Watts Water Annual Report 2007

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FY2007 Annual Report · Watts Water

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3207 Watts Water techlology AR 009ƒ 2/28/08 2:26 PM Page 2

Innovative water solutions

Watts Water Technologies, Inc.

Annual Report 2007

481087.COVER.qx6 3/11/08 1:51 PM Page 2

Financial highlights

100

77.1

77.6

55.0

48.7

36.4

04
($ Millions)

1500

1250

1000

750

500

250

1,382.3

1,230.8

924.3

824.6

701.9

04
($ Millions)

Income from Continuing Operations

Total Net Sales

871.0

821.3

900

700

500

472.6

300

629.9

545.2

452.6

367.5

253.2 266.3

210.6

500

400

300

200

100

58.7

42.0

26.2

28.1

18.7

04
($ Millions)

North America Net Sales

04
($ Millions)

Europe Net Sales

04
($ Millions)

China Net Sales

Directors

Robert L. Ayers
Director

Richard J. Cathcart
Director

Timothy P. Horne
Director

Ralph E. Jackson, Jr.
Director

Kenneth J. McAvoy
Director

John K. McGillicuddy
Director

Gordon W. Moran
Non-Executive Chairman
of the Board and Director

Daniel J. Murphy, III
Director

Patrick S. O'Keefe
Chief Executive Officer,
President and Director

Corporate
Information

Executive Offices
815 Chestnut Street
North Andover, MA 01845-6098
Tel. 978-688-1811
Fax. 978-688-2976

Registrar and Transfer Agent
Wells Fargo Bank, N.A.
161 N. Concord Exchange
South St. Paul, MN 55075
(800) 468-9716

Counsel
WilmerHale
60 State Street
Boston, MA 02109

Auditors
KPMG LLP
99 High Street
Boston, MA 02110

Stock Listing
New York Stock Exchange
Ticker Symbol: WTS

Executive Officers

Patrick S. O'Keefe
Chief Executive Officer,
President and Director

William C. McCartney
Chief Financial Officer
and Treasurer

J. Dennis Cawte
Group Managing Director,
Europe

Ernest E. Elliott
Executive Vice President
of Marketing

Michael P. Flanders
Executive Vice President
of Manufacturing Operations,
North America and Asia

Josh C. Fu
President, Asia

Gregory J. Michaud
Executive Vice President
of Human Resources

Taylor K. Robinson
Executive Vice President
of Supply Chain Management

Lester J. Taufen
General Counsel,
Vice President of Legal Affairs
and Secretary

Douglas T. White
Group Vice President

Forward Looking Statements

This Annual Report contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements that relate to

prospective events or developments are forward-looking statements. Also, words such as “believe,” “anticipate,” “plan,” “expect,” “will” and similar expressions

identify forward-looking statements. We cannot assure investors that our assumptions and expectations will prove to have been correct. There are a number of

important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements. These factors include, but are not

limited to, those set forth in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007 included in this Annual Report.

Except as required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

For additional information on Watts Water Technologies, Inc., visit our web site at www.wattswater.com

481087.P 3/12/08 11:09 PM Page 1

Our objective is

to increase value

by expanding

into new markets,

continuously

developing new

products for

Water is Essential for Life on Earth,
Watts is Essential for Water.

At Watts Water Technologies, Inc., our mission is to provide innovative products

that ensure the delivery of clean and safe water in a controlled and resource-conscious

manner to people around the world. We are carrying out this global mission by

existing markets,

working closely with engineers and plumbing code officials to update plumbing

making key

acquisitions and

reducing manu-

codes thus ensuring that water is used safely in homes and buildings, and by working

to develop products designed specifically for use with renewable energies such as

solar and geothermal. In addition, we are working with the government in China

on large-scale water infrastructure projects to efficiently deliver water to residents

facturing costs.

in this rapidly developing country.

Watts is uniquely positioned in the water industry. Our extensive product lines

range from large backflow prevention devices utilized in commercial applications

and municipal water delivery systems to under-sink water shutoff valves used in

your home. Our products address multiple markets including commercial and

residential construction, foodservice, fire protection, irrigation and waterworks.

Our disciplined acquisition strategy has fueled our growth by adding new

manufacturing and distribution capabilities, providing new technologies and

creating access to new markets. Finally, Watts’ 7,800 worldwide associates

carry out our mission daily. We believe these attributes set Watts apart and

will lead to our continued growth and success.

WATTS WATER TECHNOLOGIES, INC. ANNUAL REPORT 2007 1

481087.P 08/03/14 2:06 PM Page 2

Koike pipe hole cutter at Mueller Steam Specialty facility
St. Pauls, North Carolina

Focused

Watts Water Technologies, Inc. designs and manufactures valves and related products
that promote the comfort and safety of people and the quality, conservation and
control of water used in commercial, residential, industrial and municipal applications.

ccoommffoorrtt
We sell a full range
of engineered hydronic
radiant heating and
electric floor warming
systems that enhance
the lives of our customers.

qquuaalliittyy
We offer a broad range
of reverse osmosis water
purification systems and
backflow prevention
devices that protect
and improve the quality
of drinking water.

SSaaffeettyy
We provide an extensive
line of hot water mixing
valves and heating
safety units that
deliver water safely
to end users.

CCoonnsseerrvvaattiioonn
We manufacture a broad
range of water pressure
reducing valves and
conditioning equipment
that promote the
conservation of water.

CCoonnttrrooll
We offer one of the
most extensive lines
of flow control valves,
modules and accessories
in the world.

481087.P 3/12/08 11:12 PM Page 3

Patrick S. O’Keefe, Chief Executive Officer and
William C. McCartney, Chief Financial Officer and Treasurer

“we achieved

To our Shareholders:

record levels

of sales and

income from

continuing

operations in 2007.”

2007 Financial Highlights

We are pleased to report that we achieved record levels of sales and income from continuing

operations in 2007. Net sales for the year ended December 31, 2007 increased 12.3% to

$1.4 billion from $1.2 billion in 2006. Income from continuing operations increased

to $77.6 million in 2007 from $77.1 million in 2006. The increase in net sales was attributable

to the following factors:

Organic Growth
Acquisitions
Foreign Exchange
Total Increase in Net Sales

(in millions)

$
$
$
$

63.2
40.4
47.9
151.5

% change
5.1%
3.3%
3.9%
12.3%

During 2007, we initiated a global restructuring program and discontinued certain product

lines. This program includes the shutdown of five manufacturing facilities and the

right-sizing and relocation of our joint venture facility in China. The restructuring program

and charges for the product line eliminations will include pre-tax charges totaling approximately

$12.9 million, and will result in the elimination of approximately 330 positions worldwide.

The annual cash savings, net of tax, are estimated to be $4.5 million, which we expect to

fully realize by the second half of 2009. We recorded after-tax charges of approximately

$5.1 million for these programs during 2007.

The volatile business environment, which began in 2006, continued throughout 2007.

The North American commercial market provided growth during 2007 and we continued

to see exciting growth opportunities in Eastern Europe and the Chinese infrastructure market.

However, the North American residential construction market experienced some of the

deepest declines in recent history. We also experienced softness in many of the Western

European construction markets.

WATTS WATER TECHNOLOGIES, INC. ANNUAL REPORT 2007 3

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Powers thermostatic shower valve 3D computer
rendered CAD model

innovative

water solutions

Watts continuously provides products to meet our customers’ needs.
Our team of design engineers and state of the art manufacturing and testing
facilities give Watts a distinct advantage in the marketplace.

481087.P 3/12/08 11:13 PM Page 5

“We have introduced many new products that are

quickly gaining market acceptance.”

Despite this mixed environment we believe we are well positioned for continued growth and

we are optimistic as we look toward the future. We believe the diversity of our business model

is one of our key attributes. A significant percentage of our revenue comes from replacing the

installed base of many of our products. The vast majority of our revenue is generated from

products that are required to be installed by plumbing and building codes. We have thousands of

customers worldwide and our top ten customers accounted for only 22% of our revenue in 2007.

Watts PoolDocTM Meter

Our financial condition remains strong. At December 31, 2007 we had $290.3 million in

cash with a net debt to capital employed ratio of 13.5%. Please refer to page 41 of the

enclosed Annual Report on Form 10-K for a reconciliation of net debt to capital employed

to the nearest GAAP measures.

2007 was a year of many accomplishments. During 2007, we successfully implemented

a new North American enterprise resource planning system, which should enable us to

improve our working capital management, as well as our levels of customer service.

Watts Hot Water Recirculating Pump

We have strengthened our management team in many areas and added more expertise to assist

us in managing our global supply chain as well as our international manufacturing operations.

We also welcomed Richard J. Cathcart as a member of our Board of Directors during 2007.

Mr. Cathcart has a distinguished career working in global manufacturing companies, which

address both residential and commercial water use, as well as building controls.

Domocal Wall Mounted Unit

PoolDocTM is a handheld meter designed to provide quick and accurate readings for all

We have introduced many new products that are quickly gaining market acceptance.

chemicals needed to maintain a pool’s chemical balance. Our new hot water recirculating

pump will save the average household 10,000 gallons of water annually while increasing the

comfortable use of hot water. Our recently introduced Domocal unit is a wall-mounted

module that monitors the usage of heat energy in hot water and hydronic heating applications.

The Polyjet sleeve valve, recently introduced into the Chinese infrastructure market,

is effective in pressure control in high-pressure reduction applications. Polyjet reduces noise,

wear and downtime for water delivery systems. We have expanded our drain offering with

Polyjet Sleeve Valve

the introduction of our new trench drain. We have also introduced many new manifolds

and control technologies for thermal solar and geothermal systems to heat water.

In 2007, we established a regional distribution center in Ningbo, China. This distribution

center will allow us to more efficiently procure and move products from Asia to our

distribution centers and customers in the North American market.

WATTS WATER TECHNOLOGIES, INC. ANNUAL REPORT 2007 5

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Large diameter butterfly valve assembly line
Watts Valve (Changsha) Co., Ltd., Changsha, China

Disciplined

Acquisition Strategy

Watts has a proven track record of acquiring companies that fit into our
overall business strategy. These companies enhance our product offerings,
broaden our distribution capabilities and open new markets for our products.

481087.P 3/12/08 11:14 PM Page 7

Fully Integrated Watts Solar
Control Package

Final Assembly of a
FEBCO Backflow Preventer

Mueller Wye Strainer
Milling Machine

Topway Global

Drinking Water System

“Our target

We continue to successfully integrate the acquisitions of ATS Expansion Group and

companies must

Changsha Valve Works, both acquired in May 2006, and the FEBCO, Mueller Steam

provide a

long-term

Specialty and Polyjet product lines acquired in December 2005. Changsha Valve Works,

which we have renamed Watts Valve (Changsha) Co., Ltd., provides large diameter

hydraulic control valves for the Chinese infrastructure market. We have seen their order

strategic fit,

entry rates increase during 2007. ATS Expansion Group has expanded its market share in

as well as meet

our financial

requirements.”

the French plumbing market as we combine the ATS and Watts product lines. FEBCO and

Mueller have both returned to profitability under Watts ownership through increased

revenues and improved customer service. We are pleased with these recent acquisitions and

believe that they will continue to make an important contribution to Watts and strengthen

our position in the markets in which they serve.

In November 2007, we commenced a program to repurchase up to 3 million shares of our

Class A Common Stock. We believe this repurchase program will benefit our shareholders

by improving our near-term return on capital. At the same time we are preserving adequate

capital to fund our near-term acquisition program.

Acquisitions have played and will remain an important factor in our growth strategy.

We are proud of our disciplined and successful acquisition process, which we have developed

over many years. Our target companies must provide a long-term strategic fit, as well as

meet our financial requirements. 2007 was an unusually quiet year on the acquisition front,

as acquisition candidates were requiring unacceptable pricing. We believe, however, that

with the changing conditions in the credit markets that the pricing environment will be

returning to historical levels. We are optimistic that 2008 will be more consistent with the

historical level of our past acquisition program activity.

In November 2007, we acquired Topway Global Inc., located in Brea, California.

Topway Global 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. Topway Global has approximately $18 million in annual revenue and extends

our distribution network with the independent water quality dealers, particularly in the

southwestern United States.

WATTS WATER TECHNOLOGIES, INC. ANNUAL REPORT 2007 7

481087.P 3/12/08 11:14 PM Page 8

Pudong New Area
Shanghai, China

Well-positioned

Watts is active around the world including developing products for
renewable energy sources in Europe, manufacturing products for the water
infrastructure market in Asia and providing new engineered products
for North America. We are active in many markets and have over 130 years
of experience from which to draw.

481087.P 3/12/08 11:15 PM Page 9

We are well positioned to leverage the many long-term trends currently occurring

in the water space.

• Lack of water in many areas creates the need for increased conservation.

• Consumer awareness is increasing around issues of water quality, purity and safety.

• As discretionary income increases in the emerging economies, the demand for heat

and hot water also increases.

Growing water infrastructure
in China

• Urbanization in the emerging markets is forecasted to continue at a rapid pace.

• There is increasing use of alternative energies to heat water.

• There is increased use of non-traditional materials in water delivery and safety applications.

• There is an increasing tendency for more regulation surrounding water safety and water

quality issues.

• The cost of water continues to increase in order to support regulatory upgrades and

infrastructure improvements.

• There are a significant number of people across our globe without clean water, which

Increased use of alternative
piping methods such as PEX

creates exposure to many serious health problems.

We believe that the long-term trends in the water markets continue to create opportunities

for our future growth. New legislation and plumbing codes regarding water safety and water

quality continue to be implemented and these codes and regulations are becoming more

complex. In many parts of the world, conservation of water is reaching crisis levels.

The European markets are increasingly using alternative fuels to heat water in order to

reduce greenhouse gas emissions. Emerging markets are realizing the importance of clean

Water quality, purity and safety is
a key concern for many consumers

water as they deal with increased urbanization.

We believe we are well positioned to leverage these long-term trends given our proven

ability to deliver innovative solutions to water issues, through our global supply chain and

through our worldwide manufacturing capability and most importantly through our 7,800

dedicated and talented associates. We remain committed to providing value to our shareholders

on a long-term basis, by maintaining our leadership position in providing these innovative

water solutions, by remaining conservatively capitalized and by following our disciplined

Increased use of alternative energies
such as solar power to heat water

approach to growth.

PATRICK S. O’KEEFE
Chief Executive Officer
and President

WILLIAM C. MCCARTNEY
Chief Financial Officer
and Treasurer

WATTS WATER TECHNOLOGIES, INC. ANNUAL REPORT 2007 9

481087.P 08/03/14 2:07 PM Page 10

“We remain

innovative solutions

committed to

developing

products that

Energy prices are reaching historic levels. Carbon emissions are causing irreparable damage

to our environment. Water availability is reaching crisis proportions in many parts of the

world and awareness of our mutual responsibility to protect our environment is increasing.

conserve energy,

These issues are placing new demands on our customers and we are responding with

conserve water,

innovative solutions to address these critical issues.

and assist our

A few of the many solutions we offer include:

customers in

• Watts’ hot water recirculation systems save the average household over 10,000 gallons

meeting their

requirements

to protect our

of water per year.

• Watts’ reverse osmosis filtration systems eliminate the water wasted to rinse filters that

is normally discharged down the drain, resulting in zero waste.

• Watts is a market leader in providing control technology and manifold systems for the

environment”

thermal solar and geothermal heating of water used in radiant heating systems,

eliminating the use of petroleum and carbon emissions.

• Our extensive line of backflow preventers protect down-stream water from contamination.

• Watts’ water pressure regulators reduce incoming water pressure to both protect the

• plumbing system and reduce water consumption.

• Our water tempering valves allow water heaters to be operated at temperatures that

• prevent the growth of Legionella bacteria while reducing total energy consumption.

In addition to creating products that provide innovative solutions to these

new demands, we have also joined the United States Green Building Council,

which actively promotes environmentally responsible and sustainable

construction practices. We work closely with engineers to specify Watts’

products that can be used to obtain LEED (Leadership and Energy in Environmental

Design) green building credits. We remain committed to developing products that

conserve energy, conserve water, and assist our customers in meeting their requirements

to protect our environment.

10 WATTS WATER TECHNOLOGIES, INC. ANNUAL REPORT 2007

PRINTED ON RECYCLED PAPER

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

(cid:3) 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
(State or Other Jurisdiction of
Incorporation or Organization)

815 Chestnut Street, North Andover, MA
(Address of Principal Executive Offices)

04-2916536
(I.R.S. Employer
Identification No.)

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes (cid:2) No (cid:3)

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

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 (cid:3) No (cid:2)

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 (cid:2) No (cid:3)

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. (cid:3)

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 filer (cid:2)
Non-accelerated filer (cid:3)

Accelerated filer (cid:3)
Smaller reporting company (cid:3)

(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 (cid:3) No (cid:2)

As of June 29, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was

approximately $1,170,291,367 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 22, 2008

Class A Common Stock, $0.10 par value per share
Class B Common Stock, $0.10 par value per share

29,272,927 shares
7,293,880 shares

Portions of the Registrant’s Proxy Statement for its Annual Meeting of Stockholders to be held on May 14, 2008, are incorporated

by reference into Part III of this Annual Report on Form 10-K.

DOCUMENTS INCOPORATED BY REFERENCE

PART I

Item 1. BUSINESS.

This annual report on Form 10-K contains statements which 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 statements by forward-looking
words such as ‘‘anticipate,’’ ‘‘believe,’’ ‘‘could,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘may,’’ ‘‘should,’’ ‘‘will’’ and
‘‘would’’ or similar words. You should not rely on forward-looking statements, because 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 Company 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 with an emerging presence in China. 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 31 acquisitions since divesting our
industrial and oil and gas business in 1999, including one acquisition in 2007 and five acquisitions in
2006. Our acquisition strategy focuses on businesses that manufacture preferred brand name products
that address our themes of water quality, water safety, water conservation, 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, strong brand
names, a new or improved technology or an expansion of the breadth of our Water by Watts offering.

We are committed to reducing our manufacturing costs through a combination of expanding
manufacturing in lower-cost countries and consolidating our diverse manufacturing operations in North
America and Europe. We have acquired a number of manufacturing facilities in lower-cost regions such
as China, Bulgaria and Tunisia. In 2007, we announced a global restructuring plan to reduce our
manufacturing footprint in order to reduce our costs and to realize additional operating efficiencies.

Our products are sold to wholesale distributors, 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 states 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. The

contributions of each segment to net sales, operating income and the presentation of certain other
financial information by segment are reported in Note 17 of the Notes to Consolidated Financial
Statements and in Management’s Discussion and Analysis included elsewhere in this report.

Recent Acquisitions

On November 9, 2007, we acquired the assets and business of Topway Global Inc. (Topway)
located in Brea, California for approximately $18.4 million, of which $0.3 million of transaction costs
remain to be paid. The preliminary allocations for goodwill and intangible assets are approximately
$7.6 million and $8.2 million, respectively. The amount recorded as intangible assets is primarily for
customer relationships with an estimated useful life 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. The purchase price
allocation for Topway is preliminary pending the final determination of the fair values of certain
assumed assets and liabilities.

On August 14, 2006, we acquired 100% of the outstanding stock of Black Teknigas, Limited
(Teknigas) located in St. Neots, United Kingdom for approximately $8.7 million, which is net of cash
acquired of approximately $0.3 million. The allocations for goodwill and intangible assets are
approximately $3.6 million and $4.5 million, respectively. The amount recorded as intangible assets is
primarily for technology and customer relationships that have estimated useful lives ranging from 6 to
9 years and trade names with indefinite lives. Teknigas designs, develops and manufactures a range of
gas control products and systems for combustion, industrial, medical, laboratory and specialty gas.

On June 7, 2006, we acquired 100% of the outstanding stock of Kim Olofsson Safe Corporation
AB (KimSafe) located in Almhult, Sweden for approximately $5.8 million, which is net of cash acquired
of approximately $2.9 million. The allocations for goodwill and intangible assets are approximately
$1.2 million and $4.1 million, respectively. The amount recorded as intangible assets is primarily for
customer relationships that have estimated useful lives of 5 years and trade names with indefinite lives.
KimSafe manufactures electronic controls for heat pump, solar and pellet heaters, which provide the
ability to heat water using renewable energy.

On June 2, 2006, we acquired the assets and business of Calflex Manufacturing, Inc. (Calflex)

located in Vernon, California and the stock of Ningo Best Metal & Plastic Manufacturing, Ltd
(Ningbo) located in Ningbo, China for an aggregate of approximately $6.3 million. The allocation for
intangible assets is approximately $2.1 million. The amount recorded as intangible assets is primarily for
customer relationships that have estimated useful lives of 12 years and trade names with indefinite
lives. Calflex and Ningbo distribute and manufacture water connectors.

On May 19, 2006, we acquired 100% of the outstanding stock of ATS Expansion Group (ATS)

located in Sorgues, Grenoble and Hautvillers, France for approximately $62.1 million, which is net of
cash acquired of approximately $5.7 million plus assumed debt of approximately $14.1 million. The
allocations for goodwill and intangible assets are approximately $33.6 million and $25.6 million,
respectively. The amount recorded as intangible assets is primarily for customer relationships with
estimated useful lives of 6 years, patents with estimated useful lives from 6 to 12 years and trade names
with indefinite lives. ATS’ products include a broad range of fittings, valves and manifolds for water,
gas and heating applications and stainless steel flexible hoses.

On April 26, 2006, we acquired the assets and business of Changsha Valve Works (Changsha)
located in Changsha, China for approximately $9.2 million. The allocations for goodwill and intangible
assets are approximately $5.7 million and $3.7 million, respectively. The amount recorded as intangible
assets is primarily for non-compete agreements that have estimated useful lives of 10 years and
customer order backlog with an estimated useful life of 1 year. Changsha is a leading manufacturer of
large diameter hydraulic-actuated butterfly valves for thermo-power and hydro-power plants, water
distribution projects and water works projects in China.

Products

We believe that we have the broadest range of products in terms of design distinction, size and
configuration in a majority of our principal product lines. In 2007, water quality products accounted for
approximately 18% of our total sales. Our principal product lines include:

(cid:129) water quality products, including backflow preventers and check valves for preventing reverse

flow within water lines and fire protection systems and point-of-use water filtration and reverse
osmosis systems for both commercial and residential applications;

(cid:129) a wide range of water pressure regulators for both commercial and residential applications;

(cid:129) water supply and drainage products for commercial and residential applications;

(cid:129) temperature and pressure relief valves for water heaters, boilers and associated systems;

(cid:129) thermostatic mixing valves for tempering water in commercial and residential applications;

(cid:129) systems for under-floor radiant applications and hydraulic pump groups for gas boiler

manufacturers and renewable energy applications, including solar and heat pump control
packages;

(cid:129) flexible stainless steel connectors for natural and liquid propane gas in commercial food service

and residential applications; and

(cid:129) large diameter butterfly valves for use in China’s water infrastructure.

Customers and Markets

We sell our products to plumbing, heating and mechanical wholesale distributors, major DIY

chains and OEMs.

Wholesalers. Approximately 65% of our sales in both 2007 and 2006 were to wholesale

distributors for both commercial and residential applications. We rely on commissioned manufacturers’
representatives, some of which maintain a consigned inventory of our products, to market our product
lines.

DIY. Approximately 15% and 16% of our sales in 2007 and 2006, respectively, were to DIY
customers. Our DIY customers demand less technical products, but are highly receptive to innovative
designs and new product ideas.

OEMs. Approximately 20% and 19% of our sales in 2007 and 2006, respectively, were to
OEMs. In North America, our typical OEM customers are water heater manufacturers, equipment
manufacturers needing flow control devices and water systems manufacturers needing backflow
preventers. Our sales to OEMs in Europe are primarily to boiler manufacturers and radiant systems
manufacturers. Our sales to OEMs in China are primarily to boiler and bath manufacturers, which
include manufacturers of faucet and shower products.

In 2007, no customer accounted for more than 10% of our total net sales. Our top ten customers
accounted for approximately $304.3 million, or 22%, of our total net sales in 2007 and $282.3 million,
or 23%, of our total net sales in 2006. Thousands of other customers constituted the remaining 78% of
our net sales in 2007 and 77% of our net sales in 2006.

Marketing and Sales

We rely primarily on commissioned manufacturers’ representatives, some of which maintain a
consigned inventory of our products. These representatives sell primarily to plumbing and heating
wholesalers or service DIY store locations in North America. We also sell products for the residential
construction and home repair and remodeling industries through DIY plumbing retailers, national
catalog distribution companies, hardware stores, building material outlets and retail home center chains
and through plumbing and heating wholesalers. In addition, we sell products directly to certain large
OEMs and private label accounts.

Manufacturing

We have integrated and automated manufacturing capabilities, including bronze foundries,
machining, plastic injection molding and assembly operations. Our foundry operations include metal
pouring systems, automatic core making, yellow brass forging and brass and bronze die-castings. Our
machining operations feature computer-controlled machine tools, high-speed chucking machines with
robotics and automatic screw machines for machining bronze, brass and steel components. We have
invested heavily in recent years to expand our manufacturing base and to ensure the availability of the
most efficient and productive equipment. We are committed to maintaining our manufacturing
equipment at a level consistent with current technology in order to maintain high levels of quality and
manufacturing efficiencies.

Capital expenditures and depreciation for each of the last three years were as follows:

Years Ended
December 31,

2007

2006

2005

Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$37.8
$28.9

(in millions)
$44.7
$26.7

$18.6
$23.5

The Company’s 2006 capital expenditures included approximately $18.0 million related to the

purchase and subsequent sale-leaseback of a building in Italy.

Raw Materials

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 increases in the costs of certain raw materials, particularly
copper. Bronze and brass are copper-based alloys. The spot price of copper increased approximately
41% from December 31, 2005 to December 31, 2007. In response, we have implemented price increases
for some of our products that have become more expensive to manufacture due to the increases in raw
material costs. During 2007 and 2006, cost increases in raw materials were not completely recovered by
increased selling prices or other product cost reductions. We are not able to predict whether or for how

long these cost increases will continue. If these cost increases continue and we are not able to reduce
or eliminate the effect of the cost increases by reducing production costs or implementing price
increases, our profit margins could decrease.

Code Compliance

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. Standards
are established by such industry test and certification organizations as the American Society of
Mechanical Engineers (A.S.M.E.), the Canadian Standards Association (C.S.A.), the American Society
of Sanitary Engineers (A.S.S.E.), the University of Southern California Foundation for Cross-
Connection Control (USC FCC), the International Association of Plumbing and Mechanical Officials
(I.A.P.M.O.), Factory Mutual (F.M.), the National Sanitation Foundation (N.S.F.) and Underwriters
Laboratory (U.L.). Many of these standards are incorporated into state and municipal plumbing and
heating, building and fire protection codes.

National regulatory standards in Europe vary by country. The major standards and/or guidelines
which our products must meet are AFNOR (France), DVGW (Germany), UNI/ICIN (Italy), KIWA
(Netherlands), SVGW (Switzerland), SITAC (Sweden) and WRAS (United Kingdom). Further, there
are local regulatory standards requiring compliance as well.

Together with our commissioned manufacturers’ representatives, we have consistently advocated for
the development and enforcement of plumbing codes. We maintain stringent quality control and testing
procedures at each of our manufacturing facilities in order to manufacture products in compliance with
code requirements.

We believe that product-testing capability and investment in plant and equipment is needed to

manufacture products in compliance with code requirements. Additionally, a majority of our
manufacturing facilities are ISO 9000, 9001 or 9002 certified by the International Organization for
Standardization.

Product Development and Engineering

We maintain our own product development staff, design teams, and testing laboratories in North

America, Europe and China that continuously work to enhance our existing products and develop new
products. We maintain sophisticated product development and testing laboratories. Research and
development costs included in selling, general, and administrative expense amounted to $15.1 million,
$12.7 million and $11.6 million for the years ended December 31, 2007, 2006 and 2005, respectively.

Competition

The domestic and international markets for water safety and flow control devices are intensely
competitive and require us to compete against some companies possessing greater financial, marketing
and other resources than ours. Due to the breadth of our product offerings, the number and identities
of our competitors vary by product line and market. We consider brand preference, engineering
specifications, plumbing code requirements, price, technological expertise, delivery times and breadth of
product offerings to be the primary competitive factors. We believe that new product development and
product engineering are also important to success in the water industry and that our position in the
industry is attributable in part to our ability to develop new and innovative products quickly and to
adapt and enhance existing products. We continue to develop new and innovative products to enhance
market position and are continuing to implement manufacturing and design programs to reduce costs.
We cannot be certain that our efforts to develop new products will be successful or that our customers
will accept our new products. Although we own certain patents and trademarks that we consider to be
of importance, we do not believe that our business and competitiveness as a whole are dependent on
any one of our patents or trademarks or on patent or trademark protection generally.

Backlog

Backlog was approximately $119.1 million at February 15, 2008 and also was approximately
$114.0 million at February 16, 2007. We do not believe that our backlog at any point in time is
indicative of future operating results.

Employees

As of December 31, 2007, our wholly-owned and majority-owned domestic and foreign operations
employed approximately 7,800 people. None of our employees in North America or China are covered
by collective bargaining agreements. In some European countries our employees are subject to
traditional national collective bargaining agreements. We believe that our employee relations are good.

Available Information

We maintain a website with the address www.wattswater.com. The information contained on our

website is not included as a part of, or incorporated by reference into, this Annual Report on
Form 10-K. Other than an investor’s own internet access charges, we make available free of charge
through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we
have electronically filed such material with, or furnished such material to, the Securities and Exchange
Commission.

Certifications

Our Chief Executive Officer and Chief Financial Officer have provided the certifications required

by rule 13a-14(a) under the Securities Exchange Act of 1934, copies of which are filed as exhibits to
this Annual Report on Form 10-K. In addition, an annual chief executive officer certification was
submitted by our chief executive officer to the New York Stock Exchange on May 9, 2007 in
accordance with the New York Stock Exchange listing requirements.

Executive Officers and Directors

Set forth below are the names of our executive officers and directors, their respective ages and
positions with our Company and a brief summary of their business experience for at least the past five
years:

Name

Age

Position

Patrick S. O’Keefe . . . . . . . . . .

55 Chief Executive Officer, President and Director

William C. McCartney . . . . . . .

53 Chief Financial Officer and Treasurer

J. Dennis Cawte . . . . . . . . . . .

57 Group Managing Director, Europe

Ernest E. Elliott . . . . . . . . . . .

56 Executive Vice President of Marketing

Michael P. Flanders . . . . . . . . .

49 America and Asia

Josh C. Fu . . . . . . . . . . . . . . .

President, Asia

Executive Vice President of Manufacturing Operations, North

Gregory J. Michaud . . . . . . . . .

46 Executive Vice President of Human Resources

Taylor K. Robinson . . . . . . . . .

44 Executive Vice President of Supply Chain Management

Lester J. Taufen . . . . . . . . . . .

64 General Counsel,Vice President of Legal Affairs and Secretary

Douglas T. White . . . . . . . . . .

63 Group Vice President

Robert L. Ayers(1)(3) . . . . . . .

62 Director

Richard J Carthcart(1)(3) . . . .

63 Director

Timothy P. Horne . . . . . . . . . .

69 Director

Ralph E. Jackson Jr.(2)(3) . . . .

66 Director

Kenneth J. McAvoy(1)(3) . . . .

67 Director

John K. McGillicuddy(1) . . . . .

64 Director

Gordon W. Moran(2)(3) . . . . .

69 Non-Executive Chairman of the Board and Director

Daniel J. Murphy, III(2) . . . . .

66 Director

(1) Member of the Audit Committee

(2) Member of the Compensation Committee

(3) Member of the Nominating and Corporate Governance Committee

Patrick S. O’Keefe joined our Company in 2002. Prior to joining our Company, he served as

President, Chief Executive Officer and Director of Industrial Distribution Group, a supplier of
maintenance, repair, operating and production products, from 1999 to 2001. He was Chief Executive
Officer of Zep Manufacturing, a unit of National Service Industries and a manufacturer of specialty
chemicals throughout North America, Europe and Australia, from 1997 to 1999. He also held various
senior management positions with Crane Co. from 1994 to 1997.

William C. McCartney joined our Company in 1985 as Controller. He was appointed our Vice

President of Finance in 1994 and served as our Corporate Controller from 1988 to 1999. He was
appointed Chief Financial Officer and Treasurer in 2000. He served as Secretary of the Company from
January 2000 to November 2005.

J. Dennis Cawte joined our Company in 2001 and was appointed Group Managing Director

Europe. Prior to joining our Company, he was European President of PCC Valve and Controls, a

division of Precision Castparts Corp., a manufacturer of components and castings to the aeronautical
industry, from 1999 to 2001. He had also worked for approximately 20 years for Keystone Valve
International, a manufacturer and distributor of industrial valves, where his most recent position was
the Managing Director Northern Europe, Middle East, Africa and India.

Ernest E. Elliott joined our Company in 1986 and has served in a variety of sales and marketing

roles. He was appointed Vice President of Sales in 1991, served as Executive Vice President of
Wholesale Sales and Marketing from 1996 to March 2003, Executive Vice President of Wholesale
Marketing from March 2003 to February 2006 and as Executive Vice President of Marketing since
February 2006. Mr. Elliott temporarily assumed responsibilities of our former Chief Operating Officer
and President of North American and Asian Operations in September 2007. Prior to joining our
Company, he was Vice President of BTR Inc.’s Valve Group, a diversified manufacturer of industrial
and commercial valve products.

Michael P. Flanders joined our Company in October 2007 as Executive Vice President of
Manufacturing Operations, North America and Asia. From August 2005 to July 2007, he served as
President and Chief Operating Officer of Aavid Thermalloy, LLC, an international manufacturing
company providing thermal management solutions to the computer and electronics industries. From
July 2003 to April 2005, he was Vice President and General Manager of Waukesha Bearings
Corporation, a manufacturer of hydrodynamic and active magnetic bearings and a subsidiary of Dover
Corporation. From November 1998 to July 2003, he was General Manager of the LCN Division of
Ingersoll-Rand Company Limited, which manufactured mechanical and electronic door control
products.

Josh C. Fu joined our Company in January 2008 as President, Asia. From January 2007 to

December 2007, he served as President and Chief Executive Officer of Reradiant
International Co. Ltd., a consulting firm focused on the energy and industrial goods industries. From
August 2004 to December 2006, he served as President of the China operations of Flowserve
Corporation, a global manufacturer of flow control equipment, including valves, pumps, and seals.
From July 2003 to August 2004, he was Executive Vice President, Product Development and
Merchandise Sourcing for Intercon Merchandise Sourcing, an importer of consumer goods from China.
From 2000 to 2003, he held various senior management positions with the China operations of BP
p.l.c., a worldwide petroleum and petrochemicals company.

Gregory J. Michaud joined our Company in April 2006 as Executive Vice President of Human

Resources. Prior to joining our Company, he served as Vice President, Human Resources of the
Compact Equipment division of Ingersoll-Rand Company Limited, a diversified industrial company,
from June 2003 through March 2006. He served as Vice President, Human Resources of the
Productivity Solutions division of Ingersoll-Rand from January 2003 to June 2003 and as Director,
Human Resources & Corporate Organizational Planning of Ingersoll-Rand from June 2000 to
December 2002.

Taylor K. Robinson joined our Company in September 2007 as Executive Vice President of Supply
Chain Management. From January 2007 to August 2007, he owned and operated a consulting company
named Global Supply Chain Solutions, which provided advice to international clients to improve their
global supply chain methods and operations. From February 2004 to April 2006, he was Chief
Procurement Officer for H.J. Heinz Company, an international manufacturer and marketer of
processed foods. From January 1999 to January 2004, he served in various positions for Honeywell
International Inc., a diversified technology and manufacturing company, including Global Supply Chain
Director, Aviation Aftermarket Services, Director of Global Sourcing, Aerospace Electronic Systems
and Corporate Director of Global Commodity Management—Electronics.

Lester J. Taufen joined our Company in 1999 as Associate Corporate Counsel. He was appointed

General Counsel, Vice President of Legal Affairs and Assistant Secretary in January 2000. He was
appointed Secretary in November 2005. Prior to joining our Company, he was employed for 13 years at
Elf Atochem North America, a chemical manufacturing company, serving as Senior Counsel.

Douglas T. White joined our Company in 2001 as Group Vice President. Prior to joining our

Company he was employed by Honeywell International, Inc., a diversified technology and
manufacturing company, as Vice President of Marketing—Consumer Products Group from 1998 to
2001.

Robert L. Ayers has served as a director of our Company since October 2006. He was Senior Vice
President of ITT Industries and President of ITT Industries’ Fluid Technology from October 1999 until
September 2005. Mr. Ayers continued to be employed by ITT Industries from September 2005 until his
retirement in September 2006, during which time he focused on special projects for the company.
Mr. Ayers originally joined ITT Industries in 1998 as President of ITT Industries’ Industrial Pump
Group. Before joining ITT Industries, he was President of Sulzer Industrial USA and Chief Executive
Officer of Sulzer Bingham, a pump manufacturer. He is a director of T-3 Energy Services, Inc.

Richard J. Cathcart has served as a director of our Company since October 2007. He was Vice

Chairman and a member of the Board of Directors of Pentair, Inc. from February 2005 until his
retirement in September 2007. Pentair is a diversified manufacturing company consisting of two
operating segments: Water Technologies and Technical Products. He was appointed President and Chief
Operating Officer of Pentair’s Water Technologies Group in January 2001 and served in that capacity
until his appointment as Vice Chairman in February 2005. He began his career at Pentair in March
1995 as Executive Vice President, Corporate Development, where he identified water as a strategic area
of growth. In February 1996, he was named Executive Vice President and President of Pentair’s Water
Technologies Group. Prior to joining Pentair, he held several management and business development
positions during his 20-year career with Honeywell International Inc. He is a director of Fluidra S.A.

Timothy P. Horne has served as a director of our Company since 1962. He became an employee of

our Company in 1959 and served as our President from 1976 to 1978, from 1994 to 1997 and from 1999
to 2002. He served as our Chief Executive Officer from 1978 to 2002, and he served as Chairman of
our Board of Directors from 1986 to 2002. He retired as an employee of our Company on
December 31, 2002. Since his retirement, he has continued to serve our Company as a consultant.

Ralph E. Jackson, Jr. has served as a director of our Company since 2004. He worked for Cooper

Industries, Inc., a manufacturer of electrical products, from 1985 until his retirement in December
2003. Prior to joining Cooper Industries, he worked for the Bussmann and Air Comfort divisions of
McGraw-Edison from 1976 until McGraw-Edison was acquired by Cooper Industries in 1985. While
with Cooper Industries, he served as Chief Operating Officer from 2000 to December 2003, Executive
Vice President, Electrical Operations from 1992 to 2000, and President, Bussmann Division from the
time McGraw-Edison was acquired by Cooper Industries to 1992. He served as a member of the Board
of Directors of Cooper Industries from 2000 to December 2003.

Kenneth J. McAvoy has served as a director of our Company since 1994. He was Controller of our

Company from 1981 to 1985 and Chief Financial Officer and Treasurer from 1986 to 1999. He also
served as Vice President of Finance from 1984 to 1994; Executive Vice President of European
Operations from 1994 to 1996; and Secretary from 1985 to 1999. He retired from our Company on
December 31, 1999.

John K. McGillicuddy has served as a director of our Company since 2003. He was employed by

KPMG LLP, a public accounting firm, from 1965 until his retirement in 2000. He was elected into the
Partnership at KPMG LLP in June 1975 where he served as Audit Partner, SEC Reviewing Partner,
Partner-in-Charge of Professional Practice, Partner-in-Charge of College Recruiting and
Partner-in-Charge of Staff Scheduling. He is a director of Brooks Automation, Inc.

Gordon W. Moran has served as a director of our Company since 1990. He has been the Chairman

of Hollingsworth & Vose Company, a paper manufacturer, since 1997, and served as its President and
Chief Executive Officer from 1983 to 1998.

Daniel J. Murphy, III has served as a director of our Company since 1986. He has been the

Chairman of Northmark Bank, a commercial bank he founded, since 1987. Prior to forming Northmark

Bank in 1987, he was a Managing Director of Knightsbridge Partners, a venture capital firm, from
January to August 1987, and President and a director of Arltru Bancorporation, a bank holding
company, and its wholly-owned subsidiary, Arlington Trust Company, from 1980 to 1986.

Product Liability, Environmental and Other Litigation Matters

We are subject to a variety of potential liabilities connected with our business operations, including

potential liabilities and expenses associated with possible product defects or failures and compliance
with environmental laws. We maintain product liability and other insurance coverage, which we believe
to be generally in accordance with industry practices. Nonetheless, such insurance coverage may not be
adequate to protect us fully against substantial damage claims.

Contingencies

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. We 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 thirty-four
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. To date, 11 of the named cities have intervened, and attempts by four other named
cities to intervene have been denied.

In June 2002, the trial court excluded 47 cities from this December 2000 total of 161, but this
exclusion was reversed by an August 30, 2006 California Court of Appeal ruling that is now final. This
August 30, 2006 Court of Appeal ruling also reversed dismissals of Tyco International and Mueller Co.,
and this allowed the Relator to make a successful motion that removed the Armenta Case litigation
from Judge Lichtman’s court to the court of Judge Chaney, another complex litigation judge.

One of the allegations in the Second Amended Complaint and the Complaints-in-Intervention is

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. We believe 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. We 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. This settlement payment included the Relator’s statutory share, and
the claims of these three cities have been dismissed. In addition to this $13.0 million payment, we are
obligated to pay the Relator’s attorney’s fees.

After the Phase I settlement, the Court permitted the defendants to select five additional cities to

serve as the plaintiffs in a second trial phase of the case. Contra Costa, Corona, Santa Ana, Santa Cruz
and Vallejo were chosen. The Company and James Jones then reached an agreement to settle the
claims of the City of Santa Ana for a total of $45,000, an amount which approximates Santa Ana’s
purchases of James Jones products during the relevant period. The Santa Ana settlement was approved
by the Court and then completed.

On June 22, 2005, the Court dismissed the claims of the remaining Phase II cities (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 spec 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 March 17, 2009 for six Phase III cities with three cities to
be selected by each side. Litigation is inherently uncertain, and we are unable to predict the outcome
of this case.

On September 15, 2004, the Relator’s attorneys filed a new common law fraud lawsuit in the
California Superior Court for the City of Banning and forty-six other cities and water districts against
James Jones, Watts and Mueller Co. based on the same transactions alleged in the Armenta case.
About forty-two of the plaintiffs in this new lawsuit are also plaintiffs in the Armenta case. The statute
of limitations threshold issue is in the process of being resolved for these plaintiffs. Litigation is
inherently uncertain, and we are unable to predict the outcome of this case.

We have a reserve of approximately $28.0 million with respect to the James Jones Litigation in our

consolidated balance sheet as of December 31, 2007. We believe, on the basis of all available
information, that this reserve is adequate to cover the probable and reasonably estimable losses
resulting from the Armenta case and the insurance coverage litigation with Zurich American Insurance
Company (Zurich) discussed below. We are currently unable to make an estimate of the range of any
additional losses.

On February 14, 2001, after our insurers had denied coverage for the claims in the Armenta case,

we filed a complaint for coverage against our insurers in the California Superior Court (the coverage
case). James Jones filed a similar complaint, the cases were consolidated, and the trial court made
summary adjudication rulings that Zurich must pay all reasonable defense costs incurred by us and
James Jones in 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 both us
(approximately $16.6 million plus future costs) and James Jones (which we estimate to be $17.0 million
plus future costs), and Zurich is currently making payments 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 us and James Jones for amounts paid to settle with the City of Los Angeles.
Zurich’s attempt to obtain appellate review of this order was denied, but Zurich will still be able to
appeal this order at the end of the coverage case. On August 6, 2004, the trial court made another
summary adjudication ruling that Zurich must indemnify and pay us and James Jones for the
$13.0 million paid to settle the claims of the Phase I cities described above. Zurich’s attempt to obtain

appellate review of this ruling was denied on December 3, 2004 by the California Court of Appeal, but
Zurich will still be able to appeal this order 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. We are
currently unable to predict the finality of these indemnity payment orders since Zurich can also appeal
them at the end of the coverage case. We have recorded reimbursed indemnity settlement amounts (but
not reimbursed defense costs) as a liability pending court resolution of the indemnification matter as it
relates to Zurich.

Zurich has asserted that all amounts (which we estimate to be $56.0 million for both defense costs

and indemnity amounts paid for settlements) paid by it to us and James Jones are subject to
reimbursement under Deductible Agreements related to the insurance policies between Zurich and
Watts. If Zurich were to prevail on this argument, James Jones would have a possible indemnity claim
against us for its exposure from the Armenta case. We believe the Armenta case should be viewed as
one occurrence and the deductible amount should be $0.5 million per occurrence.

These reimbursement claims are subject to arbitration under the Watts/Zurich Deductible

Agreements. Zurich claims its reimbursement right for defense costs paid arises under six Deductible
Agreements, and we contend that only two Deductible Agreements apply. We further contend that a
final decision in California supports our position on the number of Deductible Agreements that should
apply to defense costs. 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. We appealed this ruling. On October 20, 2006, the United States Court of
Appeals for the Seventh Circuit affirmed that an arbitration panel could decide which deductible
agreements between Zurich and us would control Zurich’s reimbursement claim for defense costs paid
in the James Jones case. As a result of this development, we recorded a pre-tax charge of $5.0 million
to discontinued operations in 2006.

Based on management’s assessment, we do not believe that the ultimate outcome of the James
Jones Litigation will have a material adverse effect on our liquidity, financial condition or results of
operations. While this assessment is based on all available information, litigation is inherently uncertain,
the actual liability to us to resolve this litigation fully cannot be predicted with any certainty and there
exists a reasonable possibility that we may ultimately incur losses in the James Jones Litigation in
excess of the amount accrued. We intend to continue to contest vigorously all aspects of the James
Jones Litigation.

Environmental Remediation

We have been named as a potentially responsible party (PRP) 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. We accrue estimated environmental
liabilities based on assumptions, which are subject to a number of factors and uncertainties.
Circumstances which 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. We recognize changes in estimates as new remediation requirements are
defined or as new information becomes available. At December 31, 2007, we have a reserve of
approximately $1.4 million (environmental accrual), which we estimate will likely be paid for
environmental remediation liabilities over the next five to ten years. Based on the facts currently known
to us, we do not believe that the ultimate outcome of these matters will have a material adverse effect
on our liquidity, financial condition or results of operations. Some of our environmental matters are
inherently uncertain and there exists a possibility that we may ultimately incur losses from these
matters in excess of the amount accrued. However, we cannot currently estimate the amount of any
such additional losses.

Asbestos Litigation

We are defending approximately 100 cases filed primarily, but not exclusively, in Mississippi and

New Jersey state courts alleging injury or death as a result of exposure to asbestos. These filings
typically name multiple defendants and are filed on behalf of many plaintiffs. They do not identify any
particular Watts products as a source of asbestos exposure. To date, we have been dismissed from each
case when the scheduled trial date comes near or when discovery fails to yield any evidence of
exposure to any of our products. Based on the facts currently known to us, we do not believe that the
ultimate outcome of these claims will have a material adverse effect on our 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 us, we do not believe that the
ultimate outcome of these other litigation matters will have a material adverse effect on our liquidity,
financial condition or results of operations.

Item 1A. RISK FACTORS.

We face intense competition and, if we are not able to respond to competition in our markets, our revenues
may decrease.

Competitive pressures in our markets could adversely affect our competitive position, leading to a

possible loss of market share or a decrease in prices, either of which could result in decreased revenues
and profits. We encounter intense competition in all areas of our business. Additionally, customers for
our products are attempting to reduce the number of vendors from which they purchase in order to
reduce the size and diversity of their inventories and their transaction costs. To remain competitive, we
will need to invest continually in manufacturing, marketing, customer service and support and our
distribution networks. We may not have sufficient resources to continue to make such investments and
we may be unable to maintain our competitive position. In addition, we anticipate that we may have to
reduce the prices of some of our products to stay competitive, potentially resulting in a reduction in the
profit margin for, and inventory valuation of, these products. Some of our competitors are based in
foreign countries and have cost structures and prices in foreign currencies. Accordingly, currency
fluctuations could cause our U.S. dollar-priced products to be less competitive than our competitors’
products which are priced in other currencies.

Reductions or interruptions in the supply of raw materials and increases in the costs of raw materials could
reduce our profit margins and adversely affect our ability to meet our customer delivery commitments.

We require substantial amounts of raw materials, including bronze, brass, cast iron, steel and
plastic and substantially all of the raw materials we require are purchased from outside sources. The
availability and costs of raw materials may be subject to curtailment or change due to, among other
things, new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production
by suppliers and changes in exchange rates and worldwide price and demand levels. We typically do not
enter into long-term supply agreements. Our inability to obtain adequate supplies of raw materials for
our products at favorable costs, or at all, could have a material adverse effect on our business, financial
condition or results of operations by decreasing our profit margins and by hindering our ability to
deliver products to our customers on a timely basis. During 2006 and continuing through 2007, the
costs of many of these raw materials were at the highest levels that they have been in many years. We
may continue to experience further cost increases of these materials. In 2006 and 2007, cost increases
in raw materials were not completely recovered by increased selling prices or other product cost
reductions. If we are not able to reduce or eliminate the effect of these cost increases through lowering
other costs of production or successfully implementing price increases to our customers, such cost
increases from our vendors could continue to have a negative effect on our financial results.
Additionally, we continue to purchase increased levels of finished product from international sources. If

there is an interruption in delivering these finished products to our domestic warehouses, this could
have a negative effect on our financial results.

Down economic cycles, particularly reduced levels of residential and non-residential starts and remodeling,
could have an adverse effect on our revenues and operating results.

We have experienced and expect to continue to experience fluctuations in revenues and operating

results due to economic and business cycles. The businesses of most of our customers, particularly
plumbing and heating wholesalers and home improvement retailers, are cyclical. Therefore, the level of
our business activity has been cyclical, fluctuating with economic cycles. We also believe our level of
business activity is influenced by residential and non-residential starts and renovation and remodeling,
which are, in turn, heavily influenced by interest rates, consumer debt levels, changes in disposable
income, employment growth and consumer confidence. The current conditions in the housing and debt
markets have caused a reduction in residential and non-residential starts and renovation and
remodeling. If these conditions continue or worsen in the future, our revenues and profits could
decrease and could result in a material adverse effect on our financial condition and results of
operations.

Implementation of our acquisition strategy may not be successful, which could affect our ability to increase
our revenues or our profitability.

One of our strategies is to increase our revenues and profitability and expand our markets through
acquisitions that will provide us with complementary water-related products and increase market share
for our existing product lines. We cannot be certain that we will be able to identify, acquire or
profitably manage additional companies or successfully integrate such additional companies without
substantial costs, delays or other problems. Also, companies acquired recently and in the future may
not achieve revenues, profitability or cash flows that justify our investment in them. We expect to spend
significant time and effort in expanding our existing businesses and identifying, completing and
integrating acquisitions. We have faced increasing competition for acquisition candidates which have
resulted in significant increases in the purchase prices of many acquisition candidates. This competition,
and the resulting purchase price increases, may limit the number of acquisition opportunities available
to us, possibly leading to a decrease in the rate of growth of our revenues and profitability. In addition,
acquisitions may involve a number of special risks, including, but not limited to:

(cid:129) inadequate internal controls over financial reporting and our ability to bring such controls into
compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely
manner;

(cid:129) adverse short-term effects on our reported operating results;

(cid:129) diversion of management’s attention;

(cid:129) investigations of, or challenges to, acquisitions by competition authorities;

(cid:129) loss of key personnel at acquired companies; and

(cid:129) unanticipated management or operational problems or legal liabilities.

We are subject to risks related to product defects, which could result in product recalls and could subject us to
warranty claims in excess of our warranty provisions or which are greater than anticipated due to the
unenforceability of liability limitations.

We maintain strict quality controls and procedures, including the testing of raw materials and
safety testing of selected finished products. However, we cannot be certain that our testing will reveal
latent defects in our products or the materials from which they are made, which may not become
apparent until after the products have been sold into the market. We also cannot be certain that our
suppliers will always eliminate latent defects in products we purchase from them. Accordingly, there is
a risk that product defects will occur, which could require a product recall. Product recalls can be

expensive to implement and, if a product recall occurs during the product’s warranty period, we may be
required to replace the defective product. In addition, a product recall may damage our relationship
with our customers and we may lose market share with our customers. Our insurance policies may not
cover the costs of a product recall.

Our standard warranties contain limits on damages and exclusions of liability for consequential

damages and for misuse, improper installation, alteration, accident or mishandling while in the
possession of someone other than us. We may incur additional operating expenses if our warranty
provision does not reflect the actual cost of resolving issues related to defects in our products. If these
additional expenses are significant, it could adversely affect our business, financial condition and results
of operations.

We face risks from product liability and other lawsuits, which may adversely affect our business.

We have been and expect to continue to be subject to various product liability claims or other
lawsuits, including, among others, that our products include inadequate or improper instructions for use
or installation, or inadequate warnings concerning the effects of the failure of our products. In the
event that we do not have adequate insurance or contractual indemnification, damages from these
claims would have to be paid from our assets and could have a material adverse effect on our results of
operations, liquidity and financial condition. We, like other manufacturers and distributors of products
designed to control and regulate fluids and gases, face an inherent risk of exposure to product liability
claims and other lawsuits in the event that the use of our products results in personal injury, property
damage or business interruption to our customers. Although we maintain strict quality controls and
procedures, including the testing of raw materials and safety testing of selected finished products, we
cannot be certain that our products will be completely free from defect. In addition, in certain cases,
we rely on third-party manufacturers for our products or components of our products. Although we
have product liability and general insurance coverage, we cannot be certain that this insurance coverage
will continue to be available to us at a reasonable cost, or, if available, will be adequate to cover any
such liabilities. For more information, see ‘‘Item 1. Business—Product Liability, Environmental and
Other Litigation Matters.’’

Economic and other risks associated with international sales and operations could adversely affect our
business and future operating results.

Since we sell and manufacture our products worldwide, our business is subject to risks associated

with doing business internationally. Our business and future operating results could be harmed by a
variety of factors, including:

(cid:129) trade protection measures and import or export licensing requirements, which could increase our

costs of doing business internationally;

(cid:129) potentially negative consequences from changes in tax laws, which could have an adverse impact

on our profits;

(cid:129) difficulty in staffing and managing widespread operations, which could reduce our productivity;

(cid:129) costs of compliance with differing labor regulations, especially in connection with restructuring

our overseas operations;

(cid:129) natural disasters and public health emergencies;

(cid:129) laws of some foreign countries, which may not protect our intellectual property rights to the

same extent as the laws of the United States; and

(cid:129) unexpected changes in regulatory requirements, which may be costly and require time to

implement.

Fluctuations in foreign exchange rates could materially affect our reported results.

We are exposed to fluctuations in foreign currencies, as a portion of our sales and certain portions
of our costs, assets and liabilities are denominated in currencies other than U.S. dollars. Approximately
41.7% of our sales during the year ended December 31, 2007 were from sales outside of the U.S.
compared to 38.0% for the year ended December 31, 2006. For the years ended December 31, 2007
and 2006, the appreciation of the euro against the U.S. dollar had a positive impact on sales of
approximately $34.1 million and $7.1 million, respectively. Additionally, our Canadian operations
require significant amounts of U.S. purchases for their operations. Instead of buying or manufacturing
domestically, we currently have a favorable cost structure for goods we source from our joint venture,
our wholly-owned subsidiaries in China and our outside vendors. In 2005, China revalued its currency
higher against the U.S. dollar and stated it would no longer tie the yuan to a fixed rate against the U.S.
currency. The yuan was valued at 7.3 and 7.8 at December 31, 2007 and 2006, respectively. China also
stated it will peg the yuan against numerous currencies, although it will keep the yuan in a tight band
rather than letting it trade freely. The spot rate of the euro, Canadian dollar and yuan increased in
value from December 31, 2006 to December 31, 2007 by approximately 12%, 16% and 6% respectively,
against the U.S. dollar. If our share of revenue and purchases in non-dollar denominated currencies
continues to increase in future periods, exchange rate fluctuations will likely have a greater impact on
our results of operations and financial condition.

There are risks in expanding our manufacturing operations and acquiring companies in China.

As part of our strategy, we have shifted a portion of our manufacturing operations to China to
reduce our production costs and to sell products into the Chinese market. This shift has subjected a
greater portion of our operations to the risks of doing business in China. In addition, we have
increased our participation in the Chinese water and power infrastructure markets with our acquisition
of Changsha Valve Works. Changsha sells exclusively into the domestic Chinese marketplace. The
increased production levels in China require increased levels of working capital and manufacturing
equipment. If we are unable to quickly train these new employees we may experience product quality
issues. The Chinese central and local government authorities have a higher degree of control over our
businesses in China than is customary in many of the countries in which we operate, and this makes the
process of obtaining necessary regulatory approval in China inherently unpredictable. For instance, as
announced in 2006, the local Chinese authorities in Tianjin, China informed us that property occupied
by our TWT joint venture will be taken over by eminent domain by the end of the second quarter of
2008, and we have incurred significant costs in connection with the relocation of our operations there.
In addition, the protection accorded our proprietary technology and know-how under the Chinese legal
system is not as strong as in the United States and, as a result, we may lose valuable trade secrets and
competitive advantage.

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

The equipment and management systems necessary for the operation of our manufacturing

facilities may break down, perform poorly or fail, resulting in fluctuations in our ability 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 and Europe and our plant

relocations in China are not successful, our results of operations and financial condition could be
materially adversely affected.

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:

(cid:129) intense competition;

(cid:129) changes in specifications required by our customers, plumbing codes and/or regulatory agencies;

(cid:129) technically complex products; and

(cid:129) constant improvement to existing products and introductions of new products.

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 an inability to attract 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.

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

Our operations and properties 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 until 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.

Under 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.

We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality
provisions and licensing arrangements to establish and protect our proprietary rights. We may be
required to spend resources to monitor and police our intellectual property rights. If we fail to
successfully enforce our intellectual property rights, our competitive position could suffer, which could
harm our operating 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, ‘‘Goodwill and Other
Intangible Assets’’ (FAS 142) may result in a write-off of all or a portion of our goodwill and non-amortizable
intangible assets, which would negatively affect our operating results and financial condition.

As of December 31, 2007, we recorded goodwill and non-amortizable intangible assets of

$385.8 million and $52.2 million, respectively. If we are required to take an impairment charge to our
goodwill or intangible assets in connection with the requirements of FAS 142, our operating results may
decrease and our financial condition may be harmed. Under FAS 142, goodwill and identifiable
intangible assets that have indefinite useful lives are no longer amortized. In lieu of amortization, we
are required to perform an annual impairment review of both goodwill and non-amortizable intangible
assets. We concluded that no impairment existed at October 28, 2007, the time of our latest annual
review. We perform our annual test for indications of goodwill and non-amortizable intangible assets
impairment in the fourth quarter of our fiscal year or sooner if indicators of impairment exist.

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

Our largest customer, The Home Depot Inc. and its wholly-owned subsidiaries, accounted for
approximately $100.2 million, or 7%, of our total net sales for the year ended December 31, 2007 and
$122.7 million, or 10%, of our total net sales for year ended December 31, 2006. 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 products from Home Depot and other customers. A
significant reduction in orders from, or change in terms of contracts with, Home Depot or other
significant customers could have a material adverse effect on our future results of operations.

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.

Investments in auction rate certificates are subject to risks which may cause losses and affect the liquidity of
these investments.

At December 31, 2007, we had $39.0 million in investment securities. We have historically invested

these amounts in auction rate certificates whose underlying investments are AAA rated municipal
bonds. Our auction rate certificates are bought and sold at auction with reset dates of up to 35 days.
Through February 25, 2008, we liquidated approximately $22.0 million of our auction rate certificates at
par value and invested the proceeds into money market accounts. At February 25, 2008, we held
approximately $17.0 million of auction rate certificates whose underlying investments are AAA rated
municipal bonds.

We have no current indications that the securities we hold may be impaired. However, volatility in

the credit markets could affect our ability to liquidate these investments or cause the fair value of the
securities to be impaired. If liquidity of the securities becomes prohibitive, we may be forced to hold
the securities until maturity or until conditions improve, which could be as long as 33 years. Subsequent
to December 31, 2007 through February 25, 2008, we experienced failed auctions on $6.6 million of our
auction rate certificates. We do not have a present need to access these funds for operational purposes.
The amounts associated with failed auctions will not be accessible until a successful auction occurs, a
buyer is found outside of the auction process or the underlying securities have matured. As a result, we
have classified the $17.0 million of auction rate certificates held as of February 25, 2008 as long-term
assets in the our December 31, 2007 consolidated balance sheet. If the fair value of the securities
deteriorates, we would be required to adjust the carrying value of the securities. The market risks
associated with our auction rate certificates could adversely affect our results of operations, liquidity
and financial condition.

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

As of February 1, 2008, Timothy P. Horne, a member of our board of directors, beneficially owned
approximately 19.6% 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% of our outstanding shares of Class B Common Stock, which represents
approximately 70.4% 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, 2008, there were outstanding 29,680,122 shares of our Class A Common Stock

and 7,293,880 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, 2008, our Class B Common
Stock constituted 19.7% of our total outstanding common stock and 71.1% 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, 2007, we maintained approximately 78 facilities worldwide, including our

corporate headquarters located in North Andover, Massachusetts. The remaining facilities consist of
foundries, manufacturing facilities, warehouses, sales offices and distribution centers. 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
Export, PA . . . . . . . . . . . . . . . . . . . . . Manufacturing
Franklin, NH . . . . . . . . . . . . . . . . . . . Manufacturing/

Distribution

Burlington, ON, Canada . . . . . . . . . . . Manufacturing
Kansas City, KS . . . . . . . . . . . . . . . . . Manufacturing
Fort Myers, FL . . . . . . . . . . . . . . . . . . Manufacturing
St. Pauls, NC . . . . . . . . . . . . . . . . . . . Manufacturing
Spindale, NC . . . . . . . . . . . . . . . . . . . Manufacturing/

Distribution

Chesnee, SC . . . . . . . . . . . . . . . . . . . . Manufacturing
Palmdale, CA . . . . . . . . . . . . . . . . . . . Manufacturing
Dunnellon, FL . . . . . . . . . . . . . . . . . . Warehouse
San Antonio, TX . . . . . . . . . . . . . . . . . Warehouse
Springfield, MO . . . . . . . . . . . . . . . . . Manufacturing/

Distribution

Langley, BC, Canada . . . . . . . . . . . . . . Manufacturing
Santa Ana, CA . . . . . . . . . . . . . . . . . . Manufacturing
Woodland, CA . . . . . . . . . . . . . . . . . . Manufacturing
Houston, TX . . . . . . . . . . . . . . . . . . . . Manufacturing
Wilmington, NC . . . . . . . . . . . . . . . . . Manufacturing
Brea, CA . . . . . . . . . . . . . . . . . . . . . . Manufacturing
Phoenix, AZ . . . . . . . . . . . . . . . . . . . . Warehouse
Chicago, IL . . . . . . . . . . . . . . . . . . . . . Distribution Center
Reno, NV . . . . . . . . . . . . . . . . . . . . . . Distribution Center
Vernon, CA . . . . . . . . . . . . . . . . . . . . Distribution Center
Calgary, AB, Canada . . . . . . . . . . . . . . Distribution Center

Owned
Owned
Owned

Owned
Owned
Owned
Owned
Owned

Owned
Owned
Owned
Owned
Leased

Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased

Europe:

Location

Principal Use

Owned/Leased

Eerbeek, Netherlands . . . . . . . . . . . . . European Headquarters/

Owned

Manufacturing
Biassono, Italy . . . . . . . . . . . . . . . . . . . Manufacturing
Brescia, Italy . . . . . . . . . . . . . . . . . . . . Manufacturing
Landau, Germany . . . . . . . . . . . . . . . . Manufacturing
Fresseneville, France . . . . . . . . . . . . . . Manufacturing
Hautvillers, France . . . . . . . . . . . . . . . Manufacturing
Plovdiv, Bulgaria . . . . . . . . . . . . . . . . . Manufacturing
Ammanford, United Kingdom . . . . . . . Manufacturing
Rosi`eres, France . . . . . . . . . . . . . . . . . Manufacturing
Monastir, Tunisia . . . . . . . . . . . . . . . . . Manufacturing
Gardolo, Italy . . . . . . . . . . . . . . . . . . . Manufacturing
Sorgues, France . . . . . . . . . . . . . . . . . . Manufacturing
Grenoble, France . . . . . . . . . . . . . . . . Manufacturing

Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Leased
Leased
Leased

China:

Location

Principal Use

Owned/Leased

Tianjin Tanggu District, THMT, China . Manufacturing
Taizhou, Yuhuan, China . . . . . . . . . . . . Manufacturing
Hunan, Changsha, China . . . . . . . . . . . Manufacturing
Ningbo, Beilun, China . . . . . . . . . . . . . Manufacturing
Tianjin Tanggu District, China . . . . . . . Manufacturing
Ningbo, Beilun Port, China . . . . . . . . . Distribution Center

Owned
Owned
Owned
Owned
Leased
Leased

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.
We believe that our manufacturing facilities are currently operating at a level that our management
considers normal capacity, except for our plants in St. Pauls, North Carolina, Langley, BC, Canada and
Gardolo, Italy, which are under-utilized. Management believes capacity utilization will continue to
increase in 2008 at these plants, subject to unexpected changes in our sales volume.

Item 3. LEGAL PROCEEDINGS.

We are from time to time involved in various legal and administrative procedures. See Part I,

Item 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.

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.

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 2007 and 2006 and cash dividends paid per share.

First Quarter . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . .

High

$46.71
41.34
39.96
33.09

2007

Low

$35.05
36.10
30.40
25.40

Dividend

High

$.10
.10
.10
.10

$37.00
40.03
36.24
45.43

2006

Low

$29.55
29.00
28.08
30.71

Dividend

$.09
.09
.09
.09

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).

Aggregate common stock dividend payments for 2007 and 2006 were $15.6 million and

$12.4 million, respectively. While we presently intend to continue to pay 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, 2008 was 172.

The number of record holders of our Class B Common Stock as of February 22, 2008 was 7.

Beginning in the second quarter of 2007, the Company satisfies 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.

The following table includes information with respect to shares of the Company’s Class A

Common Stock withheld to satisfy withholding tax obligations during the quarter ended December 31,
2007.

Period

Issuer Purchases of Equity Securities

(d) Maximum Number (or
Approximate Dollar
Value) of Shares (or

Price Paid per Publicly Announced
Purchased Share (or Unit) Plans or Programs

Purchased as Part of Units) that May Yet Be
Purchased Under the
Plans or Programs

(b) Average

(a) Total
Number of
Shares (or
Units)

October 1, 2007 - October 28, 2007 . . . . . . .
October 29, 2007 - November 25, 2007 . . . .
November 26, 2007 - December 31, 2007 . . .

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . .

70
—
—

$32.42
—
—

$32.42

—
—
—

—

—
—
—

—

The following table includes information with respect to repurchases we made of our Class A

Common Stock during the quarter ended December 31, 2007.

Period

(d) Maximum Number (or
Approximate Dollar
Value) of Shares (or

Purchased as Part of Units) that May Yet Be
Purchased Under the
Publicly Announced
Plans or Programs(1)
Purchased(1) Share (or Unit) Plans or Programs(1)

(b) Average
Price Paid per

(a) Total
Number of
Shares (or
Units)

October 1, 2007 - October 28, 2007 . . . . . .
October 29, 2007 - November 25, 2007 . . .
November 26, 2007 - December 31, 2007 . .

—
176,330
691,121

Total . . . . . . . . . . . . . . . . . . . . . . . . . .

867,451

—
$27.94
$29.00

$28.78

—
176,330
691,121

867,451

—
2,823,670
2,132,549

2,132,549

(1) On November 9, 2007, we announced that our Board of Directors had authorized a stock repurchase program.
Under the program, we may repurchase up to an aggregate of 3.0 million shares of our Class A Common Stock
in open market purchases or in privately negotiated transactions.

Performance Graph

Set forth below is a line graph comparing the cumulative total shareholder return on our Class A

Common Stock for the last five years with the cumulative return of companies on the Standard &
Poor’s 500 Stock Index and the Russell 2000 Index. We chose the Russell 2000 Index because it
represents companies with a market capitalization similar to that of Watts. The graph assumes that the
value of the investment in our Class A Common Stock and each index was $100 at December 31, 2002
and that all dividends were reinvested.

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

D
O
L
L
A
R
S

300

250

200

150

100

12/31/02

12/31/03

12/31/04

12/31/05

12/31/06

12/31/07

Watts Water Technologies, Inc.

S & P 500

Russell 2000

22FEB200813321213

$100 invested on December 31, 2002 in stock or index, including reinvestment of dividends. Fiscal
year ending December 31.

Cumulative Total Return

12/31/02

12/31/03

12/31/04

12/31/05

12/31/06

12/31/07

Watts Water Technologies, Inc . . . . . . . . . . . . . .
S & P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Russell 2000 . . . . . . . . . . . . . . . . . . . . . . . . . .

100.00
100.00
100.00

143.05
128.68
147.25

210.02
142.69
174.24

199.34
149.70
182.18

273.27
173.34
215.64

200.42
182.87
212.26

The above Performance Chart 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)

operations—diluted . . . . . . . . . . . .

1.99

Statement of operations data:
Net sales . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . .
Loss from discontinued operations,

net of taxes . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . .
Income per share from continuing

Loss per share from discontinued

operations—diluted . . . . . . . . . . . .
Net income per share—diluted . . . . .
Cash dividends declared per common
share . . . . . . . . . . . . . . . . . . . . . .

Balance Sheet Data (at year end):
Total assets . . . . . . . . . . . . . . . . . . . .
Long-term debt, net of current

Year Ended

12/31/07(1)(7) 12/31/06(2)(7) 12/31/05(3)(4)(7) 12/31/04(5)(6)(7) 12/31/03(7)(8)

$1,382.3
77.6

$1,230.8
77.1

$ 924.3
55.0

$824.6
48.7

$701.9
36.4

(.2)
77.4

(.01)
1.99

(3.4)
73.7

2.29

(.10)
2.19

(.4)
54.6

1.67

(.01)
1.66

(1.9)
46.8

1.49

(.06)
1.43

(3.1)
33.4

1.32

(.11)
1.21

.40

.36

.32

.28

.25

$1,729.3

$1,660.9

$1,101.0

$922.7

$840.9

portion . . . . . . . . . . . . . . . . . . . . .

$ 432.2

$ 441.7

$ 293.4

$180.6

$179.1

(1) 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 China
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.

(2) 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.

(3) 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.

(4) 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.

(5) 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.

(6) 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.

(7) In December 2004, we decided to divest our interest in our minority-owned subsidiary, Jameco

International, LLC (Jameco LLC). We recorded in discontinued operation a net of tax impairment
charge of $0.7 million for the year ended December 31, 2004. Also included in discontinued
operations is the net of tax operating results of Jameco LLC of $0.1 million of loss and
$0.1 million of income for the year ended December 31, 2004 and 2003, respectively. 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 2007, 2006, 2005, 2004 and 2003 relate to legal and settlement costs
associated with the James Jones Litigation. The loss, net of taxes, consists of $0.2 million,
$3.4 million, $0.4 million, $1.1 million and $3.1 million for the years ended December 31, 2007,
2006, 2005, 2004 and 2003, respectively.

(8) For the year ended December 31, 2003, net income includes the following pre-tax costs:

restructuring of $0.4 million; other costs consist of: inventory and other asset write-downs and
accelerated depreciation of $0.5 million; and $0.8 million of other related charges. The after-tax
cost of these items was $1.1 million.

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 emerging presence in
China. For over 130 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: