impact on its consolidated financial statements.

        In February 2007, the FASB issued FAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities—including an Amendment to FAS No. 115," (FAS 159), which permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Earlier application is encouraged. The Company has elected not to measure its eligible financial instruments at fair value and therefore the adoption of FAS 159 did not have an impact on its consolidated financial statements.

        In September 2006, the FASB issued FAS No. 157, "Fair Value Measurements," (FAS 157), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. FAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements and was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB FSP 157-2 which delayed the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilitiespresented.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(2) Accounting Policies(3) Discontinued Operations (Continued)


assumed in a business combination. Effective January 1, 2008,        Condensed operating statements for discontinued operations are summarized below:

 
 Years Ended
December 31,
 
 
 2011 2010 2009 
 
 (in millions)
 

Operating income (loss)—TEAM

 $ $ $(0.3)

Operating income (loss)—CWV

  1.7  (5.7) (5.3)

Costs and expenses—Municipal Water Group

      (0.3)

Write down of net assets—CWV

    (0.1) (8.5)

Adjustments to reserves for litigation—Municipal Water Group

    (0.1) 9.5 

Gain (loss) on disposal—TEAM

  0.2  (0.1) (18.0)
        

Income (loss) before income taxes

  1.9  (6.0) (22.9)

Income tax benefit (expense)

  (0.2) 1.7  (0.7)
        

Income (loss) from discontinued operations, net of taxes

 $1.7 $(4.3)$(23.6)
        

        The Company did not recognize any tax benefits on the write down of net assets of CWV as the Company adopted FAS 157 for financial assets and liabilities recognized at fair value on a recurring basis. The partial adoption of FAS 157 for financial assets and liabilities diddoes not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

        In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements" (SAB 108), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company adopted the provisions of SAB 108 for fiscal year 2006 and the impact of SAB 108 was not material to its consolidated financial statements.

        In September 2006, the FASB issued FAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)," (FAS 158), which requires an employer to: (a) recognize in its statement of financial position an asset for a plan's overfunded status or a liability for a plan's underfunded status; (b) measure a plan's assets and its obligationsbelieve that determine its funded status as of the end of the employer's fiscal year; and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes are reported in other comprehensive income. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006 for companies with publicly traded equity securities. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008, although earlier adoption is permitted. As a result of the requirement to recognize the funded status of the Company benefit plans as of December 31, 2006, the Company recorded an increase in its pension liability of approximately $8.3 million, a decrease of approximately $1.3 million in other assets: other, net and a decrease in accumulated other comprehensive income of approximately $5.8 million, net of tax. The Company has early-adopted the measurement date provisions of FAS 158 effective January 1, 2007. The Company's pension plans previously used a September 30 measurement date. All plans are now measured as of December 31, consistent with the Company's fiscal year end. The non-cash effect of the adoption of the measurement date provisions of FAS 158 was not material and there was no effect on the Company's results of operations.

        In July 2006, the FASB issued Financial Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position willtax benefits would be sustained upon examination, based on the technical merits. This interpretation also provides guidance on measurement, de-recognition, classification, interest and penalties, accountingrealized.

        Revenues reported in interim periods, disclosure and transition. FIN 48 was effective for fiscal years beginning after December 15, 2006.discontinued operations are as follows:

 
 Years Ended
December 31,
 
 
 2011 2010 2009 
 
 (in millions)
 

Revenues—CWV

 $ $ $11.5 

Revenues—TEAM

      2.6 
        

Total revenues—discontinued operations

 $ $ $14.1 
        

        The Company adopted the provisionscarrying amounts of FIN 48 for fiscal year 2007 and the impact was not material to its consolidated financial statements.

        In March 2006, the FASB issued FAS No. 156 "Accounting for Servicingmajor classes of Financial Assets—an amendment of FASB Statement No. 140," (FAS 156). FAS 156 amends FAS Statement No.140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," with respect to the accounting for separately recognized servicing assets and servicing liabilities. FAS 156 addresses the recognition and measurement of separately recognized servicing assets and liabilities and



Watts Water Technologies, Inc.at December 31, 2011 and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(2) Accounting Policies (Continued)


provides an approach to simplify efforts to obtain hedge-like (offset) accounting. The Company adopted the provisions of FAS 156 for fiscal year 2007 and the impact was not material to its consolidated financial statements.

        In February 2006, the FASB issued FAS No. 155 "Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140" (FAS 155). FAS 155 amends FAS 133, "Accounting for Derivatives and Hedging Activities," and FAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and allows an entity to remeasure at fair value a hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation from the host, if the holder irrevocably elects to account for the whole instrument on a fair value basis. Subsequent changes in the fair value of the instrument would be recognized in earnings. The Company adopted the provisions of FAS 155 for fiscal year 2007 and the impact was not material to its consolidated financial statements.

(3) Discontinued Operations

        In September 1996, the Company divested its Municipal Water Group businesses, which included Henry Pratt, James Jones Company and Edward Barber and Company Ltd. Costs and expenses related to the Municipal Water Group relate to legal and settlement costsDecember 31, 2010 associated with the James Jones Litigation (see Note 15).

        Condensed operating statements and balance sheets for discontinued operations are summarized below:as follows:

 
 Years Ended
December 31,
 
 
 2008 2007 2006 
 
 (in millions)
 

Costs and expenses—Municipal Water Group

 $(1.1)$(0.4)$(5.5)
        

Loss before income taxes

  (1.1) (0.4) (5.5)

Income tax benefit

  0.4  0.2  2.1 
        

Loss from discontinued operations, net of taxes

 $(0.7)$(0.2)$(3.4)
        

 
 December 31,
2011
 December 31,
2010
 
 
 (in millions)
 

Prepaid expenses and other assets

 $  0.4 

Deferred income taxes

    1.4 
      

Assets of discontinued operations

 $ $1.8 
      

Accrued expenses and other liabilities

    5.8 
      

Liabilities of discontinued operations

 $ $5.8 
      


(4) Restructuring and Other Charges, Net

 
 December 31, 
 
 2008 2007 
 
 (in millions)
 

Prepaid expenses and other assets

 $0.8 $(0.3)

Deferred income taxes

  10.8  10.7 
      
 

Assets of discontinued operations

 $11.6 $10.4 
      

Accrued expenses and other liabilities

 $29.7 $28.6 
      
 

Liabilities of discontinued operations

 $29.7 $28.6 
      

        The assets and liabilities for 2008 and 2007 primarily relateCompany's Board of Directors approves all major restructuring programs that involve the discontinuance of product lines or the shutdown of facilities. From time to reserves fortime, the James Jones Litigation. StatementsCompany takes additional restructuring actions, including involuntary terminations that are not part of Cash Flows amounts for 2008, 2007 and 2006 relate to operating activities.a major



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(4) Restructuring and Other (Income) Charges, Net (Continued)

program. The Company accounts for these costs in the period that the individual employees are notified or the liability is incurred. These costs are included in restructuring and other charges in the Company's consolidated statements of operations. In 2011, the Board approved an integration program in association with the acquisition of Socla. The program was designed to integrate certain operations and management structures in the Watts and Socla organizations with a total estimated pre-tax cost of $6.4 million with costs being incurred through 2012. As of December 31, 2011, the Company revised its forecast to $5.1 million due to reduced expected severance costs.

        During 2007, the Company undertook a review of certain product lines and its overall manufacturing capacity. Based on that review,2011, the Company initiated several other actions that were not part of a globalmajor program. In September 2011, the Company announced a plan of termination that would result in a reduction of approximately 10% of North American non-direct payroll costs. The Company recorded a charge of $1.1 million for severance in connection with the plan during the year ended December 31, 2011. Also in 2011, the Company initiated restructuring program that was approved byactivities with respect to the Company's Boardoperating facilities in Europe, which included the closure of Directors on October 30, 2007.a facility. The Company also discontinued certain product lines. This program isEurope restructuring activities are expected to include pre-tax costs of approximately $2.6 million, including costs for severance and shut down costs. The total net after-tax charge is $1.8 million with costs being incurred through 2012. Total costs incurred during 2011 were $2.5 million, primarily for severance. In addition, the shutdownCompany recorded income in restructuring and other charges related to the reduction in the contingent liability for the anticipated earnout payment in connection with the BRAE acquisition of five manufacturing$1.2 million.

        A summary of the pre-tax cost by restructuring program is as follows:

 
 Years Ended
December 31,
 
 
 2011 2010 2009 
 
 (in millions)
 

Restructuring costs:

          

2007 Actions

 $ $1.0 $3.2 

2009 Actions

    1.8  9.3 

2010 Actions

  3.3  11.1  4.6 

2011 Actions

  3.1     

Other Actions

  3.6  0.2  1.8 
        

Total restructuring costs incurred

  10.0  14.1  18.9 

Income related to contingent liability reduction

  (1.2)    

Less: amounts included in cost of goods sold

    (1.5) (1.7)
        

Total restructuring and other charges

 $8.8 $12.6 $17.2 
        

        The Company recorded net pre-tax restructuring and other charges in its business segments as follows:

 
 Years Ended
December 31,
 
 
 2011 2010 2009 
 
 (in millions)
 

North America

 $1.2 $4.1 $4.3 

Europe

  8.6  9.2  5.9 

Asia

  0.2  0.8  8.7 
        

Total

 $10.0 $14.1 $18.9 
        


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(4) Restructuring and Other Charges, Net (Continued)

        Also, during 2011, the Company recorded a tax charge of $1.1 million related to restructuring in France offset by a tax benefit of $4.2 million realized in connection with the disposition of TWVC.

2011 Actions

        The following table summarizes the total expected, incurred and remaining pre-tax costs for the 2011 Socla integration program:

Reportable Segment
 Total
Expected
Costs
 Incurred
through
December 31 2011
 Remaining
Costs at
December 31, 2011
 
 
 (in millions)
 

Europe

 $4.9 $2.9 $2.0 

Asia

  0.2  0.2   
        

Total

 $5.1 $3.1 $2.0 
        

        The Company expects to spend the remaining costs by the end of 2012.

        Details of the Company's 2011 Socla integration reserves for the year ended December 31, 2011 are as follows:

 
 Severance Facility exit
and other
 Total 
 
 (in millions)
 

Balance at December 31, 2010

 $ $ $ 

Net pre-tax restructuring charges

  3.1    3.1 

Utilization and foreign currency impact

  (2.7)   (2.7)
        

Balance at December 31, 2011

 $0.4 $ $0.4 
        

        The Company expects to exhaust the remaining reserve by mid-2012.

        The following table summarizes expected, incurred and remaining costs for 2011 Socla integration actions by type:

 
 Severance Facility exit
and other
 Total 
 
 (in millions)
 

Expected costs

 $5.1 $ $5.1 

Costs Incurred—2011

  (3.1)   (3.1)
        

Remaining costs at December 31, 2011

 $2.0 $ $2.0 
        

2010 Actions

        On February 8, 2010, the Board approved a restructuring program with respect to the Company's operating facilities and the rightsizing of a sixth facility, including the relocation of its joint venture facility in China that was previously disclosed.France. The restructuring program and charges for certain product line discontinuancesincluded the consolidation of five facilities into two facilities. The program was originally expected to include pre-tax charges totaling approximately $12.9 million. Charges are primarily$12.5 million, including costs for severance, ($4.3 million), relocation, costs ($2.8 million)clean-up and othercertain 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 were discontinued and accelerated depreciation resulted in a pre-tax charge of $4.3 million during 2007. Total net after-tax charges for this program are expected to be approximately $9.4 million ($4.4 million non-cash), with costs being incurred through 2010.write-downs. The Company expectsrevised its forecast to spend approximately $13.4$16.5 million in capital expendituresprimarily to consolidate operationsreflect additional severance 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 will be fully realized by the second half of 2010.

        The following table presents the total estimated pre-tax charges to be incurred for the global restructuring program and product line discontinuances initiated in 2007 by the Company's reportable segments:

Reportable Segment
 Total Spent to Date 
 
 (in millions)
 

North America

 $5.7 $5.8 

Europe

  3.9  0.2 

China

  3.3  2.9 
      

Total

 $12.9 $8.9 
      

        For 2008, the Company recorded pre-tax charges of approximately $5.7 million. Pre-tax costs of $0.3 million recorded in costs of goods sold were primarily for accelerated depreciation. Pre-tax costs of $5.6 million recorded in restructuring and other charges were primarily severance costs, asset write-downs, accelerated depreciation related to the Company's relocation of its then 60% owned Chinese joint venture. The Company also recognized income of $0.2 million in minority interest representing the 40% liability of its Chinese joint venture partner in the restructuring plan.

        For 2007, the Company recorded pre-tax charges of approximately $7.5 million. Pre-tax costs of $4.3 million recorded in costs of goods sold were primarily for product line discontinuances. Pre-tax costs of $3.2 million recorded in restructuring and other charges were primarily for asset write-downs related to the Company's wholly owned Chinese manufacturing plants, accelerated depreciation related to the Company's relocation of its then 60% owned Chinese joint venture and severance costs in both China and North America. The Company also recognized income of $0.9 million in minority interest representing the 40% liability of its then Chinese joint venture partners in the restructuring plan.

        For 2006, the Company recorded charges of $4.7 million in costs of goods sold primarily for manufacturing severance costs related to the Company's relocation plan for its then 60% owned Chinese joint venture. The Company recorded income of $5.7 million to restructuring and other (income) charges which is primarily comprised of gains of approximately $8.2 million related to the sales of buildings in Italy, partially offset by charges of approximately $2.1 million for severance costslegal costs.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(4) Restructuring and Other (Income) Charges, Net (Continued)


The Company recorded certain severance costs related to this program in 2009 as the amounts related to contractual or statutory obligations. This program is complete.

        On September 13, 2010, the Board approved a restructuring program with respect to certain of the Company's Europeanoperating facilities in the United States. The restructuring plans and approximately $0.4 million for accelerated amortization related toprogram included the shutdown of two manufacturing facilities in North Carolina. Operations at these facilities have been consolidated into the Company's Chinese restructuring plan.manufacturing facilities in New Hampshire, Missouri and other locations. The program originally included pre-tax charges totaling approximately $4.9 million, including costs for severance, shutdown costs and equipment write-downs and pre-tax training and pre-production set-up costs of approximately $2.0 million. The Company also recognized incomerevised its forecast to $2.5 million due to reduced shutdown costs. The total net after-tax charge for this restructuring program was approximately $1.5 million. The restructuring program is expected to be completed in the first quarter of $1.5 million in minority interest representing2012.

        The following table summarizes the 40% liability of its then Chinese joint venture partners.

        With respect tototal expected, incurred and remaining pre-tax costs for the table below, restructuring costs consist primarily of severance costs. In 2007, severance costs were recorded in restructuring2010 Europe and other charges (income) and, in 2006, were recorded in cost of goods sold. Asset write-downs consist primarily of write-offs of fixed assets and accelerated depreciation. Product line discontinuances consist of inventory write-offs related to product linesNorth America footprint consolidation-restructuring programs by the Company has discontinued and are recorded in cost of goods sold. Other costs consist of gains on sales of buildings in 2006 and of removal and shipping costs associated with relocation of manufacturing equipment in 2007.Company's reportable segments:

 
 Total Expected
Costs
 Incurred through
December 31, 2010
 Additional Costs
incurred through
December 31, 2011
 Remaining Costs 
 
 (in millions)
 

Europe

 $16.5 $13.7 $2.8 $ 

North America

  2.5  2.0  0.5 $ 
          

Total

 $19.0 $15.7 $3.3 $ 
          

        Details of the Company's manufacturing restructuring plans2010 Europe and North America footprint consolidation-restructuring program reserves through December 31, 20082011 are as follows:

 
 Restructuring Asset write-downs Product line discontinuance Other costs Minority interest Total 
 
 (in millions)
 

Balance as of December 31, 2005

 $ $ $ $ $ $ 

Provisions during 2006

  6.7  0.5    (8.2) (1.5) (2.5)

Utilized during 2006

  (2.5) (0.5)   8.2  1.5  6.7 
              

Balance as of December 31, 2006

  4.2          4.2 
              

Provisions during 2007

  0.8  2.8  3.8  0.1  (0.9) 6.6 

Utilized during 2007

  (2.6) (2.8) (3.8) (0.1) 0.9  (8.4)
              

Balance as of December 31, 2007

  2.4          2.4 
              

Provisions during 2008

  3.7  0.6    1.6  (0.2) 5.7 

Utilized during 2008

  (6.1) (0.6)   (1.6) 0.2  (8.1)
              

Balance as of December 31, 2008

 $ $ $ $ $ $ 
              

 
 Severance Asset write-
downs
 Facility exit
and other
 Total 
 
 (in millions)
 

Balance at December 31, 2008

 $ $ $ $ 

Net pre-tax restructuring charges

  4.2    0.4  4.6 

Utilization and foreign currency impact

      (0.4) (0.4)
          

Balance at December 31, 2009

  4.2      4.2 

Net pre-tax restructuring charges

  4.9  1.7  4.5  11.1 

Utilization and foreign currency impact

  (1.7) (1.7) (4.5) (7.9)
          

Balance at December 31, 2010

 $7.4 $ $ $7.4 

Net pre-tax restructuring charges

  1.5  0.5  1.3  3.3 

Utilization and foreign currency impact

  (6.0) (0.5) (1.3) (7.8)
          

Balance at December 31, 2011

 $2.9 $ $ $2.9 
          


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(4) Restructuring and Other Charges, Net (Continued)

        The following table summarizes expected, incurred and remaining costs for the Company's 2010 Europe and North America footprint consolidation-restructuring actions by type:

 
 Severance Asset write-
downs
 Facility exit
and other
 Total 
 
 (in millions)
 

Expected costs

 $10.6 $2.2 $6.2 $19.0 

Costs incurred—2009

  (4.2)   (0.4) (4.6)

Costs incurred—2010

  (4.9) (1.7) (4.5) (11.1)

Costs incurred—2011

  (1.5) (0.5) (1.3) (3.3)
          

Remaining costs at December 31, 2011

 $ $ $ $ 
          

2009 Actions

        In February 2009, the Board approved a plan to consolidate its manufacturing footprint in North America and Asia. The final plan provided for the closure of two plants, with those operations being moved to existing facilities in either North America or Asia or relocated to a new central facility in the United States. The project was completed in 2010.

        The following table summarizes the total estimated pre-tax charges expected, incurred and remaining cost for the footprint consolidation- restructuring program initiated in 2009 by the Company's reportable segments:

 
 Total Expected
Costs
 Incurred through
December 31, 2010
 Remaining Costs 
 
  
 (in millions)
  
 

North America

 $1.9 $1.9 $ 

Asia

  9.2  9.2   
        

Total

 $11.1 $11.1 $ 
        

        Details of the Company's footprint consolidation-restructuring program through December 31, 2010 are as follows:

 
 Severance Asset write-
downs
 Facility exit
and other
 Total 
 
 (in millions)
 

Balance at December 31, 2008

 $ $ $ $ 

Net pre-tax restructuring charges

  1.7  7.5  0.1  9.3 

Utilization

  (1.7) (7.5) (0.1) (9.3)
          

Balance at December 31, 2009

         

Net pre-tax restructuring charges

  0.7  0.1  1.0  1.8 

Utilization

  (0.7) (0.1) (1.0) (1.8)
          

Balance at December 31, 2010

 $ $ $ $ 
          


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(5) Business Acquisitions and Disposition

Socla

        On May 30, 2008,April 29, 2011, the Company acquired allcompleted the acquisition of Danfoss Socla S.A.S and the outstanding stockrelated water controls business of Blücher for approximately $183.5 million.certain other entities controlled by Danfoss A/S, in a share and asset purchase transaction (collectively, "Socla"). The aggregate consideration paid was EUR 120.0 million, less EUR 3.7 million in working capital and related adjustments. The net purchase price consisted of $170.1EUR 116.3 million inwas financed with cash on hand and euro-based borrowings under our Credit Agreement. The net purchase price was equal to approximately $172.4 million based on the exchange rate of Euro to U.S. dollars as of April 29, 2011.

        Socla is a manufacturer of water protection valves and flow control solutions for the water market and the assumption of debt of $13.4 million, net of cash acquired. Blücherheating, ventilation and air conditioning market. Its major product lines include backflow preventers, check valves and pressure reducing valves. Socla is a leading provider of stainless steel drainage systemsbased in Europe to theFrance, and its products are distributed for commercial, residential, commercialmunicipal and industrial market placesuse. Socla's annual revenue for 2010 was approximately $130.0 million. Socla strengthens the Company's European plumbing and is a worldwide leader in providing stainless steel drainageflow control products to the marine industry. Blücher provides the Company with a new product platform in Europe while allowing the Company to offer a broader product lineand also adds to its existing customer base.HVAC product line.

        The Company is accounting for the transaction as a business combination under FAS No. 141, "Business Combinations."combination. The Company completed a preliminary purchase price allocation that resulted in the recognition of $64.5$78.8 million in goodwill and $40.6 million in intangible assets and $89.5 million in goodwill.assets. Intangible assets are comprisedconsist primarily of customer relationships and patents with estimated lives of 10 years and trade names with either 20-year lives or indefinite lives. The goodwill is attributable to the workforce of Socla and the synergies that are expected to arise as a result of the acquisition. The goodwill is not expected to be deductible for tax purposes. The following table summarizes the preliminary value of the assets and liabilities acquired (in millions):

Cash

 $7.4 

Accounts receivable

  28.2 

Inventory

  24.6 

Fixed assets

  46.8 

Other assets

  6.5 

Intangible assets

  40.6 

Goodwill

  78.8 

Accounts payable

  (8.2)

Accrued expenses and other

  (19.2)

Deferred tax liability

  (22.3)

Debt

  (10.8)
    

Purchase price

 $172.4 
    

        The purchase price allocation for the acquisition noted above is preliminary pending the final determinations of fair values of intangible assets and certain assumed assets and liabilities.

        The consolidated resultsstatement of operations includeincludes the results of BlücherSocla since the acquisition date and includes $94.8 million of May 30, 2008. Had the Company completed therevenues and $1.6 million of operating income, which includes acquisition at the beginningaccounting charges of 2007, the net sales, income from continuing operations and earnings per share from continuing operations would have been as follows:

        Amounts in millions (except per share information) (unaudited)

 
 Twelve Months Ended 
 
 December 31,
2008
 December 31,
2007
 

Net sales

 $1,500.7 $1,460.2 

Income from continuing operations

 $54.3 $75.1 

Net income

 $53.6 $74.9 

Basic EPS—Net income

 $1.47 $1.94 

Diluted EPS—Net income

 $1.46 $1.92 

        During the second quarter of 2008, the Company completed the acquisition of the remaining 40% ownership of its joint venture in China, TWT, for $3.3 million in cash. TWT manufactured products to support the U.S. operations as well as to sell into the local China market. In the third quarter of 2008, the Company relocated the business supporting the U.S. from TWT into an existing operation in China. The Company then entered into an agreement to sell TWT. Under this agreement, the Company determined that the risks and rewards of ownership of TWT were effectively transferred to the buyer as of October 18, 2008. The Company further determined that it was no longer the primary beneficiary of the operating results of TWT and therefore deconsolidated TWT as of October 18, 2008. As the equity transfer from the Company to the buyer has not yet been approved by local authorities, the Company deferred a $1.1 million gain from the sale. Upon final approval of the transfer by Chinese government authority, the Company expects to recognize the gain during 2009. The deferred gain has been recorded as a current liability in the accompanying Consolidated Balance Sheet.

        On November 9, 2007, the Company acquired the assets and business of Topway located in Brea, California for approximately $18.4 million. The allocations for goodwill and intangible assets were approximately $7.6$4.7 million and $8.2 million, respectively. The amount recorded as intangible assets is primarily for customer relationships with an estimated useful liferestructuring charges of 10 years and trade names with indefinite lives. Topway manufactures a wide variety of water softeners, point-of-entry filter units, and point-of-use drinking water systems for residential, commercial and industrial applications.

        Certain acquisition agreements from prior years contain either an earn-out provision or a put feature on the remaining common stock not yet purchased by the Company. In 2008, the Company accrued approximately $0.4 million for an earn-out provision which was charged to goodwill and will be paid in 2009. In 2007, the Company accrued approximately $3.8 million in earn-out provisions which$2.7 million.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(5) Business Acquisitions and Disposition (Continued)


Supplemental pro-forma information (unaudited)

        Had the Company completed the acquisition of Socla at the beginning of 2010, net sales, net income from continuing operations and earnings per share from continuing operations would have been as follows:

 
 Year Ended 
Amounts in millions (except per share information)
 December 31,
2011
 December 31,
2010
 

Net sales

 $1,484.0 $1,404.4 

Net income from continuing operations

 $70.7 $67.1 

Net income per share:

       

Basic EPS—continuing operations

 $1.90 $1.80 

Diluted EPS—continuing operations

 $1.89 $1.79 

        Net income from continuing operations for the year ended December 31, 2011 and December 31, 2010 was adjusted to include $0.7 million and $2.1 million, respectively, of net interest expense related to the financing and $0.8 million and $2.3 million, respectively, of net amortization expense resulting from the estimated allocation of purchase price to amortizable tangible and intangible assets. Net income from continuing operations for the year ended December 31, 2011 and December 31, 2010 was also adjusted to exclude $4.3 million and $1.5 million, respectively, of net acquisition-related charges and third-party costs.

Austroflex

        On June 28, 2010, the Company acquired 100% of the outstanding stock of Austroflex for approximately $33.7 million. Austroflex is an Austrian-based manufacturer of pre-insulated flexible pipe systems for district heating, solar applications and under-floor radiant heating systems. The acquisition of Austroflex provides the Company with a full range of pre-insulated PEX tubing, pre-insulated solar tubes, under-floor heating insulation, and distribution capability and positions the Company as a major supplier of pre-insulated pipe systems in Europe. The Company completed a purchase price allocation that resulted in the recognition of $17.2 million of intangible assets and $12.3 million of goodwill. Intangible assets were chargedbased on fair value estimates and are comprised primarily of customer relationships with estimated useful lives of 8 years and trade names with indefinite lives. Goodwill is expected to be tax deductible up to a certain limit established under Austrian tax rules. Austroflex had annual sales prior to the acquisition of approximately $23.0 million. In 2011, the Company determined that the prospects for Austroflex, part of the Europe segment, were lower than originally estimated due to current operating profits being below plan and tempered future growth expectations. (See Note 2)

BRAE

        On April 13, 2010, the Company acquired 100% of the outstanding stock of BRAE located in Oakboro, North Carolina for up to $5.3 million, net of cash acquired. Of the total purchase price, $0.5 million was paid at closing and the remaining $4.8 million is contingent upon BRAE achieving a certain performance metric during the year ending December 31, 2014, which, to the extent achieved, is expected to be paid in cash in 2015. The Company recognized a liability of $1.9 million as an estimate of the acquisition date fair value of the contingent consideration, based on the net present value of $3.7 million which is derived from the weighted probability of achievement of the performance metric as of the date of the acquisition. Failure to meet the performance metric would reduce this liability to $0,



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(5) Business Acquisitions and Disposition (Continued)

while complete achievement would increase this liability to the full remaining purchase price of $4.8 million. Any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date is recognized in earnings in the period the estimated fair value changes. The excess fair value of the consideration transferred over the fair value of the net assets acquired of $2.7 million was allocated to goodwill and paid in 2008.trade name. None of the goodwill is expected to be tax deductible. BRAE is a provider of engineered rain water harvesting solutions and addresses the commercial, industrial and residential markets. BRAE had annual sales prior to the acquisition of approximately $2.0 million. In 2006,2011, the Company accrued approximately $4.0 million in earn-out provisions whichdetermined that the future prospects for BRAE were charged to goodwill and paid in 2007.lower than originally estimated as future sales growth expectations have been tempered since the acquisition. (See Note 2)

        The calculationsresults of operations for BRAE are typically based on a multiple of future gross margins or operating earnings as definedincluded in the agreements.Company's North America segment and the results of operations of Austroflex are included in the Company's Europe segment since their respective acquisition dates and were not material to the Company's consolidated financial statements. The results of Socla are included in all three operating segments since acquisition date, with the majority of its operations recorded in the European segment.

        In March 2010, in connection with the Company's manufacturing footprint consolidation, the Company closed the operations of Tianjin Watts valve Company Ltd. (TWVC) and relocated its manufacturing to other facilities. On April 12, 2010, the Company signed a definitive equity transfer agreement with a third party to sell the Company's equity ownership and remaining assets of TWVC. The sale was finalized in the fourth quarter of 2011. The Company received net proceeds of approximately $6.1 million from the sale. The Company recognized a net pre-tax gain of $7.7 million and an after-tax gain of approximately $11.4 million, or $0.30 per share, relating mainly to the recognition of a cumulative translation adjustment and a tax benefit related to the reversal of a tax clawback in China.

(6) Accumulated Other Comprehensive Income (Loss)

        Accumulated other comprehensive income (loss) consist of the following:

 
 Foreign
Currency
Translation
 Defined Benefit
Pension Plans
 Accumulated
Other
Comprehensive
Income/(Loss)
 
 
 (in millions)
 

Balance December 31, 2006

 $38.1 $(12.7)$25.4 

Change in period

  39.1  4.2  43.3 
        

Balance December 31, 2007

  77.2  (8.5) 68.7 

Change in period

  (51.8) (16.7) (68.5)
        

Balance December 31, 2008

 $25.4 $(25.2)$0.2 
        

(7) Inventories, net

        Inventories consist of the following:

 
 December 31, 
 
 2008 2007 
 
 (in millions)
 

Raw materials

 $107.4 $108.9 

Work in process

  44.9  45.7 

Finished goods

  186.7  187.0 
      

 $339.0 $341.6 
      

 
 December 31, 
 
 2011 2010 
 
 (in millions)
 

Raw materials

 $107.7 $101.9 

Work in process

  28.7  19.9 

Finished goods

  147.8  143.8 
      

 $284.2 $265.6 
      

        FinishedRaw materials, work-in-process and finished goods are net of $19.1valuation reserves of $26.2 million and $20.3$23.9 million as of December 31, 20082011 and 2007,2010, respectively. Finished goods of $13.3 million and $14.7 million as of December 31, 2011 and 2010, respectively, were consigned.


(8)
Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(7) Property, Plant and Equipment

        Property, plant and equipment consistsconsist of the following:

 
 December 31, 
 
 2008 2007 
 
 (in millions)
 

Land

 $14.9 $13.7 

Buildings and improvements

  149.4  132.6 

Machinery and equipment

  293.5  270.5 

Construction in progress

  7.6  20.6 
      

  465.4  437.4 

Accumulated depreciation

  (228.0) (213.7)
      

 $237.4 $223.7 
      

 
 December 31, 
 
 2011 2010 
 
 (in millions)
 

Land

 $15.6 $13.3 

Buildings and improvements

  153.7  132.1 

Machinery and equipment

  318.0  297.8 

Construction in progress

  7.5  7.3 
      

  494.8  450.5 

Accumulated depreciation

  (268.1) (253.0)
      

 $226.7 $197.5 
      

(8) Income Taxes

        The significant components of the Company's deferred income tax liabilities and assets are as follows:

 
 December 31, 
 
 2011 2010 
 
 (in millions)
 

Deferred income tax liabilities:

       

Excess tax over book depreciation

 $21.0 $13.7 

Intangibles

  33.6  29.3 

Other

  15.6  12.8 
      

Total deferred tax liabilities

  70.2  55.8 

Deferred income tax assets:

       

Accrued expenses

  17.9  17.9 

Net operating loss carry-forward

  6.5  8.1 

Inventory reserves

  8.1  9.4 

Pension—accumulated other comprehensive income

  12.0  15.8 

Other

  15.1  15.6 
      

Total deferred tax assets

  59.6  66.8 

Less: valuation allowance

  (9.1) (9.1)
      

Net deferred tax assets

  50.5  57.7 
      

Net deferred tax assets (liabilities)

 $(19.7)$1.9 
      


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(9)(8) Income Taxes (Continued)

        The significant components of the Company's deferred income tax liabilities and assets are as follows:

 
 December 31, 
 
 2008 2007 
 
 (in millions)
 

Deferred income tax liabilities:

       
 

Excess tax over book depreciation

 $15.9 $15.3 
 

Intangibles

  33.3  23.5 
 

Other

  8.5  12.4 
      
  

Total deferred tax liabilities

  57.7  51.2 

Deferred income tax assets:

       
 

Accrued expenses

  23.8  22.0 
 

Net operating loss carry-forward

  4.3  3.2 
 

Inventory reserves

  10.3  13.7 
 

Other

  29.1  10.7 
      
  

Total deferred tax assets

  67.5  49.6 

Less: valuation allowance

  (4.7) (3.2)
      
 

Net deferred tax assets

  62.8  46.4 
      
 

Net deferred tax (assets)/liabilities

 $5.1 $(4.8)
      

        The provision for income taxes from continuing operations is based on the following pre-tax income:

 
 Years Ended December 31, 
 
 2008 2007 2006 
 
 (in millions)
 

Domestic

 $0.9 $47.6 $49.6 

Foreign

  71.4  66.2  66.5 
        

 $72.3 $113.8 $116.1 
        


 
 Years Ended December 31, 
 
 2011 2010 2009 
 
 (in millions)
 

Domestic

 $40.0 $43.5 $21.5 

Foreign

  51.5  51.0  50.8 
        

 $91.5 $94.5 $72.3 
        


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(9) Income Taxes (Continued)

        The provision for income taxes from continuing operations consists of the following:

 
 Years Ended
December 31,
 
 
 2008 2007 2006 
 
 (in millions)
 

Current tax expense:

          
 

Federal

 $7.6 $19.2 $18.0 
 

Foreign

  24.7  20.4  20.5 
 

State

  1.9  4.8  4.1 
        

  34.2  44.4  42.6 
        

Deferred tax expense (benefit):

          
 

Federal

  (0.2) (5.7) (1.7)
 

Foreign

  (7.7) (1.2) (1.5)
 

State

  (1.3) (1.3) (0.4)
        

  (9.2) (8.2) (3.6)
        

 $25.0 $36.2 $39.0 
        

 
 Years Ended
December 31,
 
 
 2011 2010 2009 
 
 (in millions)
 

Current tax expense:

          

Federal

 $7.2 $12.0 $1.9 

Foreign

  18.6  20.5  23.5 

State

  1.9  2.9  0.6 
        

  27.7  35.4  26.0 
        

Deferred tax expense (benefit):

          

Federal

  5.3  1.6  6.8 

Foreign

  (7.3) (5.9) (3.3)

State

  1.1  0.3  1.8 
        

  (0.9) (4.0) 5.3 
        

 $26.8 $31.4 $31.3 
        

        Actual income taxes reported from continuing operations are different than would have been computed by applying the federal statutory tax rate to income from continuing operations before income taxes. The reasons for this difference are as follows:

 
 Years Ended
December 31,
 
 
 2008 2007 2006 
 
 (in millions)
 

Computed expected federal income expense

 $25.3 $39.8 $40.6 

State income taxes, net of federal tax benefit

  0.4  2.3  2.4 

Foreign tax rate differential

  (8.0) (7.2) (4.4)

Valuation allowance

  4.2  3.2   

Goodwill impairment

  3.2     

Other, net

  (0.1) (1.9) 0.4 
        

 $25.0 $36.2 $39.0 
        

 
 Years Ended
December 31,
 
 
 2011 2010 2009 
 
 (in millions)
 

Computed expected federal income expense

 $32.0 $33.0 $25.3 

State income taxes, net of federal tax benefit

  2.0  2.1  1.5 

Foreign tax rate differential

  (2.6) (3.3) 2.5 

China tax clawback

  (4.2)    

Other, net

  (0.4) (0.4) 2.0 
        

 $26.8 $31.4 $31.3 
        

        At December 31, 2008,2011, the Company has foreign net operating loss carry forwards of $16.1$24.4 million for income tax purposes; $6.2$2.4 million of the losses can be carried forward indefinitely, $4.9$7.4 million of the losses expire in 2016, and $5.0$5.4 million expire in 2017.2017, and $9.2 million expire between 2018-2020. The net operating losses consist of $5.0$2.4 million related to GermanAustrian operations, $1.2$19.2 million to AustrianDutch operations, and $9.9 million$2.8 related to NetherlandChinese operations.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(8) Income Taxes (Continued)

        At December 31, 2008,2011, the Company had a valuation allowance of $4.7$9.1 million, for aall of which relates to U.S. capital loss sustained in the U.S., as managementlosses. Management believes it is not more likely than not that the Company would use such losslosses within the applicable carryforwardcarry forward period. The entire $3.2 million beginning of year valuation allowance pertained to TWT, a Chinese subsidiary which was disposed of in 2008. The Company does not have a valuation allowance onwith respect to other deferred tax assets, as management believes that it is more likely than not that the Company will recover the net deferred tax assets.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(9) Income Taxes (Continued)

        Enacted changes in income tax laws had no material effect on the Company in 2008, 20072011, 2010 or 2006.2009.

        Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $312.5$282.2 million at December 31, 2008, $251.62011, $313.0 million at December 31, 20072010, and $168.9$320.3 million at December 31, 2006.2009. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been recorded thereon. Upon distribution of those earnings, in the form of dividends or otherwise, the Company will be subject to withholding taxes payable to the various foreign countries. Determination of the amount of U.S. income tax liability that would be incurred is not practicable because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credits may be available to reduce some portion of any U.S. income tax liability. Withholding taxes of approximately $6.1$7.8 million would be payable upon remittance of all previously unremitted earnings at December 31, 2008.2011.

(10)(9) Accrued Expenses and Other Liabilities

        Accrued expenses and other liabilities consist of the following:

 
 December 31, 
 
 2008 2007 
 
 (in millions)
 

Commissions and sales incentives payable

 $41.2 $42.6 

Accrued product liability and workers' compensation

  30.5  26.1 

Other

  28.1  38.5 

Income taxes payable

  4.1  6.4 
      

 $103.9 $113.6 
      

 
 December 31, 
 
 2011 2010 
 
 (in millions)
 

Commissions and sales incentives payable

 $39.5 $35.9 

Accrued product liability and workers' compensation

  30.5  29.4 

Other

  39.0  43.0 

Income taxes payable

  0.2  7.3 
      

 $109.2 $115.6 
      


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(11)(10) Financing Arrangements

        Long-term debt consists of the following:

 
 December 31, 
 
 2008 2007 
 
 (in millions)
 

5.85% notes due April 2016

 $225.0 $225.0 

4.87% notes due May 2010

  50.0  50.0 

5.47% notes due May 2013

  75.0  75.0 

$350.0 million Revolving Credit Facility maturing in April 2011. Eurocurrency rate loans interest accruing at LIBOR or Euro LIBOR plus an applicable percentage (Euro LIBOR at 0.4% and 4.7% at December 31, 2008 and 2007, respectively) At December 31, 2008, $55.0 million was for euro based borrowings and there were no outstanding U.S. borrowings. At December 31, 2007, $81.8 million were for euro based borrowings and there were no outstanding U.S. borrowings. 

  55.0  81.8 

Other—consists primarily of European borrowings (at interest rates ranging from 4.1% to 6.0%)

  9.3  1.7 
      

  414.3  433.5 

Less Current Maturities

  4.5  1.3 
      

 $409.8 $432.2 
      

 
 December 31, 
 
 2011 2010 
 
 (in millions)
 

5.85% notes due April 2016

 $225.0 $225.0 

5.47% notes due May 2013

  75.0  75.0 

5.05% notes due June 2020

  75.0  75.0 

Revolving credit facility—Eurocurrency loans accruing at LIBOR or Euro Libor plus an applicable percentage (2.96% as of December 31, 2011)

  13.0   

Other—consists primarily of European borrowings (at interest rates ranging from 5.0% to 6.0%)

  11.4  3.7 
      

  399.4  378.7 

Less Current Maturities

  2.0  0.7 
      

 $397.4 $378.0 
      

        Principal payments during each of the next five years and thereafter are due as follows (in millions): 2009—$4.5; 2010—$50.8; 2011—$55.7; 2012—$0.8;2.0; 2013—$75.777.1; 2014—$2.2; 2015—$18.1; 2016—$225.0 and thereafter—$226.8.75.0.

        The Company maintains letters of credit that guarantee its performance or payment to third parties in accordance with specified terms and conditions. Amounts outstanding were approximately $39.3$34.9 million as of December 31, 20082011 and $45.0 million as of December 31, 2007.2010. The Company's letters of credit are primarily associated with insurance coverage and to a lesser extent foreign purchases. The Company's letters of credit generally expire within one year of issuance and are drawn down against the revolving credit facility. These instruments may exist or expire without being drawn down. Therefore, they do not necessarily represent future cash flow obligations.

        On June 18, 2010, the Company entered into a note purchase agreement with certain institutional investors (the 2010 Note Purchase Agreement). Pursuant to the 2010 Note Purchase Agreement, the Company issued senior notes of $75.0 million in principal, due June 18, 2020. The Company will pay interest on the outstanding balance of the Notes at the rate of 5.05% per annum, payable semi-annually on June 18 and December 18 until the principal on the Notes shall become due and payable. The Company may, at its option, upon notice, and subject to the terms of the 2010 Note Purchase Agreement, prepay at any time all or part of the Notes in an amount not less than $1 million by paying the principal amount plus a make-whole amount (as defined in the 2010 Note Purchase Agreement). The 2010 Note Purchase Agreement includes operational and financial covenants, with which the Company is required to comply, including, among others, maintenance of certain financial ratios and restrictions on additional indebtedness, liens and dispositions. As of December 31, 2011, the Company was in compliance with all covenants related to the 2010 Note Purchase Agreement.

        On June 18, 2010, the Company entered into a credit agreement (the Credit Agreement) among the Company, certain subsidiaries of the Company who become borrowers under the Credit Agreement, Bank of America, N.A., as Administrative Agent, swing line lender and letter of credit issuer, and the other lenders referred to therein. The Credit Agreement provides for a $300 million, five-year, senior unsecured revolving credit facility which may be increased by an additional $150 million under certain circumstances and subject to the terms of the Credit Agreement. The Credit Agreement has a sublimit of up to $75.0 million in letters of credit. Borrowings outstanding under the



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(10) Financing Arrangements (Continued)

Credit Agreement bear interest at a fluctuating rate per annum equal to (i) in the case of Eurocurrency rate loans, the British Bankers Association LIBOR rate plus an applicable percentage, ranging from 1.70% to 2.30%, determined by reference to the Company's consolidated leverage ratio plus, in the case of certain lenders, a mandatory cost calculated in accordance with the terms of the Credit Agreement, or (ii) in the case of base rate loans and swing line loans, the highest of (a) the federal funds rate plus 0.5%, (b) the rate of interest in effect for such day as announced by Bank of America, N.A. as its "prime rate," and (c) the British Bankers Association LIBOR rate plus 1.0%, plus an applicable percentage, ranging from 0.70% to 1.30%, determined by reference to the Company's consolidated leverage ratio. In addition to paying interest under the Credit Agreement, the Company is also required to pay certain fees in connection with the credit facility, including, but not limited to, a facility fee and letter of credit fees. The Credit Agreement expires on June 18, 2015. The Company may repay loans outstanding under the Credit Agreement from time to time without premium or penalty, other than customary breakage costs, if any, and subject to the terms of the Credit Agreement.

        Under the Credit Agreement, the Company is required to satisfy and maintain specified financial ratios and other financial condition tests. As of December 31, 2011, the Company was in compliance with all covenants related to the Credit Agreement and had $252.4 million of unused and available credit under the Credit Agreement, $34.6 million of stand-by letters of credit outstanding on the Credit Agreement and $13.0 million in euro-based borrowings under the Credit Agreement.

        On April 27, 2006, the Company completed a private placement of $225.0 million of 5.85% senior unsecured notes due April 2016 (the 2006 Note Purchase Agreement). The 2006 Note Purchase Agreement includes operational and financial covenants, with which the Company is required to comply, including, among others, maintenance of certain financial ratios and restrictions on additional indebtedness, liens and dispositions. Events of default under the 2006 Note Purchase Agreement include failure to comply with its financial and operational covenants, as well as bankruptcy and other insolvency events. The Company may, at its option, upon notice to the noteholders,note holders, prepay at any time all or part of the Notes in an amount not less than $1.0 million by paying the principal amount plus a make-whole amount, which is dependent upon the yield of respective U.S. Treasury Securities.securities. As of December 31, 2008,2011, the Company was in compliance with all covenants related to the 2006 Note Purchase Agreement. The payment of interest on the senior unsecured notes is due semi-annually on April 30th and October 30th of each year. Additionally, the Company amended its 2003 Note Purchase Agreement to reflect the existence of the subsidiary guarantors and to substantially conform certain provisions of the 2003 Note Purchase Agreement to the 2006 Note Purchase Agreement.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(11) Financing Arrangements (Continued)

        On April 27, 2006, the Company amended and restated its unsecured revolving credit facility with a syndicate of banks (as amended, the revolving credit facility). The revolving credit facility provides for multi-currency unsecured borrowings and stand-by letters of credit of up to $350.0 million and expires in April 2011. Borrowings outstanding under the revolving credit facility bear interest at a fluctuating rate per annum equal to an applicable percentage equal to (i) in the case of Eurocurrency rate loans, the British Bankers Association LIBOR rate plus an applicable percentage of 0.625%, which is determined by reference to the Company's consolidated leverage ratio and debt rating, or (ii) in the case of base rate loans and swing line loans, the higher of (a) the federal funds rate plus 0.5% and (b) the rate of interest in effect for such day as announced by Bank of America, N.A. as its "prime rate." For 2008, the average interest rate under the revolving credit facility for euro-based borrowings was approximately 5.2%. The revolving credit facility includes operational and financial covenants customary for facilities of this type, including, among others, restrictions on additional indebtedness, liens and investments and maintenance of certain leverage ratios. As of December 31, 2008, the Company was in compliance with all covenants related to the revolving credit facility; had $260.0 million of unused and potentially available credit under the revolving credit facility; had no U.S dollar denominated debt and $55.0 million of euro-based borrowings outstanding on its revolving credit facility; and had $35.0 million for stand-by letters of credit outstanding on its revolving credit facility.

        On May 15, 2003, the Company completed a private placement of $125.0 million of senior unsecured notes consisting of $50.0 million principal amount of 4.87% senior notes due 2010 and $75.0 million principal amount of 5.47% senior notes due May 2013. The payment of interest on the senior unsecured notes is due semi-annually on May 15th and November 15th of each year. The senior unsecured notes were issued by Watts Water Technologies, Inc. and arepari passu with the revolving credit facility. The senior unsecured notes allowIn May 2010, the Company to have (i) debtrepaid $50.0 million in principal of 4.87% senior to the notes in an amount up to $150.0 million plus 5%due upon maturity. As of stockholders' equity and (ii) debtpari passu or junior to the senior unsecured notes to the extentDecember 31, 2011, the Company maintainswas in compliance with a 2.0 to 1.0 fixed charge coverage ratio. The notes include a prepayment provision which might require a make-whole paymentall covenants related to the note holders. Such payment is dependent upon the level of the respective treasuries. The notes include other customary terms and conditions, including events of default.purchase agreement.

(12)(11) Common Stock

        The Class A Common Stock and Class B Common Stock have equal dividend and liquidation rights. Each share of the Company's Class A Common Stock is entitled to one vote on all matters submitted to stockholders and each share of Class B Common Stock is entitled to ten votes on all such matters. Shares of Class B Common Stock are convertible into shares of Class A Common Stock, on a one-to-one basis, at the option of the holder. As of December 31, 2008,2011, the Company has reserved a



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(11) Common Stock (Continued)

total of 4,340,3243,260,320 of Class A Common Stock for issuance under its stock-based compensation plans and 7,293,8806,953,680 shares for conversion of Class B Common Stock to Class A Common Stock.

        In November 2007,On August 2, 2011 the Company announced that itsthe Board of Directors had authorized a stock repurchase ofprogram for up to 3,000,000one million shares of its Class A Common Stock. The Company also announced the discontinuance of the previous stock repurchase program, which was originally announced on November 9, 2007. During the three months ended October 2, 2011, the Company repurchased the entire one million shares of Class A Common Stock authorized by the Board of Directors at a cost of $27.2 million. As a result of such repurchases, the Company's August 2011 repurchase program expired by its terms.

(12) Stock-Based Compensation

As of December 31, 2008,2011, the Company had repurchased 2.45 million shares of stock for a total cost of $68.1 million.

(13) Stock-Based Compensation

        The Company maintainsmaintained three stock incentive plans under which key employees and outside directors have been granted incentive stock options (ISOs) and nonqualified stock options (NSOs) to purchase the Company's Class A Common Stock. Only one plan, the 2004 Stock Incentive Plan, is



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(13) Stock-Based Compensation (Continued)


currently available for the grant of new equity awards.awards, which are currently being granted only to employees. Stock options granted under prior plans became exercisable over a five-year period at the rate of 20% per year and expire ten years after the date of grant. Under the 2004 Stock Incentive Plan, options become exercisable over a four-year period at the rate of 25% per year and expire ten years after the grant date. ISOs and NSOs granted under the plans may have exercise prices of not less than 100% and 50% of the fair market value of the Class A Common Stock on the date of grant, respectively. The Company's current practice is to grant all options at fair market value on the grant date. At December 31, 2008, 2,827,2182011, 1,596,082 shares of Class A Common Stock were authorized for future grants of new equity awards under the Company's stock incentive plans.

        The Company also grants shares of restricted stock to key employees and non-employee members of the Company's Board of Directors under the 2004 Stock Incentive Plan, which vest either immediately, over a one-year period, or over a three-year period at the rate of one-third per year. The restricted stock awards are amortized to expense on a straight-line basis over the vesting period.

        The Company also has a Management Stock Purchase Plan that allows for the granting of restricted stock units (RSUs) to key employees. On an annual basis, key employees may elect to receive a portion of their annual incentive compensation in RSUs instead of cash. Each RSU provides the key employee with the right to purchase a share of Class A Common Stock at 67% of the fair market value on the date of grant. RSUs vest annuallyratably over a three-year period from the grant date. An aggregate of 2,000,000 shares of Class A Common Stock may be issued under the Management Stock Purchase Plan.

    2004 Stock Incentive Plan

        At December 31, 2008,2011, total unrecognized compensation cost related to the unvested stock options was approximately $3.7$4.9 million with a total weighted average remaining term of 2.83.0 years. For 2008, 20072011, 2010 and 2006,2009, the Company recognized compensation cost of $2.3$1.6 million, $2.7$1.7 million and $1.4$1.7 million, respectively, in selling, general and administrative expenses.

The following is a summaryCompany recognized additional stock compensation expense in 2011 related to unvested stock options of stock option activity andapproximately $2.2 million in connection with the modification of our former CEO's options related information:to his separation agreement.

 
 Years Ended December 31, 
 
 2008 2007 2006 
 
 Options Weighted
Average
Exercise
Price
 Intrinsic
Value
 Options Weighted
Average
Exercise
Price
 Options Weighted
Average
Exercise
Price
 
 
 (Options in thousands)
 

Outstanding at beginning of year

  1,168 $25.32     1,140 $23.99  1,089 $21.70 

Granted

  202  29.35     189  33.36  164  35.20 

Cancelled/Forfeitures

  (68) 31.68     (94) 31.08  (7) 34.16 

Exercised

  (86) 19.08     (67) 17.17  (106) 17.61 
                    

Outstanding at end of year

  1,216 $26.07 $  1,168 $25.32  1,140 $23.99 
                    

Exercisable at end of year

  800 $23.22 $1.75  705 $21.42  566 $19.13 
                    


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(13)(12) Stock-Based Compensation (Continued)

        The following is a summary of stock option activity and related information:

 
 Years Ended December 31, 
 
 2011 2010 2009 
 
 Options Weighted
Average
Exercise
Price
 Weighted
Average
Intrinsic
Value
 Options Weighted
Average
Exercise
Price
 Options Weighted
Average
Exercise
Price
 
 
 (Options in thousands)
 

Outstanding at beginning of year

  1,303 $29.00     1,300 $26.25  1,216 $26.07 

Granted

  295  29.39     282  33.65  214  26.34 

Cancelled/Forfeitures

  (78) 30.38     (94) 23.33  (101) 27.63 

Exercised

  (248) 21.68     (185) 19.69  (29) 14.23 
                    

Outstanding at end of year

  1,272 $30.43 $3.78  1,303 $29.00  1,300 $26.25 
                    

Exercisable at end of year

  745 $30.61 $3.60  769 $27.56  882 $24.98 
                    

As of December 31, 2008,2011, the aggregate intrinsic values of exercisable options were approximately $1.4$2.7 million, representing the total pre-tax intrinsic value, based on the Company's closing Class A Common Stock price of $24.97$34.21 as of December 31, 2008,2011, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised for 2008, 20072011, 2010 and 20062009 was approximately $0.8$3.9 million, $1.4$2.7 million and $2.2$0.3 million, respectively.

        Upon exercise of options, the Company issues shares of Class A Common Stock.

        The following table summarizes information about options outstanding at December 31, 2008:2011:

 
 Options Outstanding Options Exercisable 
Range of Exercise Prices
 Number
Outstanding
 Weighted Average
Remaining Contractual
Life (years)
 Weighted Average
Exercise
Price
 Number
Exercisable
 Weighted Average
Exercise
Price
 
 
 (Options in thousands)
 

$10.56—$14.08

  43  2.38 $10.99  43 $10.99 

$14.09—$17.60

  337  3.91  16.53  337  16.53 

$24.64—$28.16

  167  5.59  25.02  167  25.02 

$28.17—$31.68

  200  9.58  29.35    29.35 

$31.69—$35.20

  469  7.48  33.28  253  33.04 
               

  1,216  6.40 $26.07  800 $23.22 
               

 
 Options Outstanding Options Exercisable 
Range of Exercise Prices
 Number
Outstanding
 Weighted Average
Remaining Contractual
Life (years)
 Weighted Average
Exercise
Price
 Number
Exercisable
 Weighted Average
Exercise
Price
 
 
 (Options in thousands)
 

$14.09–$17.60

  16  1.56 $17.46  16 $17.46 

$17.61–$28.16

  247  5.86  25.88  180  25.71 

$28.17–$31.68

  406  8.60  29.15  106  29.35 

$31.69–$35.21

  603  6.55  33.60  443  33.51 
               

  1,272  7.03 $30.43  745 $30.61 
               

        The fair value of each option granted under the 2004 Stock Incentive Plan is estimated on the date of grant, using the Black-Scholes-Merton Model, based on the following weighted average assumptions:

 
 Years Ended
December 31,
 
 
 2008 2007 2006 

Expected life (years)

  6.0  5.8  5.8 

Expected stock price volatility

  35.6% 37.2% 35.9%

Expected dividend yield

  1.5% 1.2% 1.0%

Risk-free interest rate

  3.5% 4.6% 4.9%

 
 Years Ended
December 31,
 
 
 2011 2010 2009 

Expected life (years)

  6.0  6.0  6.0 

Expected stock price volatility

  40.9% 41.3% 41.2%

Expected dividend yield

  1.5% 1.3% 1.7%

Risk-free interest rate

  1.6% 1.9% 2.8%


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(12) Stock-Based Compensation (Continued)

        The risk-free interest rate is based upon the U.S. Treasury yield curve at the time of grant for the respective expected life of the option. The expected life (estimated period of time outstanding) of options and volatility were calculated using historical data. The expected dividend yield of stock is the Company's best estimate of the expected future dividend yield. The Company applied an estimated forfeiture rate of 15%6.75% for 2011, 2010 and 2009, for its stock options. These rates were calculated based upon historical activity and are an estimate of granted shares not expected to vest. If actual forfeitures differ from the expected rates, the Company may be required to make additional adjustments to compensation expense in future periods.

        The above assumptions were used to determine the weighted average grant-date fair value of stock options of $10.10, $12.75$10.19, $12.36 and $13.50$9.70 for the years endingended December 31, 2008, 20072011, 2010 and 2006,2009, respectively.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(13) Stock-Based Compensation (Continued)

        The following is a summary of unvested restricted stock activity and related information:

 
 Years Ended December 31, 
 
 2008 2007 2006 
 
 Shares Weighted
Average
Grant Date
Fair Value
 Shares Weighted
Average
Grant Date
Fair Value
 Shares Weighted
Average
Grant Date
Fair Value
 
 
 (Shares in thousands)
 

Unvested at beginning of year

  89 $34.05  73 $33.62  27 $26.51 

Granted

  80  29.35  74  33.21  60  35.27 

Forfeitures

  (7) 33.71  (15) 34.10  (1) 35.20 

Vested

  (47) 32.92  (43) 31.85  (13) 26.09 
                 

Unvested at end of year

  115 $31.27  89 $34.05  73 $33.62 
                 

 
 Years Ended December 31, 
 
 2011 2010 2009 
 
 Shares Weighted
Average
Grant Date
Fair Value
 Shares Weighted
Average
Grant Date
Fair Value
 Shares Weighted
Average
Grant Date
Fair Value
 
 
 (Shares in thousands)
 

Unvested at beginning of year

  162 $31.39  117 $28.20  115 $31.28 

Granted

  115  29.51  105  33.65  86  26.21 

Cancelled/Forfeitures

  (14) 31.12  (7) 28.09  (16) 29.15 

Vested

  (110) 30.94  (53) 29.24  (68) 30.62 
                 

Unvested at end of year

  153 $30.33  162 $31.39  117 $28.20 
                 

        The total fair value of shares vested during 2008, 20072011, 2010 and 20062009 was $1.4$2.5 million, $1.4$1.5 million and $0.4$2.1 million, respectively. At December 31, 2008,2011, total unrecognized compensation cost related to unvested restricted stock was approximately $2.7$3.8 million with a total weighted average remaining term of 1.52.2 years. For 2008, 20072011, 2010 and 2006,2009, the Company recognized compensation costs of $2.4 million, $1.8 million $1.6 million and $0.6$2.0 million, respectively, in selling, general and administrative expenses. The Company recognized additional stock compensation expense in 2011 related to restricted stock of approximately $0.8 million in connection with the modification of our former CEO's stock awards related to his separation agreement.

        The Company applied an estimated forfeiture rate of 10%9.0%, 9.75% and 5.2% for 2011, 2010 and 2009, respectively, for restricted stock issued to key employees. The aggregate intrinsic value of restricted stock granted and outstanding approximated $2.9$5.5 million representing the total pre-tax intrinsic value based on the Company's closing Class A Common Stock price of $24.97$34.21 as of December 31, 2008.2011.

    Management Stock Purchase Plan

        Total unrecognized compensation cost related to unvested RSUs was approximately $1.2$1.9 million at December 31, 20082011 with a total weighted average remaining term of 1.51.7 years. For 2008, 20072011, 2010 and 20062009 the Company recognized compensation cost of $1.3 million, $1.2 million $1.7 million and $1.0$1.2 million, respectively, in selling, general and administrative expenses. Dividends declared for RSUs, that are paid to individuals, that remain unpaid at December 31, 20082011 total approximately $0.2$0.3 million.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(13)(12) Stock-Based Compensation (Continued)

        A summary of the Company's RSUsRSU activity and related information for 2008 is shown in the following table:

 
 Years Ended December 31, 
 
 2008 2007 2006 
 
 RSUs Weighted
Average
Purchase Price
 Intrinsic
Value
 RSUs Weighted
Average
Purchase Price
 RSUs Weighted
Average
Purchase Price
 
 
 (RSU's in thousands)
 

Outstanding at beginning of period

  366 $18.98     347 $19.00  328 $16.02 

Granted

  60  19.09     160  25.73  87  23.34 

Cancelled/Forfeitures

  (19) 23.23     (31) 25.03     

Settled

  (110) 22.06     (110) 15.62  (68) 10.20 
                    

Outstanding at end of period

  297 $21.86 $3.11  366 $22.45  347 $19.00 
                    

Vested at end of period

  133 $20.27 $4.70  141 $18.98  148 $15.64 
                    

 
 Years Ended December 31, 
 
 2011 2010 2009 
 
 RSUs Weighted
Average
Purchase
Price
 Weighted
Average
Intrinsic
Value
 RSUs Weighted
Average
Purchase
Price
 RSUs Weighted
Average
Purchase
Price
 
 
 (RSU's in thousands)
 

Outstanding at beginning of period

  361 $16.92     350 $18.13  297 $21.86 

Granted

  99  25.15     159  19.87  150  13.25 

Cancelled/Forfeitures

  (10) 20.92     (21) 16.68  (7) 18.08 

Settled

  (58) 18.01     (127) 23.95  (90) 22.31 
                    

Outstanding at end of period

  392 $18.74 $15.47  361 $16.92  350 $18.13 
                    

Vested at end of period

  157 $15.57 $18.64  105 $15.21  131 $21.12 
                    

        As of December 31, 2008,2011, the aggregate intrinsic values of outstanding and vested RSUs were approximately $0.9$6.1 million and $0.6$2.9 million, respectively, representing the total pre-tax intrinsic value, based on the Company's closing Class A Common Stock price of $24.97$34.21 as of December 31, 20082011, which would have been received by the RSUs holders had all RSUs settled as of that date. The total intrinsic value of RSUs settled for 2008, 20072011, 2010 and 20062009 was approximately $1.2 million, $0.7 million $2.5 million and $1.4$0.1 million, respectively. Upon settlement of RSUs, the Company issues shares of Class A Common Stock.

        The following table summarizes information about RSUs outstanding at December 31, 2008:2011:

 
 RSUs Outstanding RSUs Vested 
Range of Purchase Prices
 Number
Outstanding
 Weighted Average
Remaining Contractual
Life (years)
 Weighted Average
Purchase
Price
 Number
Vested
 Weighted Average
Purchase
Price
 
 
 (RSUs in thousands)
 

$7.04—$10.56

  32  2.5 $9.54  32 $9.54 

$14.08—$17.60

  7  0.2  15.50  7  15.50 

$17.61—$21.11

  54  2.2  19.09     

$21.12—$24.64

  80  0.3  23.27  53  23.23 

$24.65—$25.73

  124  1.2  25.73  41  25.73 
               

  297  1.2 $21.86  133 $20.27 
               

 
 RSUs Outstanding RSUs Vested 
Range of Purchase Prices
 Number
Outstanding
 Weighted Average
Remaining Contractual
Life (years)
 Weighted Average
Purchase
Price
 Number
Vested
 Weighted Average
Purchase
Price
 
 
 (RSUs in thousands)
 

$7.04–$10.56

  17  2.1 $10.38  17 $10.38 

$10.57–$17.60

  123  0.2  13.25  82  13.25 

$17.61–$21.11

  150  1.2  19.86  51  19.84 

$21.12–$24.64

  3  3.3  22.42  3  22.42 

$24.65–$25.73

  99  2.3  25.17  4  25.73 
               

  392  1.2 $18.74  157 $15.57 
               


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(13)(12) Stock-Based Compensation (Continued)

        The fair value of each share issued under the Management Stock Purchase Plan is estimated on the date of grant, using the Black-Scholes-Merton Model, based on the following weighted average assumptions:

 
 Years Ended
December 31,
 
 
 2008 2007 2006 

Expected life (years)

  3.0  3.0  3.0 

Expected stock price volatility

  37.2% 35.3% 25.7%

Expected dividend yield

  1.5% 1.0% 1.5%

Risk-free interest rate

  2.2% 4.8% 4.5%

 
 Years Ended
December 31,
 
 
 2011 2010 2009 

Expected life (years)

  3.0  3.0  3.0 

Expected stock price volatility

  44.9% 45.6% 45.0%

Expected dividend yield

  1.2% 1.5% 2.2%

Risk-free interest rate

  1.2% 1.5% 1.4%

        The risk-free interest rate is based upon the U.S. Treasury yield curve at the time of grant for the respective expected life of the RSU's.RSUs. The expected life (estimated period of time outstanding) of RSU'sRSUs and volatility were calculated using historical data. The expected dividend yield of stock is the Company's best estimate of the expected future dividend yield. The Company applied an estimated forfeiture rate of 10%6.3%, 6.3% and 5.2% for 2011, 2010 and 2009, respectively, for its RSUs. These rates were calculated based upon historical activity and are an estimate of granted shares not expected to vest. If actual forfeitures differ from the expected rates, the Company may be required to make additional adjustments to compensation expense in future periods.

        The above assumptions were used to determine the weighted average grant-date fair value of RSUs granted of $11.44, $16.79$16.25, $12.81 and $13.60$8.14 during 2008, 20072011, 2010 and 2006,2009, respectively.

        The Company distributed dividends of $0.44 per share for 2008, $0.40 per share for 2007each of 2011, 2010 and $0.36 per share for 20062009 on the Company's Class A Common Stock and Class B Common Stock.

(14)(13) Employee Benefit Plans

        The Company sponsors funded and unfunded non-contributing defined benefit pension plans that together cover substantially all of its domestic employees. Benefits are based primarily on years of service and employees' compensation. The funding policy of the Company for these plans is to contribute an annual amount that does not exceed the maximum amount that can be deducted for federal income tax purposes. Beginning in 2007,

        On October 31, 2011, the Company uses aCompany's Board of Directors voted to cease accruals effective December 31, measurement date for its plans. Prior2011 under both the Company's Pension Plan and Supplemental Employees Retirement Plan. The Company recorded a curtailment charge of approximately $1.5 million to 2007,write-off previously unrecognized prior service costs and reduced the Company used a September 30 measurement date for its plans.projected benefit obligation by $12.5 million. The Board of Directors also voted to enhance the Company's existing 401 (k) Savings Plan. The net effect of these plan changes is expected to reduce future retirement plans expense by approximately $2.0 million annually.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(14)(13) Employee Benefit Plans (Continued)

        The funded status of the defined benefit plans and amounts recognized in the consolidated balance sheet are as follows:

 
 December 31, 
 
 2008 2007 
 
 (in millions)
 

Change in projected benefit obligation

       

Balance at beginning of the year

 $73.4 $72.6 

Service cost

  3.4  3.8 

Administration cost

  (0.8) (0.4)

Plan change

  0.8  0.1 

Interest cost

  4.7  4.3 

Actuarial loss (gain)

  8.1  (6.0)

Benefits paid

  (2.5) (2.3)

One-time adjustment for measurement date change

    1.3 
      
 

Balance at end of year

 $87.1 $73.4 
      

Change in fair value of plan assets

       

Balance at beginning of the year

 $58.8 $42.6 

Actual (loss) gain on assets

  (13.8) 3.6 

Employer contributions

  3.2  7.3 

Administration cost

  (0.8) (0.4)

Benefits paid

  (2.5) (2.3)

One-time adjustment for measurement date change

    8.0 
      
 

Fair value of plan assets at end of the year

 $44.9 $58.8 
      

Funded status at end of year

 $(42.2)$(14.6)
      

 
 December 31, 
 
 2011 2010 
 
 (in millions)
 

Change in projected benefit obligation

       

Balance at beginning of the year

 $112.6 $96.1 

Service cost

  5.3  4.6 

Administration cost

  (0.6) (1.0)

Interest cost

  6.0  5.7 

Actuarial loss

  13.6  10.2 

Benefits paid

  (3.2) (3.0)

Curtailment adjustment

  (12.5)  
      

Balance at end of year

 $121.2 $112.6 
      

Change in fair value of plan assets

       

Balance at beginning of the year

 $90.3 $66.6 

Actual gain on assets

  14.1  7.4 

Employer contributions

  7.8  20.3 

Administration cost

  (0.6) (1.0)

Benefits paid

  (3.2) (3.0)
      

Fair value of plan assets at end of the year

 $108.4 $90.3 
      

Funded status at end of year

 $(12.8)$(22.3)
      

        Amounts recognized in the consolidated balance sheet are as follows:

 
 December 31, 
 
 2008 2007 
 
 (in millions)
 

Current liabilities

 $(0.1)$(0.1)

Noncurrent liabilities

  (42.1) (14.5)
      

Net amount recognized

 $(42.2)$(14.6)
      

 
 December 31, 
 
 2011 2010 
 
 (in millions)
 

Current liabilities

 $(0.2)$(0.1)

Noncurrent liabilities

  (12.6) (22.2)
      

Net amount recognized

 $(12.8)$(22.3)
      

        Amounts recognized in accumulated other comprehensive income consist of:

 
 December 31, 
 
 2008 2007 
 
 (in millions)
 

Net actuarial loss

 $37.6 $11.2 

Prior service cost

  2.3  1.8 
      

Net amount recognized

 $39.9 $13.0 
      

 
 December 31, 
 
 2011 2010 
 
 (in millions)
 

Net actuarial loss

 $31.1 $39.3 

Prior service cost

    1.7 
      

Net amount recognized

 $31.1 $41.0 
      


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(14)(13) Employee Benefit Plans (Continued)

        Information for pension plans with an accumulated benefit obligation in excess of plan assets are as follows:

 
 December 31, 
 
 2008 2007 
 
 (in millions)
 

Projected benefit obligation

 $87.1 $73.4 

Accumulated benefit obligation

 $78.0 $66.4 

Fair value of plan assets

 $44.9 $58.8 

 
 December 31, 
 
 2011 2010 
 
 (in millions)
 

Projected benefit obligation

 $13.7 $112.6 

Accumulated benefit obligation

 $13.7 $102.8 

Fair value of plan assets

 $ $90.3 

        Information for pension plans with plan assets in excess of accumulated benefit obligation are as follows:

 
 December 31, 
 
 2011 2010 
 
 (in millions)
 

Projected benefit obligation

 $107.6 $ 

Accumulated benefit obligation

 $107.6 $ 

Fair value of plan assets

 $108.4 $ 

        The components of net periodic benefit cost are as follows:

 
 Years Ended
December 31,
 
 
 2008 2007 2006 
 
 (in millions)
 

Service cost—benefits earned

 $3.4 $3.8 $3.5 

Interest costs on benefits obligation

  4.7  4.3  3.8 

Expected return on assets

  (4.9) (4.4) (3.5)

Prior service cost amortization

  0.2  0.2  0.3 

Net actuarial loss amortization

  0.4  0.9  1.2 

Curtailment charge

    0.2   
        
 

Net periodic benefit cost

 $3.8 $5.0 $5.3 
        

 
 Years Ended
December 31,
 
 
 2011 2010 2009 
 
 (in millions)
 

Service cost—benefits earned

 $5.3 $4.6 $4.1 

Interest costs on benefits obligation

  6.0  5.7  5.2 

Expected return on assets

  (7.5) (6.0) (4.0)

Prior service cost amortization

  0.3  0.3  0.3 

Net actuarial loss amortization

  2.7  2.3  3.0 

Curtailment charge

  1.5     
        

Net periodic benefit cost

 $8.3 $6.9 $8.6 
        

        The estimated net actuarial loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next year are $2.9 million and $0.2 million, respectively.is $0.6 million.

        Assumptions:

        Weighted-average assumptions used to determine benefit obligations:

 
 2008 2007 

Discount rate

  6.00% 6.50%

Rate of compensation increase

  4.00% 4.00%

 
 December 31, 
 
 2011 2010 

Discount rate

  4.80% 5.50%

Rate of compensation increase

  N/A  4.00%


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(13) Employee Benefit Plans (Continued)

        Weighted-average assumptions used to determine net periodic benefit costs:

 
 2008 2007 2006 

Discount rate

  6.00% 5.87% 5.50%

Long-term rate of return on assets

  8.50% 8.50% 8.50%

Rate of compensation increase

  4.00% 4.00% 4.00%

 
 Years Ended December 31, 
 
 2011 2010 2009 

Discount rate

 5.50%/4.70%  6.00% 6.00%

Long-term rate of return on assets

 7.75%  8.50% 8.50%

Rate of compensation increase

 N/A  4.00% 4.00%

        Discount rates are selected based upon rates of return at the measurement date utilizing a bond matching approach to match the expected benefit cash flows. In selecting the expected long-term rate of return on assets, the Company considers the average rate of earnings expected on the funds invested or to be invested to provide for the benefits of this plan. This includes considering the trust's asset allocation and the expected returns likely to be earned over the life of the plan. This basis is consistent with the prior year.



Watts Water Technologies, Inc. and Subsidiaries

Notes The original 2011 discount rate of 5.5% was revised to Consolidated Financial Statements (Continued)4.70% at October 31, 2011, the curtailment date of the plans.

(14) Employee Benefit Plans (Continued)

    Plan assets:

        The weighted average asset allocations by asset category isare as follows:

Asset Category
 2008 2007 

Equity securities

  50.3% 64.9%

Debt securities

  45.7  29.8 

Other

  4.0  5.3 
      

Total

  100.0% 100.0%
      

 
 December 31, 
Asset Category
 2011 2010 

Equity securities

  13.4% 42.5%

Debt securities

  77.4  40.2 

Other

  9.2  17.3 
      

Total

  100.0% 100.0%
      

        The Company's written Retirement Plan Investment Policy sets forth the investment policy, objectives and constraints of the Watts Water Technologies, Inc. Pension Plan. This Retirement Plan Investment Policy, set forth by the Pension Plan Committee, defines general investment principles and directs investment management policy, addressing preservation of capital, risk aversion and adherence to investment discipline. Investment managers are to make a reasonable effort to control risk and are evaluated quarterly against commonly accepted benchmarks to ensure that the risk assumed is commensurate with the given investment style and objectives.

        The portfolio is designed to achieve a balanced return of current income and modest growth of capital, while achieving returns in excess of the rate of inflation over the investment horizon in order to preserve purchasing power of Plan assets. All Plan assets are required to be invested in liquid securities. Derivative investments are not allowed.

        Prohibited investments include, but are not limited to the following: commodities and futures contracts, private placements, options, limited partnerships, venture-capital investments, real estate properties, interest-only (IO), principal-only (PO), and residual tranche CMOs, and Watts Water Technologies, Inc. stock.

        Prohibited transactions include, but are not limited to the following: short selling and margin transactions.

        Allowable assets include: cash equivalents, fixed income securities, equity securities, mutual funds, and GICs.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(13) Employee Benefit Plans (Continued)

        Specific guidelines regarding allocation of assets are as follows: equities shall comprise between 25% and 75% offollowed using a liability driven investment (LDI) strategy. Under a LDI strategy, investments are made based on the total portfolio, whileexpected cash flows required to fund the pension plan's liabilities. This cash flow matching technique requires a plan's asset allocation to be heavily weighted toward fixed income shall comprise between 30%securities. The Company's current allocation target is 80% fixed income, 20% equities and 65%.other investments. With the recent plan curtailment, the Company expects this allocation target to increase to 90% or more in fixed income in 2012. Investment performance is monitored on a regular basis and investments are re-allocated to stay within specific guidelines. An equity/fixed income allocation of 55%/45% is preferred. The securities of any one company or government agency should not exceed 10% of the total fund, and no more than 20% of the total fund should be invested in any one industry. Individual treasury securities may represent 50% of the total fund, while the total allocation to treasury bonds and notes may represent up to 100% of the Plan's aggregate bond position.

        The following table presents the investments in the pension plan measured at fair value at December 31, 2011 and 2010:

 
 December 31, 2011 December 31, 2010 
 
 Level
1
 Level
2
 Level
3
 Total Level
1
 Level
2
 Level
3
 Total 
 
 (in millions)
 

Money market funds

 $ $4.9 $ $4.9 $ $10.1 $ $10.1 

Equity securities

                         

U.S. equity securities(a)

  8.0      8.0  12.5      12.5 

Non-U.S. equity securities(a)

  2.3      2.3  9.0      9.0 

Other equity securities(b)

  4.1      4.1  16.9      16.9 

Debt securities

                         

U.S. government

  19.9      19.9  10.1      10.1 

U.S. and non-U.S. corporate(c)

    63.3    63.3    26.2    26.2 

Other investments(d)

  4.9  1.0    5.9  5.2  0.3    5.5 
                  

Total investments

 $39.2 $69.2 $ $108.4 $53.7 $36.6 $ $90.3 
                  

(a)
Includes investments in common stock from diverse industries

(b)
Includes investments in index and exchange-traded funds

(c)
Includes investment grade bonds from diverse industries

(d)
Includes investments in real estate investment funds, exchange-traded funds, commodity mutual funds and accrued interest

Cash flows:

        The information related to the Company's pension funds cash flow is as follows:

 
 December 31, 
 
 2011 2010 
 
 (in millions)
 

Employer Contributions

 $7.8 $20.3 

Benefit Payments

 $3.2 $3.0 

        The Company expects to contribute approximately $0.6 million in 2012.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(14)(13) Employee Benefit Plans (Continued)

    Cash flows:

        The information related to the Company's pension funds cash flow is as follows:

 
 December 31, 
 
 2008 2007 
 
 (in millions)
 

Employer Contributions

 $3.2 $7.3 

Benefit Payments

 $2.5 $2.3 

        The Company expects to contribute approximately $6.0 million in 2009.

        Expected benefit payments to be paid by the pension plans are as follows:

 
 (in millions) 

During fiscal year ending December 31, 2009

 $2.9 

During fiscal year ending December 31, 2010

 $3.2 

During fiscal year ending December 31, 2011

 $3.4 

During fiscal year ending December 31, 2012

 $3.6 

During fiscal year ending December 31, 2013

 $4.0 

During fiscal year ending December 31, 2014 through December 31, 2018

 $27.7 

 
 (in millions) 

During fiscal year ending December 31, 2012

 $4.2 

During fiscal year ending December 31, 2013

 $4.5 

During fiscal year ending December 31, 2014

 $4.9 

During fiscal year ending December 31, 2015

 $5.2 

During fiscal year ending December 31, 2016

 $5.5 

During fiscal year ending December 31, 2017 through December 31, 2021

 $32.0 

        Additionally, substantially all of the Company's domestic employees are eligible to participate in certain 401(k) savings plans. Under these plans, the Company matches a specified percentage of employee contributions, subject to certain limitations. The Company's match contributions (included in selling, general and administrative expense) for the years ended December 31, 2008, 2007,2011, 2010 and 2006 were $0.62009 was $0.5 million in each year, respectively.year. The Company's largest 401(k) plan will be enhanced beginning January 1, 2012. Under the revised plan, the Company will provide a base contribution of 2% of an employee's salary, regardless of whether the employee participates in the plan. Further, the Company will make a matching contribution of up to 100% of the first 4% of an employee's contribution. Charges for European pension plans approximated $3.3$6.2 million, $3.0$3.5 million and $1.9$2.8 million for the years ended December 31, 2008, 2007,2011, 2010 and 2006,2009, respectively. These costs relate to plans administered by certain European subsidiaries, with benefits calculated according to government requirements and paid out to employees upon retirement or change of employment.

        The Company entered into a Supplemental Compensation Agreement (the Agreement) with Timothy P. Horne on September 1, 1996. Per the Agreement, upon ceasing to be an employee of the Company, Mr. Horne must make himself available, as requested by the Board, to work a minimum of 300 but not more than 500 hours per year as a consultant in return for certain annual compensation as long as he is physically able to do so. If Mr. Horne complies with the consulting provisions of the agreement above, he shall receive supplemental compensation on an annual basis of $400,000$0.4 million per year, subject to cost of living increases each year, in exchange for the services performed, as long as he is physically able to do so. In the event of physical disability, subsequent to commencing consulting services for the Company, Mr. Horne will continue to receive $400,000this payment annually. The payment for consulting services provided by Mr. Horne will be expensed as incurred by the Company. Mr. Horne retired effective December 31, 2002, and therefore the Supplemental Compensation period began on January 1, 2003. In accordance with Financial Accounting Standards Board Statement No. 106, "Employers Accounting for Post Retirement Benefits Other Than Pensions",GAAP, the Company will accrueaccrues for the future post-retirement disability benefits over the period from January 1, 2003, to the time in which Mr. Horne becomes physically unable to perform his consulting services (the period in which the disability benefits are earned). Mr. Horne is still active as a consultant in accordance with the terms of the Agreement.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(14) Contingencies and Environmental Remediation

Accrual and Disclosure Policy

        The Company is a defendant in numerous legal matters arising from its ordinary course of operations, including those involving product liability, environmental matters and commercial disputes.

        The Company reviews its lawsuits and other legal proceedings on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for matters when the Company assesses that it is probable that a loss has been incurred and the amount of the loss can be reasonable estimated, net of any applicable insurance proceeds. The Company does not establish accruals for such matters when the Company does not believe both that it is probable that a loss has been incurred and the amount of the loss can be reasonable estimated. The Company's assessment of whether a loss is probable is based on its assessment of the ultimate outcome of the matter following all appeals.

        There may continue to be exposure to loss in excess of any amount accrued. When it is possible to estimate the reasonably possible loss or range of loss above the amount accrued for the matters disclosed, that estimate is aggregated and disclosed.

        As of December 31, 2011, the Company estimates that the aggregate amount of reasonably possible loss in excess of the amount accrued for its legal contingencies is approximately $3.3 million pre-tax. With respect to the estimate of reasonably possible loss, management has estimated the upper end of the range of reasonably possible loss based on (i) the amount of money damages claimed, where applicable, (ii) the allegations and factual development to date, (iii) available defenses based on the allegations, and/or (iv) other potentially liable parties. This estimate is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimate will change from time to time, and actual results may vary significantly from the current estimate. In the event of an unfavorable outcome in one or more of the matters described below, the ultimate liability may be in excess of amounts currently accrued, if any, and may be material to the Company's operating results or cash flows for a particular quarterly or annual period. However, based on information currently known to it, management believes that the ultimate outcome of all matters described below, as they are resolved over time, is not likely to have a material effect on the financial position of the Company.

James Jones Litigation

        The Company was party to a lawsuit filed by Nora Armenta in California Superior Court against the Company, James Jones Company, Mueller Co. and Tyco International (the "Armenta case") and a separate lawsuit filed in California Superior Court on behalf of the City of Banning, California and 42 other cities and water districts in California against the Company, James Jones Company and Mueller Co. (the "City of Banning case"). At a mediation session held with the California Superior Court on June 9-10, 2009, the parties to the Armenta case and the City of Banning case agreed in principle to settle both cases. An agreement in principle also was reached in 2009 to settle the related insurance coverage casesWatts Industries, Inc. vs. Zurich American Insurance Company, et al., andZurich American Insurance Company vs. Watts Industries, Inc., et al., pending in California Superior Court;and Zurich American Insurance Company vs. Watts Industries, Inc. and James Jones Company, pending in the United States District Court for the Northern District of Illinois, Eastern Division. The settlement of the insurance coverage cases was effective and binding upon approval of the settlement of the underlying Armenta case and City of Banning case.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(15) Contingencies and Environmental Remediation

James Jones Litigation

        On June 25, 1997, Nora Armenta (the Relator) filed a civil action in the California Superior Court for Los Angeles County (the Armenta case) against James Jones Company (James Jones), Mueller Co., Tyco International (U.S.), and the Company. The Company formerly owned James Jones. The Relator filed under the qui tam provision of the California state False Claims Act, Cal. Govt. Code § 12650 et seq. (California False Claims Act) and generally alleged that James Jones and the other defendants violated this statute by delivering some "defective" or "non-conforming" waterworks parts to municipal water systems in the State of California. The Relator filed a First Amended Complaint in November 1998 and a Second Amended Complaint in December 2000, which brought the total number of plaintiffs to 161. The Complaint further alleges that purchased non-conforming James Jones waterworks parts may leach into public drinking water elevated amounts of lead that may create a public health risk because they were made out of '81 bronze alloy (UNS No. C8440) and contain more lead than the specified and advertised '85 bronze alloy (UNS No. C83600). This contention is based on the average difference of about 2% lead content between '81 bronze (6% to 8% lead) and '85 bronze (4% to 6% lead) and the assumption that this would mean increased consumable lead in public drinking water that could cause a public health concern. The Company believes the evidence and discovery available to date indicates that this is not the case. In addition, '81 bronze is used extensively in municipal and home plumbing systems and is approved by municipal, local and national codes. The Federal Environmental Protection Agency also defines metal for pipe fittings with no more than 8% lead as "lead free" under Section 1417 of the Federal Safe Drinking Water Act.

        In this case, the Relator seeks three times an unspecified amount of actual damages and alleges that the municipalities have suffered hundreds of millions of dollars in damages. She also seeks civil penalties of $10,000 for each false claim and alleges that defendants are responsible for tens of thousands of false claims. Finally, the Relator requests an award of costs of this action, including attorneys' fees.

        In December 1998, the Los Angeles Department of Water and Power (LADWP) intervened in this case and filed a complaint. The Company settled with the city of Los Angeles, by far the most significant city, for $7.3 million plus attorneys' fees. Co-defendants contributed $2.0 million toward this settlement.

        In August 2003, an additional settlement payment was made for $13.0 million ($11.0 million from us and $2.0 million from James Jones), which settled the claims of the three Phase I cities (Santa Monica, San Francisco and East Bay Municipal Utility District) chosen by the Relator as having the strongest claims to be tried first. In addition to this $13.0 million payment, the Company was obligated to pay the Relator's attorney's fees.

        On June 22, 2005, the Court dismissed the claims of the Phase II cities selected for a second trial phase (Contra Costa, Corona, Santa Cruz and Vallejo). The Court ruled that the Relator and these cities were required to show that the cities had received out of specification parts which were related to specific invoices and that this showing had not been made. Although each city's claim is unique, this ruling is significant for the claims of the remaining cities, and the Relator appealed. On June 29, 2007, the appellate court dismissed this appeal. However, this judgment can be appealed again at the conclusion of the entire case. The trial court has scheduled a trial on October 6, 2009 for six Phase III cities. Litigation is inherently uncertain, and the Company is unable to predict the outcome of this case.

        On September 15, 2004, the Relator's attorneys filed a lawsuit in the California Superior Court for the City of Banning and 42 other cities and water districts against James Jones, Watts and Mueller Co.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(15)(14) Contingencies and Environmental Remediation (Continued)


based on        The settlement agreement was approved by the same transactions allegedplaintiffs in both the Armenta case alleging common law fraud. In October 2008,and City of Banning cases and, at the Court dismissed the claims of 11 cities as time-barred. A first phase trial of selected cities is scheduled for April 13, 2010. Litigation is inherently uncertain, and the Company is unable to predict the outcome of this case.

        On February 14, 2001, after the Company's insurers had denied coverage for the claims in the Armenta case, the Company filed a complaint for coverage against its insurers infairness hearing held November 5, 2009, the California Superior Court (theapproved the settlement of the Armenta case and City of Banning case. Based on the contemporaneous final settlement of the underlying insurance coverage case). James Jones filedcases, the Company's contribution to the settlement was $15.3 million. As a similar complaint,result of the casessettlements, all lawsuits and all claims were consolidated,dismissed. In addition, separate from the settlement, the Company paid its outside counsel an additional $5.0 million for services rendered in connection with the above described litigation.

        As a result of the settlement of the above described litigation, the Company recorded a non-cash, pre-tax gain in discontinued operations of approximately $9.5 million in 2009 to reduce previously recorded estimates of the loss and related fees to the trial court made summary adjudication rulings that Zurich mustamounts noted above.

Foreign Corrupt Practices Act (FCPA) Settlement

        On October 13, 2011, the Company entered into a settlement with the SEC to resolve allegations concerning potential violations of the FCPA at CWV, a former indirect wholly-owned subsidiary of the Company in China. Under the terms of the settlement, without admitting or denying the SEC's allegations, the Company consented to entry of an administrative cease-and-desist order under the books and records and internal controls provisions of the FCPA. The Company also agreed to pay all reasonable defense costs incurredto the SEC $3.6 million in disgorgement and prejudgment interest, and $0.2 million in penalties.

        The amounts paid by the Company and James Jones in connection with the Armenta case since April 23, 1998 as well as such defense costs in the future until the end of the Armenta case. In August 2004, the California Court of Appeal affirmed these rulings, and, on December 1, 2004, the California Supreme Court denied Zurich's appeal of this decision. This denial permanently established Zurich's obligation to pay Armenta defense costs for bothsettlement were fully accrued by the Company and James Jones, and Zurich is currently making paymentsas of incurred Armenta defense costs. However, as noted below, Zurich asserts that the defense costs paid by it are subject to reimbursement.

        On November 22, 2002, the trial court entered a summary adjudication order that Zurich must indemnify and pay the Company and James Jones for amounts paid to settle with the City of Los Angeles. On August 6, 2004, the trial court made another summary adjudication ruling that Zurich must indemnify and pay the Company and James Jones for the $13.0 million paid to settle the claims of the Phase I cities described above. Zurich will be able to appeal these orders at the end of the coverage case. Zurich has now made all of the payments required by these indemnity orders.

        On February 8, 2006, Zurich filed a motion to set aside as void the November 22, 2002 and August 6, 2004 summary adjudication indemnity payment orders. After this motion was denied, Zurich's appeal was also denied and the California Supreme Court denied Zurich's petition for review. The Company is currently unable to predict the finality of these indemnity payment orders since Zurich can also appeal them at the end of the coverage case.

        Zurich has asserted that all amounts paid by it to the Company and James Jones are subject to reimbursement under Deductible Agreements related to the insurance policies between Zurich and Watts.December 31, 2010. The Company believes that the agreements are unenforceable, that the Armenta case should be viewed as one occurrence,this settlement resolves all government investigations concerning CWV's sales practices and that the deductible amount should be $0.5 million per occurrence if the agreements are enforceable.potential FCPA violations.

        On January 31, 2006, the federal district court in Chicago, Illinois determined that there are disputes under all Deductible Agreements in effect during the period in which Zurich issued primary policies and that the arbitrator could decide which agreements would control reimbursement claims.Product Liability

        The Company appealed this ruling. On October 20, 2006,is subject to a variety of potential liabilities in connection with product liability cases. The Company maintains product liability and other insurance coverage, which the United States Court of Appeals forCompany believes to be generally in accordance with industry practices. For product liability cases in the Seventh Circuit affirmed that an arbitration panel could decideU.S., management establishes its product liability accrual by utilizing third-party actuarial valuations which deductible agreements between Zurichincorporate historical trend factors and the Company would control Zurich's reimbursement claim.

        Based on management's assessment,Company's specific claims experience derived from loss reports provided by third-party administrators. In other countries, the Company does not believe that the ultimate outcome of the James Jones Litigation will have a material adverse effect on its liquidity, financial condition or results of operations. While this assessment is based on the facts currently known by the Company, litigation is inherently uncertain, the actualmaintains insurance coverage with relatively high deductible payments, as product liability claims tend to us to resolve this litigation fully cannot be predicted with any certainty and there exists a reasonable possibility that we may ultimately incur lossessmaller than those experienced in the James Jones Litigation in excess of the amount accrued. The Company intends to continue to contest vigorously all aspects of the James Jones Litigation.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(15) Contingencies and Environmental Remediation (Continued)U.S.

Environmental Remediation

        The Company has been named as a potentially responsible party with respect to a limited number of identified contaminated sites. The levels of contamination vary significantly from site to site as do the related levels of remediation efforts. Environmental liabilities are recorded based on the most probable cost, if known, or on the estimated minimum cost of remediation. Accruals are not discounted to their present value, unless the amount and timing of expenditures are fixed and reliably determinable. The Company accrues estimated environmental liabilities based on assumptions, which are subject to a number of factors and uncertainties. Circumstances whichthat can affect the reliability and precision of these estimates include identification of additional sites, environmental regulations, level of cleanup required, technologies available, number and financial condition of other contributors to remediation and the time period over which remediation may occur. The Company recognizes changes in estimates as new remediation requirements are defined or as new information becomes available.


        Based on the facts currently known
Watts Water Technologies, Inc. and Subsidiaries

Notes to the Company, it does not believe that the ultimate outcome of these matters will have a material adverse effect on its liquidity, financial condition or results of operations. Some of its environmental matters are inherently uncertainConsolidated Financial Statements (Continued)

(14) Contingencies and there exists a possibility that we may ultimately incur losses from these matters in excess of the amount accrued. However, the Company cannot currently estimate the amount of any such additional losses.Environmental Remediation (Continued)

Asbestos Litigation

        The Company is defending approximately 10547 lawsuits in different jurisdictions, with the greatest number filed in Mississippi and California state courts, alleging injury or death as a result of exposure to asbestos. The complaints in these cases typically name a large number of defendants and do not identify anyand particular Watts products as a source of asbestos exposure. To date, the Company has obtained a dismissal in every case before it has reached trial because discovery has failed to yield evidence of substantial exposure to any Watts products. Based on the facts currently known to the Company, it does not believe that the ultimate outcome of these claims will have a material adverse effect on its liquidity, financial condition or results of operations.

Other Litigation

        Other lawsuits and proceedings or claims, arising from the ordinary course of operations, are also pending or threatened against us. Based on the facts currently known to the Company, it does not believe that the ultimate outcome of these other litigation matters will have a material adverse effect on its liquidity, financial condition or results of operations.Company.

(16)(15) Financial Instruments

Fair Value

        The carrying amounts of cash and cash equivalents, short-term investments, trade receivables and trade payables approximate fair value because of the short maturity of these financial instruments.

        The fair value of the Company's 4.87% senior notes due 2010, 5.47% senior notes due 2013, and 5.85% senior notes due 2016 and 5.05% senior notes due 2020 is based on quoted market prices.prices of similar notes (level 2). The fair value of the Company's



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(16) Financial Instruments (Continued)


variable rate debt approximates its carrying value. The carrying amount and the estimated fair market value of the Company's long-term debt, including the current portion, are as follows:

 
 December 31, 
 
 2008 2007 
 
 (in millions)
 

Carrying amount

 $414.3 $433.5 

Estimated fair value

 $339.4 $424.9 

 
 December 31, 
 
 2011 2010 
 
 (in millions)
 

Carrying amount

 $399.4 $378.7 

Estimated fair value

 $440.5 $407.5 

DerivativeFinancial Instruments

        The Company usesmeasures certain financial assets and liabilities at fair value on a recurring basis, including foreign currency derivatives, deferred compensation plan assets and related liability. There



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(15) Financial Instruments (Continued)

are no cash flow hedges as of December 31, 2011. The fair value of these certain financial assets and liabilities were determined using the following inputs at December 31, 2011 and 2010:

 
 Fair Value Measurements at December 31, 2011 Using: 
 
  
 Quoted Prices in Active
Markets for Identical
Assets
 Significant Other
Observable
Inputs
 Significant
Unobservable
Inputs
 
 
 Total (Level 1) (Level 2) (Level 3) 
 
 (in millions)
 

Assets

             

Plan asset for deferred compensation(1)

 $4.0 $4.0 $ $ 
          

Total assets

 $4.0 $4.0 $ $ 
          

Liabilities

             

Plan liability for deferred compensation(2)

 $4.0 $4.0 $ $ 

Contingent consideration(2)

  1.1      1.1 
          

Total liabilities

 $5.1 $4.0 $ $1.1 
          


 
 Fair Value Measurements at December 31, 2010 Using: 
 
  
 Quoted Prices in Active
Markets for Identical
Assets
 Significant Other
Observable
Inputs
 Significant
Unobservable
Inputs
 
 
 Total (Level 1) (Level 2) (Level 3) 
 
 (in millions)
 

Assets

             

Plan asset for deferred compensation(1)

 $3.7 $3.7 $ $ 
          

Total assets

 $3.7 $3.7 $ $ 
          

Liabilities

             

Plan liability for deferred compensation(2)

 $3.7 $3.7 $ $ 

Contingent consideration(2)

  1.9      1.9 
          

Total liabilities

 $5.6 $3.7 $ $1.9 
          

(1)
Included in other, net on the Company's consolidated balance sheet.

(2)
Included in other noncurrent liabilities on the Company's consolidated balance sheet.

        The table below provides a summary of the changes in fair value of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period December 31, 2010 to December 31, 2011.

 
  
  
 Total realized and
unrealized gains
(losses) included in:
  
 
 
 Balance
December 31,
2010
 Purchases,
sales,
settlements, net
 Earnings Comprehensive
income
 Balance
December 31,
2011
 
 
 (in millions)
 

Contingent consideration

 $1.9 $ $(0.8)$ $1.1 


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(15) Financial Instruments (Continued)

        As discussed in Note 5, in 2010 a contingent liability of $1.9 million was recognized as an estimate of the acquisition date fair value of the contingent consideration in the BRAE acquisition. This liability was classified as Level 3 under the fair value hierarchy as it was based on the weighted probability of achievement of a future performance metric as of the date of the acquisition, which was not observable in the market. During the year ended December 31, 2011, the estimate of the fair value of the contingent consideration was reduced to $1.1 million based on the revised probability of achievement of the future performance metric. The gain resulting from the decrease in the contingent liability was classified in operating earnings as restructuring and other charges, net.

        At December 31, 2009, the Company had short term investments of $6.5 million in auction rate securities (ARS). The Company elected to participate in a settlement offer from UBS AB (UBS) for all of its outstanding ARS investments. Under the terms of the settlement offer, the Company was issued rights by UBS entitling the Company to require UBS to purchase the underlying ARS at par value during the period from June 30, 2010, through July 2, 2012. The Company elected to exercise this right and, on July 1, 2010 received $6.3 million from UBS in settlement of all outstanding ARS investments.

        Short-term investment securities as of December 31, 2011 consist of a certificate of deposit with a remaining maturity of greater than three months at the date of purchase, for which the carrying amount is a reasonable estimate of fair value.

        Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase and consist primarily of certificates of deposit and money market funds, for which the carrying amount is a reasonable estimate of fair value.

        The Company uses financial instruments from time to time to enhance its ability to manage risk, including foreign currency and commodity pricing exposures, which exist as part of its ongoing business operations. The use of derivatives exposes the Company to counterparty credit risk for nonperformance and to market risk related to changes in currency exchange rates and commodity prices. The Company manages its exposure to counterparty credit risk through diversification of counterparties. The Company's counterparties in derivative transactions are substantial commercial banks with significant experience using such derivative instruments. The impact of market risk on the fair value and cash flows of the Company's derivative instruments is monitored and the Company restricts the use of derivative financial instruments to hedging activities. The Company does not enter into contracts for trading purposes nor does the Company enter into any contracts for speculative purposes. The use of derivative instruments is approved by senior management under written guidelines.

        The Company has exposure to a number of foreign currency rates, including the Canadian Dollar, the Euro, the Chinese Yuan and the British Pound. To manage this risk, the Company generally uses a layering methodology whereby at the end of any quarter, the Company has generally entered into forward exchange contracts which hedge approximately 50% of the projected intercompany purchase transactions for the next twelve months. The Company primarily uses this strategy for the purchases between Canada and the U.S. The average volume of contracts can vary but generally approximates $9 to $15 million in open contracts at the end of any given quarter. At December 31, 2011, the Company had contracts for notional amounts aggregating approximately $9.0 million. The Company accounts for the forward exchange contracts as an economic hedge to reduce the impact of currency fluctuations on certain anticipated intercompany purchase transactions that are expected to occur during the next twelve months and certain other foreign currency transactions.hedge. Realized and unrealized gains and losses on the contracts are recognized in other income/expense.(income) expense in the consolidated statement of operations. These contracts do not subject the Company to significant market risk from exchange movement because they offset gains and losses on the related foreign currency denominated transactions. At December 31, 2008 and 2007, the fair value of the contracts were immaterial.

        From time to time, the Company enters into swaps or forwards to limit the volatility associated with the purchase of metals, such as copper. The Company typically structures the terms of these financial instruments to coincide with purchases made throughout the year. DuringIn 2008, the Company



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(15) Financial Instruments (Continued)

entered into a series of copper swaps to fix the price per pound for copper from October 2008 through September 2009 for 1 million pounds to be delivered over 12 months for one customer. The Company has determined that these copper swaps dodid not qualify for hedge accounting and is accountingaccounted for these financial instruments as an economic hedge. Therefore, any changes in the fair value of the copper swaps arewere recorded immediately in the Consolidated Statementconsolidated statement of Operations. The Company believes that the use of swap contracts to fix the purchase price of copper allows the Company the ability to provide firm pricing to that one customer.operations. The Company does not enter into swap or forward contracts for speculative purposes. AtAs of December 31, 2008, unrealized losses on the copper swaps were $1.6 million2011 and are included in other income/expense in the Consolidated Statement of Operations.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(16) Financial Instruments (Continued)

        We measure certain financial assets and liabilities at fair value on a recurring basis, including trading auction rate securities, foreign currency derivatives and metal derivatives. The fair value of these certain financial assets and liabilities was determined using the following inputs at December 31, 2008:

 
 Fair Value Measurements at Reporting Date Using: 
 
  
 Quoted Prices in Active
Markets for Identical Assets
 Significant Other
Observable
Inputs
 Significant
Unobservable
Inputs
 
 
 Total (Level 1) (Level 2) (Level 3) 
 
 (in millions)
 

Assets

             

Trading securities(1)

 $8.3 $ $ $8.3 

Plan asset for deferred compensation(2)

  2.4  2.4     
          

Total assets

 $10.7 $2.4 $ $8.3 
          

Liabilities

             

Copper swap(3)

 $1.6 $ $1.6 $ 

Plan liability for deferred compensation(4)

  2.4  2.4     
          

Total liabilities

 $4.0 $2.4 $1.6 $ 
          

(1)
Included in long-term investment securities on the Company's consolidated balance sheet.

(2)
Included in other, net on the Company's consolidated balance sheet.

(3)
Included in accrued expenses and other liabilities on the Company's consolidated balance sheet.

(4)
Included in other noncurrent liabilities on the Company's consolidated balance sheet.

        The table below provides a summary of the changes in fair value of all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period December 31, 2007 to December 31, 2008.

 
  
  
 Total realized and unrealized gains
(losses) included in:
  
 
 
 Balance
December 31,
2007
 Purchases,
sales,
settlements, net
 Earnings Comprehensive
income
 Balance
December 31,
2008
 
 
 (in millions)
 

Trading securities

 $39.0 $(30.6)$(0.1)$ $8.3 

        Trading securities comprise auction rate securities and rights issued by UBS, AG (UBS). The Company holds a variety of interest bearing auction rate securities, or ARS, that includes $4.8 million in municipal bonds and $1.2 million in student loans at December 31, 2008. These ARS investments are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or sell their interests at par. The recent uncertainties in the credit markets have affected all of the Company's holdings in ARS investments, and auctions for the Company's investments in these securities have failed on their respective auction dates. Consequently, the investments are not currently liquid and2010, the Company will not be able to access these funds until a future auction of these investments is successful or a buyer is found outside of the auction process. Maturity dates for these ARS investments range from 2027 to 2036.



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(16) Financial Instruments (Continued)

        All of the ARS investments were AAA rated investment grade quality and were in compliance with the Company's investment policy at the time of acquisition. The remaining securities are rated AA. During the fourth quarter of 2008, the Company and its broker elected to participate in a settlement offer from UBS for all of thehad no outstanding ARS investments. Under the terms of the settlement offer, the Company and its broker were issued rights by UBS entitling the holder to require UBS to purchase the underlying ARS at par value for the period from June 30, 2010, through July 2, 2012. The rights also entitle UBS to purchase or sell the ARS at any time from the settlement date, in which case UBS would be required to pay par value for the ARS.

        Typically the fair value of ARS investments approximates par value due to frequent interest rate resets through the auction process. While the Company continues to earn interest on its ARS investments, these investments are not currently trading and therefore do not currently have a readily determinable market value.swaps.

        The Company has used a discounted cash flow model to determine the estimated fair value of its investment in ARS and investments in UBS rights as of December 31, 2008. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit quality of the ARS issuer, timing and amount of cash flows, government guarantees related to student loans and the expected holding periods of the ARS. Based on this assessment of fair value, as of December 31, 2008, the Company recorded a chargeincome (loss) of approximately $2.4$0.6 million, $0.5 million and ($0.8) million in 2011, 2010 and 2009, respectively to other (income) expense in the Consolidated Statementconsolidated statement of Operations for its investment in ARS. The Company performed a valuationoperations from the impact of the ARS with the rights from UBS. The Company determined the value of the rights based upon the difference between the ARS without the rights and the ARS with the rights. Based on this assessment of fair value, the Company recorded the investment in rights from UBS of approximately $2.3 million to other (income) expense.

        Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase. The remaining balance of cash equivalents consists primarily of money market funds, for which the carrying amount is a reasonable estimate of fair value.derivative instruments.

Leases

        The Company leases certain manufacturing facilities, sales offices, warehouses, and equipment. Generally, the leases carry renewal provisions and require the Company to pay maintenance costs. Future minimum lease payments under capital leases and non-cancelable operating leases as of December 31, 2011 are as follows:

 
 Capital Leases Operating Leases 
 
 (in millions)
 

2012

 $1.4 $9.3 

2013

  1.3  7.6 

2014

  1.3  5.8 

2015

  1.3  3.6 

2016

  1.3  1.2 

Thereafter

  5.0  3.1 
      

Total

 $11.6 $30.6 
       

Less amount representing interest (at rates ranging from 4.2% to 8.7%)

  1.4    
       

Present value of net minimum capital lease payments

  10.2    

Less current installments of obligations under capital leases

  1.1    
       

Obligations under capital leases, excluding installments

 $9.1    
       

        Carrying amounts of assets under capital lease include:

 
 December 31, 
 
 2011 2010 
 
 (in millions)
 

Buildings

 $16.5 $17.0 

Machinery and equipment

  2.1  1.7 
      

  18.6  18.7 

Less accumulated depreciation

  (4.8) (3.7)
      

 $13.8 $15.0 
      


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(16) Financial Instruments (Continued)


Future minimum lease payments under capital leases and non-cancelable operating leases as of December 31, 2008 are as follows:

 
 Capital Leases Operating Leases 
 
 (in millions)
 

2009

 $1.7 $7.7 

2010

  1.7  4.7 

2011

  1.7  3.2 

2012

  1.6  2.3 

2013

  1.6  2.0 

Thereafter

  9.0  6.1 
      
 

Total

 $17.3 $26.0 
       

Less amount representing interest (at rates ranging from 4.2% to 8.7%)

  (2.7)   
       

Present value of net minimum capital lease payments

  14.6    

Less current installments of obligations under capital leases

  (1.3)   
       
 

Obligations under capital leases, excluding installments

 $13.3    
       

        Carrying amounts of assets under capital lease include:

 
 December 31, 
 
 2008 2007 
 
 (in millions)
 

Buildings

 $17.7 $18.6 

Machinery and equipment

  7.8  8.9 
      

  25.5  27.5 

Less accumulated depreciation

  (4.3) (4.0)
      

 $21.2 $23.5 
      

(17) Segment Information

        Under the criteria set forth in Financial Accounting Standards Board No. 131, "Disclosure about Segments of an Enterprise and Related Information," theThe Company operates in three geographic segments: North America, Europe, and China.Asia. Each of these segments sellsells similar products, is managed separately and has separate financial results that are reviewed by the Company's chief operating decision-maker. All intercompany sales transactions have been eliminated. Sales by region are based upon location of the entity recording the sale. The accounting policies for each segment are the same as those described in the summary of significant accounting policies (see Note 2).



Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(17) Segment Information (Continued)

        The following is a summary of the Company's significant accounts and balances by segment, reconciled to its consolidated totals:

 
 December 31, 
 
 2008 2007 2006 
 
 (in millions)
 

Net Sales

          
 

North America

 $866.2 $871.0 $821.3 
 

Europe

  546.0  452.6  367.5 
 

China

  47.2  58.7  42.0 
        
  

Consolidated net sales

 $1,459.4 $1,382.3 $1,230.8 
        

Operating income (loss)

          
 

North America

 $67.8 $93.3 $98.5 
 

Europe

  65.7  53.6  50.0 
 

China

  (5.7) 7.9  7.2 
        
  

Subtotal reportable segments

  127.8  154.8 $155.7 
 

Corporate (*)

  (27.2) (29.1) (25.2)
        
  

Consolidated operating income

  100.6  125.7  130.5 
  

Interest income

  5.1  14.5  5.0 
  

Interest expense

  (26.2) (26.9) (22.1)
  

Minority interest

  1.9  2.8  1.8 
  

Other

  (9.1) (2.3) 0.9 
        
 

Income from continuing operations before income taxes

 $72.3 $113.8 $116.1 
        

Identifiable Assets

          
 

North America

 $821.7 $1,066.0 $1,046.8 
 

Europe

  716.8  531.6  493.4 
 

China

  121.6  131.7  120.7 
        
  

Consolidated identifiable assets

 $1,660.1 $1,729.3 $1,660.9 
        

Long-Lived Assets

          
 

North America

 $92.3 $100.2 $99.7 
 

Europe

  109.3  88.5  78.4 
 

China

  35.8  35.0  28.1 
        
  

Consolidated long-lived assets

 $237.4 $223.7 $206.2 
        

Capital Expenditures

          
 

North America

 $8.3 $13.9 $14.6 
 

Europe

  13.9  12.6  27.5 
 

China

  4.4  11.3  2.6 
        
  

Consolidated capital expenditures

 $26.6 $37.8 $44.7 
        

Depreciation and Amortization

          
 

North America

 $18.7 $17.8 $17.1 
 

Europe

  21.2  15.7  13.0 
 

China

  5.2  5.9  5.2 
        
  

Consolidated depreciation and amortization

 $45.1 $39.4 $35.3 
        

 
 December 31, 
 
 2011 2010 2009 
 
 (in millions)
 

Net Sales

          

North America

 $819.4 $785.5 $738.5 

Europe

  595.5  468.3  466.5 

Asia

  21.7  20.8  20.9 
        

Consolidated net sales

 $1,436.6 $1,274.6 $1,225.9 
        

Operating income (loss)

          

North America

 $112.0 $106.4 $78.6 

Europe

  28.7  43.7  51.0 

Asia

  12.2  (0.5) (6.6)
        

Subtotal reportable segments

  152.9  149.6  123.0 

Corporate (*)

  (35.8) (35.4) (30.8)
        

Consolidated operating income

  117.1  114.2  92.2 

Interest income

  1.0  1.0  0.9 

Interest expense

  (25.8) (22.8) (22.0)

Other

  (0.8) 2.1  1.2 
        

Income from continuing operations before income taxes

 $91.5 $94.5 $72.3 
        

Identifiable Assets (at end of period)

          

North America

 $831.8 $871.8 $804.7 

Europe

  773.2  692.8  686.0 

Asia

  92.5  79.7  85.4 

Discontinued operations

    1.8  23.1 
        

Consolidated identifiable assets

 $1,697.5 $1,646.1 $1,599.2 
        

Long-Lived Assets (at end of period)

          

North America

 $78.4 $77.4 $81.5 

Europe

  133.3  104.6  108.5 

Asia

  15.0  15.5  16.5 
        

Consolidated long-lived assets

 $226.7 $197.5 $206.5 
        

Capital Expenditures

          

North America

 $8.4 $9.1 $9.3 

Europe

  13.6  14.8  14.4 

Asia

  0.7  0.7  0.5 
        

Consolidated capital expenditures

 $22.7 $24.6 $24.2 
        

Depreciation and Amortization

          

North America

 $19.2 $17.9 $17.9 

Europe

  30.2  24.9  23.1 

Asia

  2.0  2.0  5.8��
        

Consolidated depreciation and amortization

 $51.4 $44.8 $46.8 
        

*
Corporate expenses are primarily for compensation expense, Sarbanes-Oxley compliance, professional fees, including legal and audit expenses, shareholder services and benefit administration costs. These costs are not allocated to the geographic segments as they are viewed as corporate functions that support all activities. Corporate costs in 2011 include $6.3 million in charges related to the separation agreement with the Company's former CEO.


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(17) Segment Information (Continued)

        The North America segment consists of U.S. net sales of $798.1 million, $805.5 million and $762.7 million for the years ended December 31, 2008, 2007 and 2006, respectively. The North American segment also consists of U.S. long-lived assets of $86.6 million, $92.7 million and $93.1 million as of December 31, 2008, 2007 and 2006, respectively.

        Intersegment sales for the year ended December 31, 2008 for North America, Europe and China were $6.4 million, $6.4 million and $133.1 million, respectively. Intersegment sales for the year ended December 31, 2007 for North America, Europe and China were $6.6 million, $6.0 million and $137.1 million, respectively. Intersegment sales for the year ended December 31, 2006 for North America, Europe and China were $6.9 million, $3.0 million and $82.3 million, respectively.

(18) Quarterly Financial Information (unaudited)

 
 First
Quarter
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 
 
 (in millions, except per share information)
 

Year ended December 31, 2008

             

Net sales

 $344.0 $389.0 $379.3 $347.1 

Gross profit

  114.4  132.7  123.9  117.4 

Income (loss) from continuing operations

  13.9  20.0  16.8  (3.4)

Net income (loss)

  13.7  19.8  16.7  (3.6)

Per common share:

             

Basic

             
 

Income (loss) from continuing operations

  0.38  0.55  0.46  (0.09)
 

Net income (loss)

  0.37  0.54  0.46  (0.10)

Diluted

             
 

Income (loss) from continuing operations

  0.37  0.54  0.46  (0.09)
 

Net income (loss)

  0.37  0.54  0.45  (0.10)

Dividends per common share

             

Year ended December 31, 2007

             

Net sales

 $346.1 $350.4 $340.5 $345.3 

Gross profit

  114.7  114.6  110.4  121.9 

Income from continuing operations

  20.0  17.7  18.2  21.7 

Net income

  20.0  17.8  18.1  21.5 

Per common share:

             

Basic

             
 

Income from continuing operations

  0.52  0.46  0.47  0.56 
 

Net income

  0.52  0.46  0.47  0.56 

Diluted

             
 

Income from continuing operations

  0.51  0.45  0.47  0.56 
 

Net income

  0.51  0.46  0.46  0.55 

Dividends per common share

  0.10  0.10  0.10  0.10 


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(19)(16) Segment Information (Continued)

        The following includes U.S. net sales and U.S. property, plant and equipment of the Company's North American segment:

 
 December 31, 
 
 2011 2010 2009 
 
 (in millions)
 

U.S. net sales

 $741.4 $712.2 $672.6 

U.S. property, plant and equipment, net (at end of period)

 $73.5 $72.4 $74.8 

        The following includes intersegment sales for North America, Europe and Asia:

 
 December 31, 
 
 2011 2010 2009 
 
 (in millions)
 

Intersegment Sales

          

North America

 $3.3 $3.6 $3.6 

Europe

  8.4  7.6  5.8 

Asia

  132.9  115.8  110.4 
        

Intersegment sales

 $144.6 $127.0 $119.8 
        

        The Company sells its products into various end markets around the world and groups net sales to third parties into four product categories. Because many of the Company's sales are through distributors and third-party manufacturers' representatives, a portion of the product categorization is based on management's understanding of final product use and, as such, allocations have been made to align sales into a product category. Net sales to third parties for the four product categories are as follows:

 
 December 31, 
 
 2011 2010 2009 
 
 (in millions)
 

Net Sales

          

Residential & commercial flow control

 $755.4 $652.2 $623.4 

HVAC & gas

  475.7  433.4  423.5 

Drains & water re-use

  135.2  122.2  117.6 

Water quality

  70.3  66.8  61.4 
        

Consolidated net sales

 $1,436.6 $1,274.6 $1,225.9 
        


Watts Water Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(17) Quarterly Financial Information (unaudited)

 
 First
Quarter
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 
 
 (in millions, except per share information)
 

Year ended December 31, 2011

             

Net sales

 $329.9 $375.7 $370.8 $360.2 

Gross profit

  121.0  130.3  135.7  128.5 

Income from continuing operations

  11.1  12.9  23.6  17.1 

Net income

  11.1  14.6  23.7  17.0 

Per common share:

             

Basic

             

Income from continuing operations

  0.30  0.34  0.63  0.47 

Net income

  0.30  0.39  0.63  0.46 

Diluted

             

Income from continuing operations

  0.29  0.34  0.63  0.46 

Net income

  0.29  0.39  0.63  0.46 

Dividends per common share

  0.11  0.11  0.11  0.11 

Year ended December 31, 2010

             

Net sales

 $319.3 $324.0 $314.6 $316.7 

Gross profit

  117.6  120.6  113.8  112.9 

Income from continuing operations

  12.2  22.2  17.3  18.4 

Net income

  8.1  22.1  17.3  11.3 

Per common share:

             

Basic

             

Income from continuing operations

  0.33  0.60  0.46  0.30 

Net income

  0.22  0.59  0.46  0.30 

Diluted

             

Income from continuing operations

  0.33  0.59  0.46  0.30 

Net income

  0.22  0.59  0.46  0.30 

Dividends per common share

  0.11  0.11  0.11  0.11 

(18) Subsequent Events

        On February 10, 2009,January 31, 2012, the Company completed the acquisition of tekmar Control Systems (tekmar) in a plan was approved by the Boardshare purchase transaction. A designer and manufacturer of Directors to expand the Company's restructuring program to consolidate the Company's manufacturing footprintcontrol systems used in North Americaheating, ventilation, and China. The plan provides for the closure of three plants, with the relocation of those operations to existing facilities in either North America or China or to a new central facility in the United States.

        The footprint consolidation pre-tax charge will be approximately $11.7 million, including severance charges of approximately $3.2 million, relocation costs of approximately $3.3 million and asset write-downs of approximately $5.2 million. The Company also expects to record a net gain on property sales of $2.4 million. One-time tax charges of approximately $7.0 million are also expected to be incurred as part of the building relocations. Approximately 400 positions will be eliminated in connection with this consolidation. The net after tax charge for this manufacturing consolidation programair conditioning application, tekmar is expected to be approximately $14.9enhance the Company's hydronic systems product offerings in the U.S. and Canada. The initial purchase price paid was CAD $18.0 million, ($4.4 million non cash), with costsan earn-out based on future earnings levels being incurred through December 2009.achieved. The Company expects to spend approximately $4.8 milliontotal purchase price will not exceed CAD $26.2 million. Sales for tekmar in capital expenditures to consolidate operations. The Company expects this entire project will be self-funded through net proceeds from the sale of buildings and other assets being disposed of as part of the plan.2011 approximated CAD $11.0 million.

        On February 9, 2009,7, 2012, the Company declared a quarterly dividend of eleven cents ($0.11) per share on each outstanding share of Class A Common Stock and Class B Common Stock.




Watts Water Technologies, Inc. and Subsidiaries

Schedule II—Valuation and Qualifying Accounts

(Amounts in millions)

For the Three Years Ended December 31:

 
 Balance At
Beginning of
Period
 Additions
Charged To
Expense
 Additions
Charged To
Other Accounts
 Deductions Balance At
End of
Period
 

Year Ended December 31, 2006

                

Allowance for doubtful accounts

 $9.3  3.5  0.3  (2.6)$10.5 

Allowance for excess and obsolete inventories

 $17.6  9.1  1.0  (7.2)$20.5 

Year Ended December 31, 2007

                

Allowance for doubtful accounts

 $10.5  5.4  1.2  (2.2)$14.9 

Allowance for excess and obsolete inventories

 $20.5  9.1  2.0  (7.2)$24.4 

Year Ended December 31, 2008

                

Allowance for doubtful accounts

 $14.9  4.7  0.6  (8.0)$12.2 

Allowance for excess and obsolete inventories

 $24.4  7.7  0.2  (6.0)$26.3 

 
 Balance At
Beginning of
Period
 Additions
Charged To
Expense
 Additions
Charged To
Other Accounts
 Deductions Balance At
End of
Period
 

Year Ended December 31, 2009

                

Allowance for doubtful accounts

 $9.6  0.6  (0.6) (2.1)$7.5 

Allowance for excess and obsolete inventories

 $26.0  7.8  0.5  (8.6)$25.7 

Year Ended December 31, 2010

                

Allowance for doubtful accounts

 $7.5  2.7    (1.3)$8.9 

Allowance for excess and obsolete inventories

 $25.7  4.4  0.4  (6.6)$23.9 

Year Ended December 31, 2011

                

Allowance for doubtful accounts

 $8.9  1.1  0.3  (1.2)$9.1 

Allowance for excess and obsolete inventories

 $23.9  6.1  1.3  (5.1)$26.2 


EXHIBIT INDEX

Exhibit No. Description
 

2.1

 

Share and Asset Sale and Purchase Agreement dated as of April 8, 2008 between Blücher Metal1, 2011 by and among Danfoss A/S and Watts Denmark HoldingDanfoss International A/S (18)and the Registrant and Watts Industries Deutschland (25)

 

3.1

 

Restated Certificate of Incorporation, as amended (14)

 

3.2

 

Amended and Restated By-Laws as amended (1)

 

9.1

 

The Amended and Restated George B. Horne Voting Trust Agreement—1997 dated as of September 14, 1999 (15)

 

10.1*10.1

*

Supplemental Compensation Agreement effective as of September 1, 1996 between the Registrant and Timothy P. Horne (9), Amendment No. 1, dated July 25, 2000 (16), and Amendment No. 2 dated October 23, 2002 (3)

 

10.2*10.2

*

Form of Indemnification Agreement between the Registrant and certain directors and officers of the Registrant (6)

 

10.3*10.3

*

19961991 Non-Employee Directors' Nonqualified Stock Option Plan dated October 15, 1996 (10), and First Amendment dated February 28, 2003 (3)No. 1 (9)

 

10.4*10.4

*

Watts Water Technologies, Inc. Pension Plan (amended and restated effective as of January 1, 2006) and First Amendment effective as of January 1, 2008 (22)(20), Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment and Sixth Amendment

 

10.5

 

Registration Rights Agreement dated July 25, 1986 (5)

 

10.6*10.6

*

Executive Incentive Bonus Plan, as amended and restated as of January 1, 2008 (8)

 

10.7

 

Amended and Restated Stock Restriction Agreement dated October 30, 1991 (2), and Amendment dated August 26, 1997 (12)

 

10.8*10.8

*

Watts Industries, Inc. 1991 Non-Employee Directors' Nonqualified Stock Option Plan (6),Separation Agreement dated as of July 6, 2011 between the Registrant and Amendment No. 1 (9)Michael P. Flanders (23)

 

10.9*10.9

*

Watts Industries, Inc. 2003 Non-Employee Directors' Stock Option Plan (3)

 

10.10

Letter of Credit issued by Fleet National Bank (as successor to BankBoston, N.A.) for the benefit of Zurich-American Insurance Company dated June 25, 1999, as amended January 22, 2001 (17)

10.11*

*

Watts Water Technologies, Inc. Management Stock Purchase Plan (Amended and Restated as of January 1, 2005), as amended (20)Amendment No. 1 and Amendment No. 2 (19), and Amendment No. 3

 

10.12

Stock Purchase Agreement dated as of June 19, 1996 by and among Mueller Co., Tyco Valves Limited, Watts Investment Company, Tyco International Ltd. and the Registrant (11)

10.1310.11

 

Note Purchase Agreement dated as of May 15, 2003 between the Registrant and the Purchasers named in Schedule A thereto relating to the Registrant's $50,000,000 4.87% Senior Notes, Series A, due May 15, 2010 and $75,000,000 5.47% Senior Notes, Series B, due May 15, 2013 (7)

 

10.14

Form of 4.87% Senior Note due May 15, 2010 (7)

10.1510.12

 

Form of 5.47% Senior Note due May 15, 2013 (7)

 

10.16*10.13

*

Watts Water Technologies, Inc. Amended and Restated 2004 Stock Incentive Plan as amended (20)(24)

 

10.17*10.14

*

Non-Employee Director Compensation Arrangements (1)(11)

 

10.18*10.15

*

Watts Water Technologies, Inc. Supplemental Employees Retirement Plan as Amended and Restated Effective May 4, 2004, First Amendment effective March 1, 2005 and Second Amendment effective January 1, 2008 (22)(20), Third Amendment, and Fourth Amendment

 

10.19*10.16

*

Form of Incentive Stock Option Agreement under the Watts Water Technologies, Inc. 2004 Stock Incentive Plan (18)

10.17

*

Form of Non-Qualified Stock Option Agreement under the Watts Water Technologies, Inc. 2004 Stock Incentive Plan (19)

 

10.20*10.18

Form of Non-Qualified Stock Option Agreement under the Watts Water Technologies, Inc. 2004 Stock Incentive Plan (20)

10.21*

*

Form of Restricted Stock Award Agreement for Employees under the Watts Water Technologies, Inc. 2004 Stock Incentive Plan (Incremental Vesting) (20)(19)

 

10.22*10.19

*

Form of Restricted Stock Award Agreement for Employees under the Watts Water Technologies, Inc. 2004 Stock Incentive Plan (Cliff Vesting) (19)(18)

 

10.23*10.20

*

Form of Restricted Stock Award Agreement for Non-Employee Directors under the Watts Water Technologies, Inc. 2004 Stock Incentive Plan (19)(17)


Exhibit No.Description
 

10.2410.21

 

Note Purchase Agreement, dated as of April 27, 2006, between the Registrant and the Purchasers named in Schedule A thereto relating to the Registrant's $225,000,000 5.85% Senior Notes due April 30, 2016 (4)

 

10.2510.22

 

Form of 5.85% Senior Note due April 30, 2016 (4)


Exhibit No.Description
 

10.2610.23

 

Subsidiary Guaranty, dated as of April 27, 2006, in connection with the Registrant's 5.85% Senior Notes due April 30, 2016 executed by the subsidiary guarantors party thereto, including the form of Joinder to Subsidiary Guaranty (4)

 

10.2710.24

 

First Amendment, dated as of April 27, 2006, to Note Purchase Agreement dated as of May 15, 2003 among the Registrant and the purchasers named therein (4)

 

10.2810.25

��

Amended and Restated Credit Agreement, dated as of April 27, 2006,June 18, 2010, among the Registrant, certain subsidiaries of the Registrant as Borrowers, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer and the other lenders referred to therein (4)(21)

10.26

Guaranty, dated as of June 18, 2010, by the Registrant and the Subsidiaries of the Registrant set forth therein, in favor of Bank of America, N.A. and other lenders referred to therein (21)

10.27

Note Purchase Agreement, dates as of June 18, 2010, between the Registrant and Purchasers named in Schedule A thereto relating to the Registrants $75,000,000 5.05% Senior Notes due June 18, 2020 (21)

10.28

Form of 5.05% Senior Note due June 18, 2020 (21)

 

10.29

 

Amended and RestatedForm of Subsidiary Guaranty dated asin connection with the Registrants 5.05% Senior Notes due June 18, 2020, including the form of April 27, 2006, by the Registrant, the Subsidiaries of the Registrant set forth therein and Watts Industries Europe B.V., in favor of Bank of America, N.A. (4)Joinder to Subsidiary Guaranty (21)

 

10.30*10.30

*

ResignationSeparation Agreement dated February 14, 2008January 26, 2011 between the Registrant and Paul A. Lacourciere (18)

10.31*

Severance Agreement dated February 16, 2009 between the Registrant and Douglas T. WhitePatrick S. O'Keefe (22)

 

11

 

Statement Regarding Computation of Earnings per Common Share (13)

 

21

 

Subsidiaries

 

23

 

Consent of KPMG LLP, Independent Registered Public Accounting Firm

 

31.1

 

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

 

31.2

 

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

 

32.1

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350

 

32.2

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350

101.INS

**

XBRL Instance Document.

101.SCH

**

XBRL Taxonomy Extension Schema Document.

101.CAL

**

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

**

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

**

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

**

XBRL Taxonomy Extension Presentation Linkbase Document.


(1)
Incorporated by reference to the Registrant's Current Report on Form 8-K dated February 5, 2007July 12, 2010 (File No. 001-11499).

(2)
Incorporated by reference to the Registrant's Current Report on Form 8-K dated November 14, 1991 (File No. 001-11499).

(3)
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-11499).

(4)
Incorporated by reference to the Registrant's Current Report on Form 8-K dated April 27, 2006 (File No. 001-11499).

(5)
Incorporated by reference to the Registrant's Form S-1 (No. 33-6515) as part of the Second Amendment to such Form S-1 dated August 21, 1986.

(6)
Incorporated by reference to Amendment No. 1 to the Registrant's AnnualQuarterly Report on Form 10-K10-Q for yearthe quarter ended June 30, 1992October 2, 2011 (File No. 001-11499).

(7)
Incorporated by reference to the Registrant's Current Report on Form 8-K dated May 15, 2003 (File No. 001-11499).


(8)
Incorporated by reference to the Registrant's Current Report on Form 8-K dated May 14, 2008 (File No. 001-11499).

(9)
Incorporated by reference to the Registrant's Annual Report on Form 10-K for year ended June 30, 1996 (File No. 001-11499).

(10)
Incorporated by reference to Amendment No. 1 to the Registrant's Annual Report on Form S-8 (No. 333-32685) dated August 1, 1997.10-K for the year ended June 30, 1992 (File No. 001-11499).

(11)
Incorporated by reference to the Registrant's CurrentAnnual Report on Form 8-K dated September 4, 199610-K for the year ended December 31, 2009 (File No. 001-11499).


(12)
Incorporated by reference to the Registrant's Annual Report on Form 10-K for year ended June 30, 1997(File1997 (File No. 001-11499).

(13)
Incorporated by reference to notes to Consolidated Financial Statements, Note 2 of this Report.

(14)
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 2005 (File No. 001-11499).

(15)
Incorporated by reference to the Registrant's Annual Report on Form 10-K for year ended June 30, 1999 (File No. 001-11499).

(16)
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for quarter ended September 30, 2000 (File No. 001-11499).

(17)
Incorporated by reference to the Registrant's AnnualQuarterly Report on Form 10-K10-Q for the yearquarter ended December 31, 2003July 4, 2010 (File No. 001-11499).

(18)
Incorporated by reference to the Registrant's Current Report on Form 8-K dated April 8, 2008 (File No. 001-11499).

(19)
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 26, 2004 (File No. 001-11499).

(20)(19)
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 1, 2007 (File No. 001-11499).

(21)
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 2008 (File No. 001-11499).

(22)(20)
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-11499).

(21)
Incorporated by reference to the Registrant's Current Report on Form 8-K dated June 18, 2010 (File No. 001-11499).

(22)
Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 26, 2011 (File No. 001-11499).

(23)
Incorporated by reference to the Registrant's Current Report on Form 8-K dated July 6, 2011 (File No. 001-11499).

(24)
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-11499).

(25)
Incorporated by reference to the Registrant's Current Report on Form 8-K dated April 1, 2011 (File No. 001-11499).

*
Management contract or compensatory plan or arrangement.




QuickLinks

PART I
PART II
Report of Independent Registered Public Accounting Firm
PART III
PART IV
SIGNATURES
Report of Independent Registered Public Accounting Firm
Watts Water Technologies, Inc. Language): (i) Consolidated Balance Sheets at December 31, 2010 and SubsidiariesDecember 31, 2009, (ii) Consolidated Statements of Operations (Amounts in millions, except per share information)
Watts Water Technologies, Inc.for the Years Ended December 31, 2010, 2009 and Subsidiaries Consolidated Balance Sheets (Amounts in millions, except share information)
Watts Water Technologies, Inc. and Subsidiaries2008, (iii) Consolidated Statements of Stockholders'Stockholder's Equity (Amounts in millions, except share information)
Watts Water Technologies, Inc. and SubsidiariesComprehensive Income (Loss) for the Years Ended December 31, 2010, 2009 and 2008, (iv) Consolidated Statements of Cash Flows (Amounts in millions)
Watts Water Technologies, Inc.for the Years Ended December 31, 2010, 2009 and Subsidiaries2008, and (v) Notes to Consolidated Financial Statements
Watts Water Technologies, Inc.Statements.

In accordance with Rule 406T of Regulation S-T, the XBRL-related information in Exhibit 101 to this Annual Report on Form 10-K is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, is deemed not filed for purposes of section 18 of the Exchange Act, and Subsidiaries Schedule II—Valuation and Qualifying Accounts (Amounts in millions)otherwise is not subject to liability under these sections.