Watts Water Annual Report 2008

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FY2008 Annual Report · Watts Water

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Annual Report 2008

Annual Report 0915

www.wattswater.com

65550

Innovative Water Solutions

2008Backflow Preventer

Custom Fabrication
at Mueller Steam Specialty

Powers Shower System

Water Infrastructure Projects in China

Robotic Welding at Ames

Watts Pressure Reducing Valve

CNC Milling Center at Webster Valve

Pipe Cutting at Blücher

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

Directors

Robert L. Ayers
Director

Kennett F. Burnes
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

William C. McCartney
Chief Financial Officer
and Treasurer

David J. Coghlan
President of North America
and Asia

J. Dennis Cawte
Group Managing Director,
Europe

Ernest E. Elliot
Executive Vice President of Marketing

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

Josh C. Fu
President, Asia

Kenneth R. Lepage
General Counsel and Secretary

Gregory J. Michaud
Executive Vice President
of Human Resources

Taylor K. Robinson
Executive Vice President of
Supply Chain Management

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 in-
vestors 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, 2008 included in this Annual Report. We undertake no intention or obliga-
tion to update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise.

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

A Legacy of O
ne hundred and thirty five years ago, the
then-named Watts Regulator Company
developed steam pressure relief valves for
the emerging textile indus-
try in the Merrimack Valley
area of New England. Today,
Watts Water Technologies, Inc.
provides a broad range of prod-
ucts to the global water market.
Throughout our company’s history,
we have developed innovative products
to meet our customers’ needs. Our principal
product lines consist of:

• Water quality products, including back-
flow preventers and check valves for pre-
venting reverse flow within water lines and
fire protection systems, point-of-use water
filtration and reverse osmosis systems for
both commercial and residential applica-
tions, and instrumentation reagents for wa-
ter analysis.

• Water safety and flow control products,
including water pressure regulators for both
commercial and residential applications, wa-
ter supply products for commercial and resi-
dential applications, temperature and pres-
sure relief valves for water heaters, boilers and
associated systems, and thermostatic mixing
valves for tempering water in commercial
and residential applications.
• Drainage and conveyance products for in-
dustrial, commercial, infrastructure, marine
and residential applications.
• Water-based HVAC systems and com-
ponents, including systems for under-floor
radiant heating and hydraulic pump groups
for gas boiler manufacturers, and renewable
energy applications, including solar and
heat pump control packages.
• Flexible stainless steel connectors and
subassemblies for natural and liquid pro-
pane gas in commercial food service and
residential applications.

A Legacy of InnovationRainwater Harvesting Systems

Fully Integrated Solar Control Package

Radiant Floor Warming

One of the 21st century’s greatest chal-
lenges is the preservation of the earth’s nat-
ural resources in the face of a skyrocketing
world population and the depletion of water
and conventional energy sources. Consistent
with our history, Watts Water Technologies
strives to provide innovative products and
systems that deliver clean and safe water in a
controlled and resource-conscious manner.
Our membership in the United States
Green Building Council demonstrates our
commitment to offering an extensive prod-
uct line for the sustainable building industry
that reduces water and energy consumption
and lowers operating costs. Our products are
specified and installed in sustainable build-
ing projects and are used in renewable en-
ergy systems, such as solar and geothermal.

Our recently introduced rainwater har-
vesting systems preserve valuable ground-
water supplies, reduce water treatment and

transport expenses, and counter rising wa-
ter and wastewater costs.

In Europe, we continue to develop our line
of alternative energy solutions, including our
extensive line of safety and control packages
for solar thermal systems, solid fuel boilers
(pellets, split logs, wood chips), and geother-
mal heat pumps that promote both energy
efficiency and environmental protection.

While Europeans have used radiant heating
for decades, Watts Water Technologies has
pioneered its development and widespread
use in North America as a more efficient and
comfortable means of heating homes and in-
stitutional and commercial buildings.
Warming floors with renewable energy
and radiant energy is an ideal way to heat a
space. Objects are warmed directly without
overheating the air. Lower air temperatures
mean less heat loss through windows and air

SafetyConservationCommercial Reverse Osmosis System

Large Diameter Butterfly Valves

infiltration. Zone by zone control dramati-
cally lowers fuel consumption. In addition,
our water-based radiant systems can use
solar, biomass, geothermal, and waste heat
recovery to heat rooms.

The need for pure water, both for drinking
and for industrial and manufacturing uses,
grows every year while the sources of clean
surface water are diminishing. Our commer-
cial grade, large volume reverse osmosis (RO)
water purification systems and consumer-
oriented zero waste RO systems are helping
to clean and conserve water every day.

We are also providing environmentally
friendly alternatives to help building own-
ers, property managers and facility engi-

neers fight the battle against water scale and
its destructive by-products. Our OneFlow®
Anti-Scale Systems prevent scale formation
by transforming dissolved hardness miner-
als into harmless, inactive microscopic par-
ticles. They also reduce energy consumption
by keeping heat transfer surfaces free of
energy-robbing scale formation and do not
require chemicals or ongoing consumables
(such as salt) that can harm wastewater
treatment processes.

At Watts Water Technologies, our con-
tinual focus on developing products to
meet our customers’ needs derives from
our five operational pillars – comfort,
safety, quality, conservation and control.
These pillars drive our product develop-
ment and acquisitions and direct our
search for innovative products to satisfy
customers’ needs in the various markets of
the world we serve.

ComfortQualityControlTotal Net Sales

1,459.4

1,382.3

1,230.8

s
n
o

i
l
l
i

$1500

$1200

$900

$600

$300

Free Cash Flow

120.9

$125

$100

s
n
o

i
l
l
i

$75

70.2

54.5

$50

$25

For further discussion of “free cash flow,” a non-GAAP
financial measure, and the comparable GAAP measure,
see the section entitled “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” in our Form 10-K included in this Annual
Report to Shareholders.

2006

2007

2008

2006

2007

2008

North America Net Sales

Europe Net Sales

China Net Sales

$900

871.0

866.2

821.3

$600

546.0

452.6

$60

58.7

47.2

$45

42.0

s
n
o

i
l
l
i

$700

$500

$300

$400

367.5

s
n
o

i
l
l
i

$200

s
n
o

i
l
l
i

$30

$15

2006

2007

2008

2006

2007

2008

2006

2007

2008

Financial Highlights

2008
was a year in which we were able to
expand and strengthen our worldwide business de-
spite significant volatility in both our end markets
and in the global financial markets.

The United States residential
construction market declined
over 30% for the second year in a
row, commercial construction in
the United States softened and
started to decline toward year
end, and European construc-
tion levels declined across most
markets.

Patrick S. O’Keefe
Chief Executive Officer

Despite this difficult environ-
ment, we were able to increase
revenue due primarily to our ac-
quisition of Blücher Metals A/S
in June 2008 and increased sales
of products offered to the European alternative en-
ergy markets.

Consolidated revenues grew by $77.1 million, or
5.6%, with the net increase attributable to the fol-
lowing factors:

(in millions) % change
$
Organic
$
Acquisitions
$
Foreign Exchange
Dispositions
$
Total increase in net sales $

(19.0)
63.7
35.6
(3.2)
77.1

(1.4)%
4.6%
2.6%
(0.2)%
5.6%

We achieved record free cash flow of $120.9 million
in 2008, an increase of $66.4 million over 2007 and
representing 259.4% of 2008 net income. This increase
is the result of improved processes and focused work-
ing capital management. Although early in their
implementation, we are seeing immediate benefits
from lean manufacturing techniques and sales and
operational planning systems. Cash generation will
continue to be a focus area as we move into 2009.

2008 marked twenty-two years of continuous div-
idend payments to our shareholders, with a dividend
of $0.11 per share in each quarter of 2008. We also
purchased 1.6 million shares of our Class A Com-
mon Stock on the open market. The dividend and
our share repurchase program returned $60.7 mil-
lion of cash to our shareholders in 2008.

Our net income declined $30.8 million, or 40.0%,
to $46.6 million in 2008 primarily attributable to
the losses we incurred in our China
segment and a goodwill impairment
of $17.3 million in our water qual-
ity group. Our China operations
have experienced cost increases on
several fronts due to the strength-
ening of the Chinese yuan, increas-
es in China value added taxes, wage
inflation due to new labor laws and
increased costs for ocean freight
when the price of oil reached record
levels in mid-year.

William C. McCartney
Chief Financial Officer

To Our Shareholders
Blücher EuroPipe

Blücher Stainless Steel Drains

Blücher Floor Drain

European Pressure Reducing Valve

In response to these rising costs, we have intro-
duced lean manufacturing methodologies in all our
China operations and we sold an underperforming
manufacturing facility located in Tianjin, China. This
facility, which manufactured commodity butterfly
valves, accounted for 70.8% of our China segment
losses through the sale date. We have also increased
our focus in the fast-growing water infrastructure
market in China. We are encouraged with the recent
progress in our China operations as our 4th quarter
results were profitable.

Consistent with our past practices, at December
31, 2008 we continued to maintain our conservative
capital structure, with a net debt to capitalization
ratio of 22.8%.

December 31,
2008
(in millions)

Current portion of long-term debt $
Plus: Long-term debt,
net of current portion
Less: Cash and cash equivalents
Net debt

4.5

409.8
(165.6)
248.7

Net debt
Plus: Total stockholders’ equity
Capitalization

248.7
842.4
$ 1,091.1

Net Debt to Capitalization Ratio

22.8%

Our next scheduled debt repayment is in May
2010, when $50 million is scheduled to be repaid.
At December 31, 2008, we had $260.0 million of
unused and available capital from an existing line
of credit. We believe that our capital structure, in
conjunction with our cash generating capability, is
a critical component for success in the current eco-
nomic environment.

On June 1, 2008, we acquired Blücher Metals for
approximately $170 million, our largest acquisition
to date. Blücher is a manufacturer of stainless steel
drainage products based in Denmark. Blücher’s
2008 revenues were almost $90 million. Blücher
provides us with a new product platform in Europe.
We have a strong position in both
the plumbing and heating mar-
kets in Europe, and the addition
of Blücher gives us a leadership
position in the stainless steel drain
market. Blücher provides us with
a strong brand, solid management
team and many growth opportu-
nities.

We are pleased that David
Coghlan joined us this year as
the President of North America

David J. Coghlan
President of North America and Asia

European Backflow Preventers

Large Diameter Ball Valve

OneFlow® Anti-Scale Systems

Hot Water Recirculating System

Dead LevelTM Trench Drain

and Asia. David, most recently with
Trane, Inc., has spent the majority
of his career in multinational man-
ufacturing companies. Kenneth
Lepage was promoted to Gen-
eral Counsel in August 2008. Ken
joined Watts in 2003 as Assistant
General Counsel. We are confident
David and Ken will continue to
make a meaningful contribution to
Watts.

Kenneth R. Lepage
General Counsel and Secretary

Our long history of providing
innovative water solutions to our
customers continued in 2008 with
the introduction of many promising new products.
• In Europe, we launched a new range of backflow

prevention devices and pressure reducing valves;

• In China, we introduced our first large diameter

ball valve for the water infrastructure market;

• In North America, we introduced the Dead
LevelTM trench drain, which is more cost efficient
for installers; and

• In North America, we also premiered the
Watts OneFlow® anti-scale system, which prevents
scale formation, thereby extending the life of pipes,
plumbing fixtures and valves.

As we look ahead, we see many growth oppor-

tunities:

• We believe the demand for both energy and wa-
ter conservation products will continue to increase.
We currently offer a broad product line to support
the use of solar and geothermal power to heat water.
We also have an extensive offering of products that
conserve water, including water pressure regulat-
ing valves that reduce water consumption by up to
30% while supplying a constant comfortable pres-
sure, zero waste point-of-use reverse osmosis water
filtration systems that provide better than bottle-
quality water while eliminating the water waste of
a typical reverse osmosis system, and our hot water
recirculating system, which provides instantaneous
hot water at any tap or shower.

• We expect to continue to enhance our cash
flows by maintaining our focus on operational ex-
cellence. We are striving to increase our capabilities
in lean manufacturing techniques, improve logis-
tics management with widespread use of sales and
operations planning, and increase our emphasis on
capacity utilization through manufacturing foot-
print reductions.

• We intend to maintain our disciplined acqui-
sition program to provide us access to new mar-

kets and technologies.

• We may selectively

trim our portfolio.

• We plan to lever-
age our worldwide IT
systems to reduce costs,
improve working capital
management and em-
power our employees.

2008

was a year in which
we were able to
expand and strengthen
our worldwide

business despite significant

volatility in both our end markets and

in the financial markets.

challenging years as we
navigate through a weak
worldwide economy with
soft construction mar-
kets and rapidly chang-
ing foreign exchange
rates and commodity
costs. However, we be-
lieve that the combina-
tion of our capital structure, cash flow capability,
our leading market position and the dedication
of our 6,300 associates will allow us to steer a
steady course through these rough waters.

• We continue to work to provide a constant
stream of innovative new products that solve our
customers’ water systems needs.

2009 will present us with one of our more

Chief Executive Officer

Chief Financial Officer

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, 2008

(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, 2008, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was

approximately $708,165,326 based on the closing sale price as reported on the New York Stock Exchange.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

Outstanding at February 20, 2009

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

29,407,648 shares
7,193,880 shares

Portions of the Registrant’s Proxy Statement for its Annual Meeting of Stockholders to be held on May 13, 2009, are incorporated

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

DOCUMENTS INCOPORATED BY REFERENCE

Item 1. BUSINESS.

PART I

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 forward-looking
statements by words such as ‘‘anticipate,’’ ‘‘believe,’’ ‘‘could,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘may,’’
‘‘should,’’ ‘‘will’’ and ‘‘would’’ or similar words. You should not rely on forward-looking statements because
they involve known and unknown risks, uncertainties and other factors, some of which are beyond our
control. These risks, uncertainties and other factors may cause our actual results, performance or
achievements to differ materially from the anticipated future results, performance or achievements expressed
or implied by the forward-looking statements. Some of the factors that might cause these differences are
described under Item 1A—‘‘Risk Factors.’’ You should carefully review all of these factors, and you should
be aware that there may be other factors that could cause these differences. These forward-looking
statements were based on information, plans and estimates at the date of this report, and, except as required
by law, we undertake no obligation to update any forward-looking statements to reflect changes in underlying
assumptions or factors, new information, future events or other changes.

In this Annual Report on Form 10-K, references to ‘‘the Company,’’ ‘‘Watts,’’ ‘‘we,’’ ‘‘us’’ or ‘‘our’’

refer to Watts Water Technologies, Inc. and its consolidated subsidiaries.

Overview

Watts Regulator Co. was founded by Joseph E. Watts in 1874 in Lawrence, Massachusetts. Watts
Regulator Co. started as a small machine shop supplying parts to the New England textile mills of the
19th century and grew into a global manufacturer of products and systems focused on the control,
conservation and quality of water and the comfort and safety of the people using it. Watts Water
Technologies, Inc. was incorporated in Delaware in 1985 and became the parent 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 and to expand our presence in Asia. Our primary objective is to grow earnings by
increasing sales within existing markets, expanding into new markets, leveraging our distribution
channels and customer base, making selected acquisitions, reducing manufacturing costs and advocating
for the development and enforcement of industry standards.

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

We intend to continue to generate growth by targeting selected acquisitions, both in our core
markets as well as new complementary markets. We have completed 32 acquisitions since divesting our
industrial and oil and gas business in 1999, including one acquisition in each of 2008 and 2007 and five
acquisitions in 2006. 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
offerings.

We are committed to reducing our manufacturing and operating costs through a combination of
manufacturing in lower-cost countries, using Lean Six Sigma to drive continuous improvement across
all key processes, and consolidating our diverse manufacturing operations in North America, Europe
and China. 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. In February 2009,
we announced an additional plan to consolidate manufacturing in North America and China. See
Recent Developments in Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and
Results of Operations’’ for more details.

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

Additionally, a majority of our manufacturing facilities are ISO 9000, 9001 or 9002 certified by the

International Organization for Standardization.

Our business is reported in three geographic segments: North America, Europe and China. 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 of Financial Condition and Results of
Operations included elsewhere in this report.

Recent Acquisitions and Disposition

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

During the second quarter of 2008, we completed the acquisition of the remaining 40% ownership

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

On November 9, 2007, we acquired the assets and business of Topway Global Inc. (Topway)

located in Brea, California for approximately $18.4 million. Topway manufactures a wide variety of
water softeners, point of entry filter units, and point of use drinking water systems for residential,
commercial and industrial applications.

Products

We believe that we have the broadest range of products in terms of design distinction, size and
configuration in a majority of our principal product lines. In 2008 and 2007, water quality products
accounted for approximately 17% and 18%, respectively, 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) drainage products for industrial, commercial, marine and residential applications;

(cid:129) water supply 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 2008 and 2007 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. Additionally, various water quality products are sold to independent dealers throughout North
America.

DIY. Approximately 13% and 15% of our sales in 2008 and 2007, 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 22% and 20% of our sales in 2008 and 2007, 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 including
manufacturers of faucet and shower products.

In both 2008 and 2007, no customer accounted for more than 10% of our total net sales. Our top

ten customers accounted for approximately $293.9 million, or 20%, of our total net sales in 2008 and
$304.3 million, or 22%, of our total net sales in 2007. Thousands of other customers constituted the
remaining 80% of our net sales in 2008 and 78% of our net sales in 2007.

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 a bronze foundry,
machining, plastic extrusion and 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 capabilities 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,

2008

2007

2006

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

$26.6
$31.8

(in millions)
$37.8
$28.9

$44.7
$26.7

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 had experienced increases in the costs of certain raw materials, particularly copper.
Bronze and brass are copper-based alloys. Through July 3, 2008, copper prices rose significantly from
demands in the worldwide marketplace. The spot price of copper, which was $4.08 at July 3, 2008, had
increased approximately 186% from December 2005. In response, we implemented price increases for
some of our products that had 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. During the latter half of 2008, commodity
prices, including copper, decreased significantly as most industrialized and emerging economies began
experiencing economic recessions. The spot price of copper at December 31, 2008 was $1.32. We are
not able to predict whether commodity costs, including copper, will significantly increase or decrease in
the future. If commodity costs increase in the future 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. If commodity costs continue to decline, we may experience pressures from
customers to reduce our selling prices. The timing of any price reductions and decreases in commodity
costs may not align. Therefore, our near-term margins in 2009 could decline.

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.

New Product Development and Engineering

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

America, Europe and China that 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 $17.5 million, $15.1 million and
$12.7 million for the years ended December 31, 2008, 2007 and 2006, respectively.

California and Vermont recently enacted laws that will require beginning on January 1, 2010 that
all pipes, pipe and plumbing fittings and plumbing fixtures sold in those states that convey or dispense
water for human consumption contain virtually no lead content. Other states, including Maryland, are
currently considering similar legislation and we expect that similar laws will be adopted in other states
in the future. We have invested considerable resources over the past several years to develop lead free
versions of our plumbing products to comply with these new laws. We expect that our lead free product
offerings will be available for sale by the fourth quarter of 2009, which should allow our customers in
California and Vermont time to manage their inventories of our products to prepare for the January 1,
2010 implementation date of the new lead free standards.

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 $94.8 million at February 13, 2009 and was approximately
$116.8 million at February 15, 2008. We do not believe that our backlog at any point in time is
indicative of future operating results.

Employees

As of December 31, 2008, our wholly-owned domestic and foreign operations employed
approximately 6,300 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 19, 2008 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 . . . . . . . . . .

56 Chief Executive Officer, President and Director

William C. McCartney . . . . . . .

54 Chief Financial Officer and Treasurer

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

58 Group Managing Director, Europe

David J. Coghlan . . . . . . . . . .

President of North America and Asia

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

57 Executive Vice President of Marketing

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

50 Executive Vice President of Manufacturing Operations, North

America and Asia

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

President, Asia

Kenneth R. Lepage . . . . . . . . .

38 General Counsel and Secretary

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

47 Executive Vice President of Human Resources

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

45 Executive Vice President of Supply Chain Management

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

64 Group Vice President

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

63 Director

Kennett F. Burnes(1)(3) . . . . . .

66 Director

Richard J. Carthcart(2) . . . . . .

64 Director

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

70 Director

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

67 Director

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

68 Director

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

65 Director

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

70 Non-Executive Chairman of the Board and Director

Daniel J. Murphy, III(2)(3) . . .

67 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.

David J. Coghlan joined our Company in June 2008 as President of North America and Asia. Prior

to joining our Company, Mr. Coghlan served as Vice President, Global Parts of Trane Inc., a global
manufacturer of commercial and residential heating, ventilation and air conditioning equipment, from
April 2004 through May 2008. He also held several management positions within the Climate Control
Technologies segment of Ingersoll-Rand Company Limited, a manufacturer of transport temperature
control units and refrigerated display merchandisers, from 1995 to December 2003. Before joining
Ingersoll-Rand, Mr. Coghlan worked for several years with the management consulting firm of
McKinsey & Co. in both the United Kingdom and United States.

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.

Kenneth R. Lepage was appointed General Counsel and Secretary of the Company in August 2008.

Mr. Lepage originally joined our Company in September 2003 as Assistant General Counsel and
Assistant Secretary. Prior to joining our Company, he was a junior partner at the law firm of Hale and
Dorr LLP (now Wilmer Cutler Pickering Hale and Dorr LLP).

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.

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 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.

Kennett F. Burnes became a director of our Company in February 2009. Mr. Burnes is the retired

Chairman, President and Chief Executive Officer of Cabot Corporation, a global specialty chemicals
company. He was Chairman from 2001 to March 2008, President from 1995 to January 2008 and Chief
Executive Officer from 2001 to January 2008. Prior to joining Cabot Corporation in 1987, Mr. Burnes
was a partner at the Boston-based law firm of Choate, Hall & Stewart, where he specialized in
corporate and business law for nearly 20 years. He is a director of State Street Corporation, a member
of the Dana Farber Cancer Institute’s Board of Trustees and a board member of the New England
Conservatory. Mr. Burnes is also Chairman of the Board of Trustees of the Schepens Eye Research
Institute.

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. and Cabot
Corporation.

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

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. In addition to this $13.0 million payment, we are obligated to pay the
Relator’s attorney’s fees.

On June 22, 2005, the Court dismissed the claims of the Phase II cities selected for a second trial

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

On September 15, 2004, the Relator’s attorneys filed a lawsuit in the California Superior Court

for the City of Banning and 42 other cities and water districts against James Jones, Watts and
Mueller Co. based on the same transactions alleged in the Armenta case alleging common law fraud.
In October 2008, the Court dismissed the claims of 11 cities as time-barred. A first phase trial of
selected cities is scheduled for April 13, 2010. Litigation is inherently uncertain, and we are unable to
predict the outcome of this case.

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 and James
Jones, 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. 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 will be able to appeal these orders at the end of the coverage case. Zurich has
now made all of the payments required by these indemnity orders.

On February 8, 2006, Zurich filed a motion to set aside as void the November 22, 2002 and

August 6, 2004 summary adjudication indemnity payment orders. After this motion was denied, Zurich’s
appeal was also denied and the California Supreme Court denied Zurich’s petition for review. 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.

Zurich has asserted that all amounts paid by it to us and James Jones are subject to

reimbursement under Deductible Agreements related to the insurance policies between Zurich and
Watts. We believe that the agreements are unenforceable, that the Armenta case should be viewed as
one occurrence, and that the deductible amount should be $0.5 million per occurrence if the
agreements are enforceable.

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.

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 the facts currently known by us, 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 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.

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 105 lawsuits in different jurisdictions, with the greatest number

filed in Mississippi and California state courts, alleging injury or death as a result of exposure to
asbestos. The complaints in these cases typically name a large number of defendants and do not
identify any particular Watts products as a source of asbestos exposure. To date, we have obtained a
dismissal in every case before it has reached trial because discovery has failed to yield evidence of

substantial exposure to any Watts products. Based on the facts currently known to 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.

Current economic cycles, particularly reduced levels of residential and non-residential starts and remodeling,
may continue to 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. The current economic
downturn may also affect the financial stability of our customers, which could impact their ability to pay
amounts owed vendors, including us. 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
significant reduction in residential and non-residential starts and renovation and remodeling. These
conditions have caused a decrease in our revenue and profit. 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.

Our ability to make large acquisitions may be limited due to the current credit market conditions.

As widely reported, the financial markets worldwide have been experiencing, among other things,

severely diminished liquidity and credit availability. One of our strategies is to increase our revenues
and profitability and expand our markets through acquisitions. We may require capital in excess of our
available cash and the unused portion of our revolving credit facility to make large acquisitions, which
we would generally obtain from access to the credit markets. However, the current economic
environment may adversely impact the availability and cost of credit in the future. There can be no
assurance that if a large acquisition is identified that we would have access to sufficient capital to
complete such acquisition.

Sales of our products to customers serving the commercial market may be impacted by the delay or
cancellation of projects due to the current credit market conditions.

Our products are sold to commercial builders and others in the commercial construction market.
The current credit market conditions may prevent commercial builders or developers from obtaining
the necessary capital to continue existing projects or to start new projects. This may result in the delay
or cancellation of orders from our customers or potential customers and may adversely affect our
revenues and our ability to manage inventory levels, collect customer receivables and maintain
profitability.

Our ability to improve our profitability through the introduction of new technology in the manufacturing
process may be delayed due to the reallocation of capital.

With the current economic outlook worldwide, it is necessary for us to make decisions on the best
immediate use of capital. In reaching those decisions, certain planned capital expenditures which would
modernize or improve throughput at our manufacturing locations may be delayed until the current
credit market improves. The delay of these capital expenditures may impact our ability to realize
efficiencies through new technologies and may result in increased maintenance costs in the business.

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, we believe our
customers 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 changes 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 approximately
July 3, 2008, commodity costs rose significantly from demands in the worldwide marketplace. During
the latter half of 2008, commodity costs, including copper, decreased significantly as most industrialized
and emerging economies began experiencing recessions. If we cannot maintain our selling prices before
our inventory costs reflect the recent rapid decline in copper prices our profitability could decline.
Should commodity costs increase substantially again in the future, we may not be able to completely
recover such costs, as happened in 2006 and 2007, through selling price increases to our customers or
other product cost reductions, which would 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.

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
45.3% of our sales during the year ended December 31, 2008 were from sales outside of the U.S.
compared to 41.7% for the year ended December 31, 2007. For the years ended December 31, 2008
and 2007, the appreciation of the euro against the U.S. dollar had a positive impact on sales of
approximately $31.3 million and $34.1 million, respectively. There were also minor impacts on sales in
other European currencies such as the pound sterling and Danish krone against the U.S. dollar.
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 certain goods we source from 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 6.8 and 7.3 at
December 31, 2008 and 2007, 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 and Canadian dollar decreased in value and the yuan increased in value from
December 31, 2007 to December 31, 2008 by approximately 19%, 5% 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.

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

We implemented restructuring plans in 2007 and in 2009. Management’s plans include a number of

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

If we cannot 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, Europe and China are
not successful, our results of operations and financial condition could be materially adversely affected.

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

In response to the current recessionary pressures and reduced order volumes, we have decreased

our production levels to conserve cash. If we continue to experience declines in orders from customers,
we will take further steps to reduce our production levels to avoid building inventory and increasing
our working capital levels. While this step helps to preserve cash, a large amount of our production
costs are fixed and therefore will negatively impact our ability to absorb these costs, resulting in lower
gross margins for the products manufactured. Although we are expecting a certain level of decreased
production volume in 2009, there can be no assurances that additional steps will not be required to
reduce these levels further thereby decreasing our results from operations.

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

Our failure to develop new and innovative products or to custom design existing products could

result in the loss of existing customers to competitors or the inability to attract new business, either of
which may adversely affect our revenues. Our industry is characterized by:

(cid:129) intense competition;

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

(cid:129) changes in requirements under new legislation;

(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. Additionally, we recently developed lead free versions of
many of our plumbing products to comply with new lead content standards going into effect in
California and Vermont. If our lead free products fail to comply with these new standards or if we
encounter difficulties in the manufacturing processes for these products, we could lose a substantial
amount of business from customers in California and Vermont and any other states that adopt similar
standards in the future.

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, 2008, we recorded goodwill and non-amortizable intangible assets of

$431.3 million and $62.0 million, respectively. In lieu of amortization, we are required to perform an
annual impairment review of both goodwill and non-amortizable intangible assets. In 2008, in
performing our annual goodwill review, we recognized a non-cash pre-tax charge of approximately
$22.0 million as an impairment of all the goodwill value related to one reporting unit. Although we did
not experience goodwill impairment in our remaining reporting units, there can be no assurances that
future goodwill impairment will not occur. 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 or financial instability of a major customer could have an adverse effect on our results of operations.

In 2008, our top ten customers accounted for approximately 20% of our total net sales with no one

customer accounting for more than approximately 5% of our total net sales. Our customers generally
are not obligated to purchase any minimum volume of products from us and are able to terminate their
relationships with us at any time. In addition, increases in the prices of our products could result in a
reduction in orders for our customers. A significant reduction in orders from, or change in terms of
contracts with, any significant customers could have a material adverse effect on our future results of
operations. Furthermore, some of our major customers are facing financial challenges due to market
declines and heavy debt levels; should these challenges become acute, our results could be materially
adversely affected due to reduced orders and/or payment delays or defaults.

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

Our revolving credit facility and other senior indebtedness contain operational and financial

covenants that restrict our ability to make distributions to stockholders, incur additional debt and make
acquisitions and other investments unless we satisfy certain financial tests and comply with various
financial ratios. If we do not maintain compliance with these covenants, our creditors could declare a
default under our revolving credit facility or senior notes and our indebtedness could be declared
immediately due and payable. Our ability to comply with the provisions of our indebtedness may be
affected by changes in economic or business conditions beyond our control. Further, given the current
condition of the credit markets, should we require additional debt financing above our existing credit
limit, we cannot be assured such financing would be available to us or available to us on reasonable
economic terms.

Investments in auction rate securities and rights issued by UBS are subject to risks which may cause losses
and affect the liquidity of these investments.

At December 31, 2008, we held $6.0 million in auction rate securities (ARS) at fair value whose

underlying investments are AA rated municipal bonds and student loans and $2.3 million in rights
issued by UBS, AG (UBS). All of our ARS were sold by UBS. In the fourth quarter of 2008, UBS
issued a settlement offer to the holder of certain ARS including all of the securities held by us. Under
the terms of the settlement offer, UBS issued non-transferable rights entitling the holder to sell the
underlying ARS at par to UBS at any time during the period June 30, 2010 through July 2, 2012, after
which time the rights expire. UBS could elect at any time from the settlement through the expiration of
the settlement agreement to purchase the ARS, in which case UBS would be required to pay par value

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

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

As of February 1, 2009, Timothy P. Horne, a member of our board of directors, beneficially owned
approximately 19.8% 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 70.7% of the total outstanding voting power. As long as Mr. Horne controls shares
representing at least a majority of the total voting power of our outstanding stock, Mr. Horne will be
able to unilaterally determine the outcome of most stockholder votes, and other stockholders will not
be able to affect the outcome of any such votes.

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

As of February 1, 2009, there were outstanding 29,251,739 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, 2009, our Class B Common
Stock constituted 20.0% of our total outstanding common stock and 71.4% of the total outstanding
voting power and thus is able to exercise a controlling influence over our business.

Item 1B. UNRESOLVED STAFF COMMENTS.

None.

Item 2. PROPERTIES.

As of December 31, 2008, we maintained approximately 74 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/Distribution
Kansas City, KS . . . . . . . . . . . . . . . . Manufacturing
Fort Myers, FL . . . . . . . . . . . . . . . . . Manufacturing
St. Pauls, NC . . . . . . . . . . . . . . . . . . Manufacturing
Spindale, NC . . . . . . . . . . . . . . . . . . Manufacturing/Distribution
Chesnee, SC . . . . . . . . . . . . . . . . . . . Manufacturing
Dunnellon, FL . . . . . . . . . . . . . . . . . Warehouse
San Antonio, TX . . . . . . . . . . . . . . . . Warehouse
Springfield, MO . . . . . . . . . . . . . . . . Manufacturing/Distribution
Langley, BC, Canada . . . . . . . . . . . . . Manufacturing
Houston, TX . . . . . . . . . . . . . . . . . . Manufacturing
Brea, CA . . . . . . . . . . . . . . . . . . . . . Manufacturing
Phoenix, AZ . . . . . . . . . . . . . . . . . . . Warehouse
Kansas City, KS . . . . . . . . . . . . . . . . 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
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
Vildjberg, Denmark . . . . . . . . . . . . . . Manufacturing
Rosi`eres, France . . . . . . . . . . . . . . . . Manufacturing
Monastir, Tunisia . . . . . . . . . . . . . . . Manufacturing
Gardolo, Italy . . . . . . . . . . . . . . . . . . Manufacturing
Sorgues, France . . . . . . . . . . . . . . . . . Manufacturing
Grenoble, France . . . . . . . . . . . . . . . Manufacturing
Vojens, Denmark . . . . . . . . . . . . . . . Warehouse

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

China:

Location

Principal Use

Owned/Leased

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

Leased
Owned
Owned
Owned
Owned
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.
Many of our manufacturing plants, especially in North America and China, are currently operating at
levels that our management considers below normal capacity due to the current worldwide recession.
As part of its continuous manufacturing footprint review, in 2009, management will execute a plan to
further consolidate its North America and Chinese operations. See Recent Developments in Item 7,
‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations,’’ for more
details.

Item 3. LEGAL PROCEEDINGS.

We are from time to time involved in various legal and administrative procedures. See Item 1,
‘‘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 2008 and 2007 and cash dividends paid per share.

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

High

$30.75
31.00
33.00
29.90

2008

Low

$24.02
24.17
21.89
16.67

Dividend

High

$0.11
0.11
0.11
0.11

$46.71
41.34
39.96
33.09

2007

Low

$35.05
36.10
30.40
25.40

Dividend

$0.10
0.10
0.10
0.10

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 2008 and 2007 were $16.2 million and

$15.6 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, 2009 was 166.

The number of record holders of our Class B Common Stock as of February 22, 2009 was 7.

We satisfy the minimum withholding tax obligation due upon the vesting of shares of restricted

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

We did not withhold any Class A Common Stock for withholding tax obligations during the quarter

ended December 31, 2008.

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

Common Stock during the quarter ended December 31, 2008.

Issuer Purchases of Equity Securities

Period

(a) Total
Number of
Shares (or
Units)

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

(b) Average

Price Paid per Publicly Announced
Purchased Share (or Unit) Plans or Programs(1)

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

September 29, 2008 - October 26, 2008 . —
October 27, 2008 - November 23, 2008 . . —
November 24, 2008 - December 31, 2008 . —

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . —

—
—
—

—

—
—
—

—

553,615
553,615
553,615

553,615

(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. On October 28, 2008, the Company announced that it had temporarily suspended its
stock repurchase program. No shares were repurchased during the quarter ended December 31,
2008. As of December 31, 2008, we had repurchased 2.45 million shares of stock for a total cost of
$68.1 million.

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, 2003
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

$250

$200

$150

$100

$50

12/03

12/04

12/05

12/06

12/07

12/08

Watts Water Technologies, Inc.

S&P 500

Russell 2000
24FEB200911584944

$100 invested on December 31, 2003 in stock or index, including reinvestment of dividends. Fiscal
year ending December 31.

Cumulative Total Return

12/31/03

12/31/04

12/31/05

12/31/06

12/31/07

12/31/08

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

100.00
100.00
100.00

146.82
110.88
118.33

139.36
116.33
123.72

191.03
134.70
146.44

140.11
142.10
144.15

119.52
89.53
95.44

The above Performance Graph and related information shall not be deemed ‘‘soliciting material’’ or to

be ‘‘filed’’ with the Securities and Exchange Commission, nor shall such information be incorporated by
reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as
amended, except to the extent that we specifically incorporate it by reference into such filing.

Item 6. SELECTED FINANCIAL DATA.

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

FIVE-YEAR FINANCIAL SUMMARY

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

Statement of operations data:
Net sales . . . . . . . . . . . . . . . . . . .
Income from continuing operations
Loss from discontinued operations,
net of taxes . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . .
Income per share from continuing

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

1.28

Loss per share from discontinued

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

(0.02)
1.26

Year Ended

12/31/08(1)(8) 12/31/07(2)(8)

Year Ended
12/31/06(3)(8)

Year Ended

12/31/05(4)(5)(8) 12/31/04(6)(7)(8)

$1,459.4
47.3

$1,382.3
77.6

$1,230.8
77.1

$ 924.3
55.0

$824.6
48.7

(0.7)
46.6

(0.2)
77.4

1.99

(0.01)
1.99

(3.4)
73.7

2.29

(0.10)
2.19

(0.4)
54.6

1.67

(0.01)
1.66

(1.9)
46.8

1.49

(0.06)
1.43

common share . . . . . . . . . . . . . .

0.44

0.40

0.36

0.32

$ 0.28

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

$1,660.1

$1,729.3

$1,660.9

$1,101.0

$922.7

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

$ 409.8

$ 432.2

$ 441.7

$ 293.4

$180.6

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

(2) 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.

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

(4) For the year ended December 31, 2005, net income includes the following pre-tax costs:

restructuring of $0.7 million and other costs consisting of accelerated depreciation and asset write-
downs of $1.8 million. The after-tax cost of these items was $1.6 million.

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

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

(7) For the year ended December 31, 2004, net income includes the following pre-tax costs:

restructuring of $0.1 million and other costs consisting of accelerated depreciation of $2.9 million.
The after-tax cost of these items was $1.8 million.

(8) In December 2004, we decided to divest our 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 2008, 2007, 2006, 2005 and 2004 relate to legal and settlement costs
associated with the James Jones Litigation. The loss, net of taxes, consists of $ 0.7 million,
$0.2 million, $3.4 million, $0.4 million and $1.1 million for the years ended December 31, 2008,
2007, 2006, 2005 and 2004, respectively.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS.

Overview

We are a leading supplier of products for use in the water quality, water safety, water flow control

and water conservation markets in both North America and Europe with an expanding presence in
Asia. 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: