W
a
t
t
s
W
a
t
e
r
T
e
c
h
n
o
l
o
g
i
e
s
,
I
n
c
.
A
n
n
u
a
l
R
e
p
o
r
t
2
0
1
0
Annual Report 1115
© Watts Water Technologies, Inc. 2011
www.wattswater.com
WAT1201110K
Executive Officers
Directors
J. Dennis Cawte
Group Managing Director,
Europe
David J. Coghlan
Chief Executive Officer,
President and Director
Robert L. Ayers
Director
Kennett F. Burnes
Director
Richard J. Cathcart
Director
Kenneth R. Lepage
General Counsel,
Executive Vice President of Administration
and Secretary
David J. Coghlan
Chief Executive Officer,
President and Director
William C. McCartney
Chief Financial Officer
and Treasurer
Ralph E. Jackson, Jr.
Director
Kenneth J. McAvoy
Director
Corporate
Information
Executive Offices
815 Chestnut Street
North Andover, MA 01845-6098
Tel: (978)688-1811
Fax: (978)688-2976
Registrar and Transfer Agent
Wells Fargo Bank, N.A.
161 N. Concord Exchange
South St. Paul, MN 55075
Tel: (800)468-9716
Auditors
KPMG LLP
99 High Street
Boston, MA 02110
John K. McGillicuddy
Chairman of the Board and Director
Stock Listing
New York Stock Exchange
Ticker Symbol: WTS
Gordon W. Moran
Director
Merilee Raines
Director
For more information on Watts
Water Technologies, visit our
investor website by scanning the
QR code below or visiting
wattswater.com/investors.
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 “intend”, “believe”, “anticipate”,
“plan”, “expect” 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, 2010 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
Strength Through Innovation
Strength Through Innovation
WWatts Water Technologies is a world leader
in the manufacture of innovative products
to control the efficiency, safety and quality of water
within residential, commercial and institutional ap-
plications. Our expertise in a wide variety of water
technologies enables us to be a comprehensive
supplier to the water industry.
We are a “pure play” in this industry; water is our
primary focus and has been for 137 years. Our
products center around four key application areas,
referred to as our strategic business platforms:
Commercial & Residential Flow, Water Reuse &
Drainage, HVAC & Gas, and Water Quality.
We offer solutions for water and energy conserva-
tion, comfort and control, and water quality and
safety, and increasingly our products support the
sustainability efforts of our customers and the green
building industry.
We are focused on three key strategies for creating
shareholder value:
• Improving performance through continuous
improvement and operational excellence
• Growing our business through innovation,
better meeting customer needs, and making
key acquisitions
• Pursuing leverage points throughout our
business
Please see our Letter to Shareholders for an ex-
panded discussion of these strategies.
While Watts Water Technologies is U.S. based,
we have a strong global presence. In 2010, 44% of
our sales occurred outside of the United States.
Supporting our operations are more than 5,000
associates worldwide who are key to
our product development and
improved efficiency.
Total Net Sales
Free Cash Flow
1,431.4
1,274.6
1,225.9
$1500
$1200
$900
$600
$300
$0
181.2
119.9
91.0
$200
$150
$100
$50
$0
s
n
o
i
l
l
i
M
2008
2009
2010
2008
2009
2010
For further discussion of “free cash flow”, “free
For further discussion of “free cash flow”, “free
cash flow conversion rate” and “net debt to capi-
talization ratio,” which are non-GAAP financial
measures, and the comparable GAAP measures,
see the section titled “Management’s Discussion
and Analysis of Financial Condition and Results
of Operations” in our Form 10-K included in
this Annual Report to Shareholders.
s
n
o
i
l
l
i
M
This performance in 2010, coupled with our con-
servative capital structure, positions us well as we
move into 2011.
At December 31, 2010, our net debt to capitaliza-
tion ratio was 5.2%.
Current portion of long-term debt
Plus: Long-term debt,
net of current portion
Less: Cash and cash equivalents
Net debt
Net debt
Plus: Total stockholders’ equity
Capitalization
December 31,
2010
(in millions)
$0.7
378.0
(329.2)
$49.5
$49.5
901.5
$951.0
Net Debt to Capitalization Ratio
5.2%
This 5.2% at December 31, 2010, compares to
9.9% at December 31, 2009.
To Our Shareholders
2010 was a challenging year for the
global economy and our end
markets. Commercial and residential construction
markets were at historic low levels. We also faced
volatile commodity markets, with some commodi-
ties reaching record high price levels, and signifi-
cant foreign exchange rate fluctuations. But despite
this difficult environment, our Company performed
well and we improved our already strong financial
condition.
In 2010, we took additional steps to strengthen
our foundation, focusing on continuous improve-
ment and operational excellence. We continued to
launch new and innovative products to meet our
customers’ needs, strengthened the power of our
brands, and completed several key strategic acquisi-
tions. Together, this helped us further strengthen
our financial health and improve our position for
the future.
2010 Financial Highlights
2010 Financial Highlights
Consolidated revenues increased by $48.7 million,
or 4.0%, during 2010, comprised of the following:
Organic
Acquisitions
Foreign Exchange
(in millions) % change
$50.3
$11.8
($13.4)
4.2%
0.9%
(1.1%)
Total increase in net sales
$48.7
4.0%
Free cash flow was $91.0 million, which repre-
sents a free cash flow conversion rate of 144.2% of
net income from continuing operations. This was
the third consecutive year in which free cash flow
exceeded net income. Cash on hand at December
31, 2010, was $329.2 million.
From left to right:
William C. McCartney, Chief Financial Officer and Treasurer;
Kenneth R. Lepage, General Counsel, Executive Vice President
of Administration and Secretary; and David J. Coghlan, Chief
Executive Officer, President, and Director
FIMET Gauge Assembly Cell in Plovdiv, Bulgaria
Water Connector Assembly Cell in Yuhuan, China
Strengthening Our Foundation
Strengthening Our Foundation
IIn 2010, we continued to drive operational excel-
lence and greater efficiencies through our Con-
tinuous Improvement Operating System (CIOS)
and through strategic manufacturing footprint
consolidations.
Continuous Improvement
Continuous Improvement
Our CIOS program was launched in 2009 to
equip our associates with a standardized approach
to continually improve business processes. CIOS
was created and launched by our Global Manu-
facturing Council in North America, Europe, and
Asia to improve operational and financial results,
as well as to deliver significant improvements
across key business metrics and enhance customer
satisfaction.
In 2010, our associates continued to develop their
skills and expand their use of our CIOS tools to
drive improved performance across all of our key
customer-focused operating metrics, including safety,
quality, delivery, productivity, and working capital.
Our CIOS program is enabling us to identify and
pursue improvement opportunities using tools such
as Lean Manufacturing and Six Sigma, resulting in
a safer work environment, shorter product lead-
times, and improved quality. It is also enabling us
to free up significant physical space, improve inven-
tory turns, and deliver significant productivity and
cost savings at sites around the world.
Examples of CIOS Success
Examples of CIOS Success
More efficient ways of working are being devel-
oped primarily by shop floor associates who are
being empowered through our CIOS process to
eliminate waste in process and material flow.
For example, in a number of facilities, cross-
functional teams have developed new assembly
cells that link all the process steps for a specific
product to achieve continuous
flow, eliminate batch working
and foster greater teamwork. Vi-
sual performance boards inform
the cell employees of daily plans
and provide feedback of perfor-
mance against targets identified
to satisfy each customer.
Each facility has also devel-
oped site-specific improvements
and, through the CIOS process,
all are delivering measurable
results:
North America: In Franklin, NH, improve-
ments in the manufacturing of our Under Sink
Guardian (USG) thermostatic mixing valves have
resulted in a 61% reduction in needed floor space,
which allows us to use the freed space for new
product manufacturing. We have also achieved
a 98% reduction in the distance the material
needs to travel, a 32% improvement in productiv-
ity, a 71% reduction in the amount of inventory
required and a 99% reduction in manufacturing
lead time.
Europe: In Plovdiv, Bulgaria, improvements in
the assembly process for our line of FIMET tem-
perature and pressure gauges have delivered a 25%
reduction in product cycle time, an 83% increase in
productivity, a 99% reduction in inventory, an 85%
reduction in the distance traveled by the mate-
rial, and an ongoing approach to eliminate quality
problems at the root cause.
USG Manufacturing Cell in Franklin, NH
BLÜCHER
Stainless Steel Pipe
Fabrication
CIOS Accountability Room
at Webster Valve Facility in
Franklin, NH
State-of-the-art Manufacturing at
Black Teknigas Facility in the UK
Asia: In Yuhuan, China, improvements in the
assembly system for F15 flexible water connec-
tors have resulted in a 95% reduction in product
lead time, an 82% improvement in productivity, a
95% reduction in work-in-process inventory and a
22% improvement in delivery against the customer
demand schedule.
Overall, our CIOS process is enabling associates
to deliver continuous improvement and aim for
best-in-class performance at these facilities and at
other Watts Water Technologies locations around
the world. Specifically, we have seen a meaningful
improvement in our plant safety, improvement in
gross margins, more efficient use in working capital
and, as mentioned earlier, improvement in our free
cash flow conversion rate.
Consolidating Our Footprint
Consolidating Our Footprint
In 2010, we made further progress in consolidat-
ing our manufacturing footprint. We completed
the consolidation of our PEX production and
distribution operations into a new state-of-the-
art facility in Kansas City, MO. This new Center
of Excellence for PEX manufacturing will
improve our operating costs, while also reducing
lead times and freight costs for our customers.
We streamlined our North American distri-
bution network allowing us to close distribu-
tion centers in Vernon, CA; Chicago, IL; and
Springfield, MO, reducing our logistics costs
and improving our customer service.
Also in 2010, we completed the integration of
several previously acquired companies within our
Water Quality business platform into a single
organization. This change allows for a more robust
offering of both residential and commercial prod-
ucts and more focused operations dedicated to key
strategic product lines.
In Europe, we integrated BLÜCHER’s manu-
facturing and warehousing location in Vojens,
Denmark, with its main facility in Vildbjerg,
Denmark. This allows us to streamline operations
and provide our customers with improved delivery
times. We also integrated our Austrian and Ger-
man warehouses into a single distribution location
in Landau, Germany.
In Asia, we completed the closure of our
TWVC operations in Tianjin, China, and moved
products both to our existing operation in
Ningbo, China, and to our Franklin, NH, opera-
tion in the U.S.
In 2010, we also announced two
major projects that we plan to
complete in 2011. We intend to
cease manufacturing operations at
our Regtrol plant in North Carolina
and transition pieces of the opera-
tion to other locations. We also plan
to complete the consolidation of our
French manufacturing distribution
footprint, reducing its operations
from five to two locations.
Watts Radiant
Custom OEM
Manifold
Growing Our Business
Growing Our Business
HF Scientific Ballast
Water Monitoring
Powers
TempTapTM
Thermostatic
Faucet
Watts Radiant
FlexPlateTM
New Products
New Products
North America
Our Commercial & Residential Flow platform
completed the rollout of a full line of lead free po-
table water products, required to meet new Califor-
nia and Vermont lead free standards. This positions
us well to provide lead free products nationally,
supporting the recently-enacted Reduction of Lead
in Drinking Water Act, which will take effect in
January 2014.
Last year, we experienced continued volume growth
in Watts potable PEX piping and accessories. We
also launched 14 new products under the Watts and
Powers brands that improve hot water system energy
efficiency and safety, and we introduced a new gen-
eration of modular water pressure reducing valves.
Our Water Reuse & Drainage platform acquired
a new rainwater harvesting business, Blue Ridge
Atlantic Enterprises (BRAE). We also contin-
ued to broaden our new and very successful line
of trench drains, including the Watts 6 inch wide
Dead LevelTM Trench drain and the Watts 12 inch
wide Dead LevelTM Trench drain. In addition, we
incorporated BLÜCHER stainless steel drains
into our product offerings in North America with
promising results.
Our HVAC & Gas platform released a new Watts
Radiant FlexPlate™ product line, graphite-based
heat distribution panels for hydronic radiant appli-
cations, which significantly improve heat distribu-
tion over traditional aluminum plates. Also, we
introduced our European MicroFlex® product line
in North America and launched it as Watts Radi-
ant R-flex™ insulated PEX piping systems, which
reduce heat loss and improve system efficiency.
Also in 2010, our Water Quality platform con-
tinued to gain market share, offering
environmentally friendly, low-salt and
no-salt filtration and scale prevention
products, and zero waste drinking
water systems. Key among our Watts
scale prevention products are the
commercial OneFlow® and Sca-
leNet™ systems and the residential
E-TREAT® system. These effective
scale prevention technologies extend
the life of plumbing systems and
reduce energy costs by allowing heat
to radiate more efficiently.
Our Instrumentation business
showed solid double digit growth,
with sales for HF Scientific up 19%
in 2010. This growth is attributable
to core market share capture, new
market entry, new product releases
and an expanding OEM business. In particular,
two initiatives that gained significant traction
in 2010 centered on ballast water monitoring to
help prevent the spread of invasive aquatic species,
and a push to develop a new family of safer and
“greener” consumables for turbidity and chlorine
monitoring.
Watts
Dead LevelTM
Trench Drain
European Backflow
Prevention Products
BLÜCHER
Stainless Steel
Grating
Black Teknigas
In-house Engineering
and CAD Design
Europe
In 2010, we increased market share in Europe
with our new range of backflow products intro-
duced under our Commercial & Residential Flow
platform. This new range covers sizes up to and in-
cluding 2 inches, and the products were designed to
reduce the weight of brass by 50% as compared to
the previous models by incorporating several plastic
components. Larger sizes are in the final design
stages and are planned for launch in 2012.
As part of our HVAC & Gas platform, we
continued to focus on renewable energy packages
with a new range of integrated electronic controls.
We also continued to gain market share with our
insulated PEX piping product offering. This prod-
uct is well positioned as we address the increasing
demands for energy efficiency, district heating and
new heat loss standards in the European market.
Collaboration between two of our companies,
Black Teknigas in the U.K. and Giuliani Anello
in Italy, led to the development of new products
providing gas control solutions. In 2010, the two
companies collaborated on the modification of an
existing gas shutoff valve for U.K. original equip-
ment manufacturers, as well as the modification of
a leading Black Teknigas gas safety shutoff valve
for the Italian market.
Within our Water Reuse & Drainage platform,
we added new low-height floor drains to our line of
BLÜCHER stainless steel drainage products to ad-
dress market demands for drains that fit into lighter
building construction projects. These drains are de-
signed for low-height floors and decks in buildings
and shower cabin applications on board ships. Our
low-height drains are combinable with a variety of
frames and gratings to suit any floor type and bath-
room style, and they further strengthen our leading
position in the drains market.
Asia
During 2010, we established an
engineering and advanced test
center in Ningbo, China, to facili-
tate our growth strategies for Asia.
Our goal is to leverage our North
American and European capa-
bilities into Asia, develop advanced
local expertise and expand our full
product line, as well as provide low-
cost engineering and test capabili-
ties to North America.
Geographic Expansion
Geographic Expansion
In addition to launching new prod-
ucts, in 2010 we positioned ourselves
for growth through geographic
expansion in the Middle East.
Also, in Tunisia, we moved low-cost
electronic assembly operations into a
new plant built to accommodate our
growing business volume and to effec-
tively implement Lean Manufacturing
methods.
Landmark Tower in
Abu Dhabi featuring
BLÜCHER stainless steel
drains
BRAE Rainwater
Harvesting Systems
Astroflex Pre-insulated
Flexible Pipe
Strategic Acquisitions
Strategic Acquisitions
Pursuing Leverage Points
Pursuing Leverage Points
In 2010, two strategic acquisitions strengthened
our position as an important supplier to the “clean
tech” market, particularly related to water conserva-
tion and energy efficiency.
In April, we announced that we completed the
acquisition of Blue Ridge Atlantic Enterprises
(BRAE). BRAE is a leading provider of engi-
neered rainwater harvesting solutions and ad-
dresses the commercial, institutional and resi-
dential markets. BRAE’s rainwater harvesting
systems are an integral part of the green building
movement to conserve water and can contribute
up to 30% of LEED points available for green
buildings.
In June, we announced that we completed the
acquisition of Austroflex Rohr-Isoliersysteme
GmbH. Austroflex is an Austrian-based manufac-
turer of pre-insulated flexible pipe for district heat-
ing and solar applications and under-floor radiant
heating systems.
The acquisition of Austroflex, in conjunction
with our existing line of pre-insulated piping
products, provides us with a full range of pre-in-
sulated PEX tubing, pre-insulated solar tubes and
under floor heating insulation—strengthening
our offering in both traditional and alternative
energy heating markets. Austroflex also expanded
our distribution capability and positions us as a
major supplier of pre-insulated pipe systems in
Europe.
Under an initiative called “One Watts Water”, we
are pursuing a number of leverage points across our
company.
In mid 2010, we began the rollout of a new sales
channel organization for North America. We
took the separate sales resources from a number
of our businesses and merged them into one
unified sales organization focused on five key
channels: Wholesale, Retail, OEM, Industrial
and Canada.
This allows us to create “One Watts Water” teams
focused on bringing our full offer-
ing of products and brands to each
of these key channels. Within our
Wholesale channel, it also has al-
lowed us to create dedicated teams
focused on distributors, commercial
construction and residential construc-
tion—enabling us to more effectively
partner with distributor customers, as
well as architects, engineers, contrac-
tors and builders going forward.
In addition, to further support our
global manufacturing and supply
chain, we initiated a multi-year pro-
gram to fully deploy a single global
Enterprise Resource Planning (ERP)
system. This new ERP system will allow us to
continue to consolidate administrative support
into shared service centers.
Looking Ahead
Looking Ahead
Although the global economy remains difficult, we
see opportunities ahead through continued innova-
tion. As our markets change, we are ready to provide
solutions to our customers’ water-related needs.
As mentioned earlier, in January 2011, President
Obama signed into law the Reduction of Lead in
Drinking Water Act, which by January 2014 man-
dates the reduction of lead content nationally in
plumbing fixtures, fittings and valves to the levels
now required in California and Vermont. We plan
to lead the way with one of the largest certified lead
free product lines in the industry.
Also, recent plumbing code changes are leading
many states and municipalities to require that all
new homes be equipped with residential fire sprin-
kler systems. In 2011, we will be releasing a new
line of residential fire products to serve the growing
residential fire protection market.
In addition, in February 2011, we announced our
intent to acquire Danfoss Socla and the related
water controls business of Danfoss A/S. Danfoss
Socla, based in France, is a manufacturer of a wide
range of water protection valves and flow control
solutions for the water market and the heating,
ventilation and air conditioning market. Its prod-
ucts are distributed worldwide for municipal, in-
dustrial, commercial and residential use. We expect
to close on this acquisition in the second quarter.
This year we will also work to expand our busi-
ness in the Middle East, as well as maintain a focus
on Asia, where we expect that the expansion of
plumbing and building codes will provide long-
term opportunities. We also see growing interest in
Asia in energy and water conservation.
As an important final note, we are moving into
2011 with new leadership, but with an unwavering
focus. On January 26, 2011, due to health reasons,
Patrick O’Keefe resigned as our Chief Executive
Officer and President. We thank Pat for his leader-
ship and vision, which played an important part in
our growth and success over the past several years.
Our Board of Directors subsequently appointed
David Coghlan, previously our Chief Operating
Officer, to the position of Chief Executive Officer
and President, and elected him as a member of our
Board of Directors.
All associates at Watts Water Technologies will
continue to work together in 2011 to create share-
holder value through continuous improvement
and operational excellence; growing our business
through innovation, key acquisitions, and better
meeting customer needs; and by pursuing leverage
points throughout our business.
Chief Executive Officer, President,
and Director
Chief Financial Officer and Treasurer
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, 2010
Or
(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
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes (cid:2) No (cid:3)
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 whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes (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) Accelerated filer (cid:3)
Smaller reporting company (cid:3)
Non-accelerated filer (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 July 2, 2010, the aggregate market value of the registrant’s common stock held by non-affiliates of the
registrant was approximately $830,344,650 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 24, 2011
Class A Common Stock, $0.10 par value per share
Class B Common Stock, $0.10 par value per share
30,112,753 shares
6,953,680 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for its Annual Meeting of Stockholders to be held on May 11, 2011,
are incorporated by reference into Part III of this Annual Report on Form 10-K.
Item 1. BUSINESS.
PART I
This Annual Report on Form 10-K contains statements that 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,’’ and
‘‘would’’ or similar words. You should not rely on forward-looking statements because they involve known
and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks,
uncertainties and other factors may cause our actual results, performance or achievements to differ
materially from the anticipated future results, performance or achievements expressed or implied by the
forward-looking statements. Some of the factors that might cause these differences are described under
Item 1A—‘‘Risk Factors.’’ You should carefully review all of these factors, and you should be aware that
there may be other factors that could cause these differences. These forward-looking statements were based
on information, plans and estimates at the date of this report, and, except as required by law, we undertake
no obligation to update any forward-looking statements to reflect changes in underlying assumptions or
factors, new information, future events or other changes.
In this Annual Report on Form 10-K, references to ‘‘the Company,’’ ‘‘Watts,’’ ‘‘we,’’ ‘‘us’’ or ‘‘our’’
refer to Watts Water Technologies, Inc. and its consolidated subsidiaries.
Overview
Watts Regulator Co. was founded by Joseph E. Watts in 1874 in Lawrence, Massachusetts. Watts
Regulator Co. started as a small machine shop supplying parts to the New England textile mills of the
19th century and grew into a global manufacturer of products and systems focused on the control,
conservation and quality of water and the comfort and safety of the people using it. Watts Water
Technologies, Inc. was incorporated in Delaware in 1985 and became the parent Company of Watts
Regulator Co.
Our ‘‘Water by Watts’’ strategy is to be the leading provider of water quality, water conservation,
water safety and water flow control products for the residential and commercial markets in North
America and Europe with a presence in Asia. Our primary objective is to grow earnings by increasing
sales within existing markets, expanding into new markets, leveraging our distribution channels and
customer base, making selected acquisitions, reducing manufacturing costs and advocating for the
development and enforcement of industry standards.
We intend to continue to introduce products in existing markets by enhancing our preferred
brands, developing new complementary products, promoting plumbing code development to drive sales
of safety and water quality products and continually improving merchandising in both the do-it-yourself
(DIY) and wholesale distribution channels. We continually target selected new product and geographic
markets based on growth potential, including our ability to leverage our existing distribution channels.
Additionally, we continually leverage our distribution channels through the introduction of new
products, as well as the integration of products of our acquired companies.
We intend to continue to generate growth by targeting selected acquisitions, both in our core
markets as well as new complementary markets. We have completed 34 acquisitions since divesting our
industrial and oil and gas business in 1999. Our acquisition strategy focuses on businesses that
manufacture preferred brand name products that address our themes of water quality, water
conservation, water safety, water flow control and comfort and related complementary markets. We
target businesses that will provide us with one or more of the following: an entry into new markets, an
increase in shelf space with existing customers, strong brand names, a new or improved technology or
an expansion of the breadth of our Water by Watts offerings.
2
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 Asia. We have a number of manufacturing facilities in lower-cost regions such as China, Bulgaria
and Tunisia. In recent years, we have announced several global restructuring plans to reduce our
manufacturing footprint in order to reduce our costs and to realize additional operating efficiencies.
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.
Products
We have a broad range of products in terms of design distinction, size and configuration. Our only
product line that is greater than 10% of our total revenue is our water quality product line. In 2010,
2009 and 2008, water quality products accounted for approximately 15%, 14% and 17%, respectively, of
our total sales. Our principal product lines include:
• water quality products, including backflow preventers and check valves for preventing reverse
flow within water lines and fire protection systems and point-of-use and point-of-entry water
filtration and reverse osmosis systems for both commercial and residential applications;
• a wide range of water pressure regulators for both commercial and residential applications;
• drainage products for commercial, industrial, marine and residential applications;
• water supply products for commercial and residential applications;
• temperature and pressure relief valves for water heaters, boilers and associated systems;
• thermostatic mixing valves for tempering water in commercial and residential applications;
• systems for under-floor radiant applications and hydraulic pump groups for gas boiler
manufacturers and renewable energy applications, including thermal control and solar and heat
pump control packages; and
• flexible stainless steel connectors for natural and liquid propane gas in commercial food service
and residential applications.
Customers and Markets
We sell our products to plumbing, heating and mechanical wholesale distributors, major DIY
chains and OEMs.
3
Wholesalers. Approximately 64% and 65% of our sales in 2010 and 2009, respectively, were to
wholesale distributors for 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 16% of our sales in both 2010 and 2009 were to DIY customers. Our DIY
customers demand less technical products, but are highly receptive to innovative designs and new
product ideas.
OEMs. Approximately 20% and 19% of our sales in 2010 and 2009, 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 2010 and 2009, no customer accounted for more than 10% of our total net sales. Our top
ten customers accounted for approximately $273.6 million, or 22%, of our total net sales in 2010 and
$306.4 million, or 25%, of our total net sales in 2009. Thousands of other customers constituted the
remaining 78% of our net sales in 2010 and 75% of our net sales in 2009.
Marketing and Sales
We rely primarily on commissioned manufacturers’ representatives to sell our products, 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 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:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended
December 31,
2010
2009
2008
(in millions)
$24.2
$33.7
$24.6
$30.5
$26.2
$31.5
4
Raw Materials
We require substantial amounts of raw materials to produce our products, including bronze, brass,
cast iron, steel, plastic, and components used in products, and substantially all of the raw materials we
require are purchased from outside sources. The commodity markets have experienced tremendous
volatility over the past several years, particularly copper. The market prices of many commodities
decreased during the latter half of 2008, but increased throughout 2009 and 2010. Bronze and brass are
copper-based alloys. The spot price of copper increased approximately 33.2% from December 31, 2009
to December 31, 2010. The fact that we significantly source internationally means that several months
of raw materials and work in process are moving through our business at any point in time. We are not
able to predict whether commodity costs, including copper, will significantly increase or decrease in the
future. If commodity costs continue to 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 were 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. As a result, our margins could be affected.
With limited exceptions, we have multiple suppliers for our commodities or other raw materials.
We believe our relationships with our key suppliers are good and that an interruption in supply from
any supplier would not materially affect our ability to meet our immediate demands while another
supplier is qualified. We regularly review our suppliers to evaluate their strengths. If a supplier is
unable to meet our demands, we believe that our inventory of raw materials will allow for sufficient
time to identify and obtain the necessary commodities and other raw materials from an alternate
source. We believe that the nature of the commodities and other raw materials used in our business are
such that multiple sources are generally available in the market.
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
that 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.
5
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 $18.6 million, $17.8 million and
$17.5 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Effective January 1, 2010, California and Vermont required all pipes, pipe and plumbing fittings
and plumbing fixtures sold in those states that convey or dispense water for human consumption to
contain virtually no lead content. On January 4, 2011, the federal government enacted a similar law
that will take effect nationwide in January 2014. We have invested considerable resources over the past
several years to develop lead-free versions of our plumbing products to comply with the new laws in
California and Vermont, and we introduced our lead-free product offerings in California and Vermont
in the fourth quarter of 2009.
Complying with these new requirements on a nationwide basis will pose a significant challenge for
us. The transition to comply with the expected requirements may cause our material costs to increase
as suppliers of alternative lead-free metals are currently limited. We may not succeed in passing
through these cost increases to our customers. We may also experience technical challenges in our
manufacturing process in converting our present manufacturing operations to 100% lead-free products.
In addition, we could have difficulty providing sufficient quantities of our lead-free compliant products
to meet nationwide demand and we could be left with potentially obsolete traditional leaded product
inventories if customers convert to lead-free offerings faster than anticipated.
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 quality, brand preference, delivery
times, engineering specifications, plumbing code requirements, price, technological expertise 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 $84.2 million at February 18, 2011 and was approximately $86.6 million
at February 12, 2010. We do not believe that our backlog at any point in time is indicative of future
operating results and we expect our entire current backlog to be converted to sales in 2011.
Employees
As of December 31, 2010, we employed approximately 5,400 people worldwide. 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.
6
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.
Executive Officers and Directors
Set forth below in alphabetical order 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:
Executive Officers
Age
Position
J. Dennis Cawte . . . . . . . . . . .
60 Group Managing Director, EMEA
David J. Coghlan . . . . . . . . . .
51 Chief Executive Officer, President and Director
Kenneth R. Lepage . . . . . . . . .
40 General Counsel, Executive Vice President of Administration
and Secretary
William C. McCartney . . . . . . .
56 Chief Financial Officer and Treasurer
Non-Employee Directors
Robert L. Ayers(1)(3) . . . . . . .
65 Director
Kennett F. Burnes(1)(3) . . . . . .
68 Director
Richard J. Cathcart(2)(3) . . . . .
66 Director
Ralph E. Jackson Jr.(2)(3) . . . .
69 Director
Kenneth J. McAvoy(1)(3) . . . .
70 Director
John K. McGillicuddy(1)(3) . . .
67 Chairman of the Board and Director
Gordon W. Moran(2)(3) . . . . .
72 Director
Merilee Raines(1)(3) . . . . . . . .
55 Director
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Nominating and Corporate Governance Committee
J. Dennis Cawte joined our Company in 2001 and was appointed Group Managing Director,
EMEA. 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 was appointed Chief Executive Officer, President and Director in January 2011.
He previously served as our Chief Operating Officer from January 2010 to January 2011 and as
President of North America and Asia from June 2008 to January 2010. Prior to joining our Company,
Mr. Coghlan served as Vice President, Global Parts for Trane Inc., a global manufacturer of
commercial and residential heating, ventilation and air conditioning equipment, from April 2004
7
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.
Kenneth R. Lepage was appointed General Counsel and Secretary of the Company in August 2008
and Executive Vice President of Administration in December 2009. 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).
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.
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. Mr. Ayers served as a director of T-3 Energy Services, Inc. from
August 2007 to January 2011.
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.
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.
8
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. Mr. McAvoy has decided not to stand for re-election at our 2011 annual meeting
of stockholders.
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. Mr. Moran is not standing for re-election at our 2011
annual meeting of stockholders.
Merilee Raines was elected as a member of our Board of Directors in February 2011. Ms. Raines
has served as Chief Financial Officer of IDEXX Laboratories, Inc. since October 2003. Prior to
becoming Chief Financial Officer, Ms. Raines held several management positions with IDEXX
Laboratories, including Corporate Vice President of Finance, Vice President and Treasurer of Finance,
Director of Finance, and Controller. IDEXX Laboratories develops, manufactures and distributes
diagnostic and information technology products and services for pet and production animal health,
water quality and milk safety, and human point-of-care diagnostics.
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
Foreign Corrupt Practices Act Investigation
In 2009, we conducted an investigation into payments made by employees of Watts Valve
Changsha Co., Ltd. (CWV), at that time an indirect wholly-owned subsidiary of the Company in China,
to individuals associated with state-owned agencies that may violate the United States Foreign Corrupt
Practices Act (FCPA). We voluntarily disclosed this matter to the Securities and Exchange Commission
(SEC) and the Department of Justice (DOJ). We have engaged in negotiations with the staff of the
SEC and DOJ to resolve potential violations of the FCPA relating to these payments. Those
negotiations reached a stage at which we were able to estimate a probable pre-tax charge in connection
with these matters of approximately $5.3 million, which amount includes estimated disgorgement of
profits and interest. This has been reflected in our results for the year ended December 31, 2010. We
have recorded this charge, net of tax, in discontinued operations as these potential violations pertained
to CWV, which had been classified as discontinued operations in 2009. We sold CWV in January 2010.
There is currently no definitive agreement with the SEC staff or DOJ for the resolution of this matter,
including with respect to any disgorgement of profits, fines, penalties or interest payment, and any
agreement will be subject to the approval by the Commissioners of the SEC and senior DOJ personnel.
Therefore, there can be no assurance that our negotiations with the SEC staff and DOJ will result in a
definitive agreement, and the amount of the loss upon final disposition of these matters may exceed
our current estimate.
9
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 that 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 that 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 101 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.
10
Item 1A. RISK FACTORS.
Current economic cycles, particularly those involving reduced levels of commercial and 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 recent economic downturn
may also affect the financial stability of our customers, which could affect their ability to pay amounts
owed to their vendors, including us. We also believe our level of business activity is influenced by
commercial and 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 credit market conditions may prevent commercial and residential
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. The current conditions in the housing and debt markets
have caused a significant reduction in commercial and residential starts and renovation and remodeling.
These conditions have adversely impacted 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.
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.
Changes in the costs of raw materials could reduce our profit margins. Reductions or interruptions in the
supply of components or finished goods from international sources could 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
costs of raw materials may be subject to change due to, among other things, 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 supplies of raw materials for our
products at favorable costs could have a material adverse effect on our business, financial condition or
results of operations by decreasing our profit margins. The commodity markets have experienced
tremendous volatility over the past several years, particularly copper. The market price of copper
increased by 35.6% from January 1, 2010 to February 9, 2011. Should commodity costs continue to
increase substantially, we may not be able to completely recover such costs, through selling price
increases to our customers or other product cost reductions, which would have a negative effect on our
11
financial results. Additionally, we continue to purchase increased levels of components and finished
goods from international sources. In limited cases, these components or finished goods are single-
sourced. The availability of components and finished goods from international sources could be
adversely impacted by, among other things, interruptions in production by suppliers, suppliers’
allocations to other purchasers and new laws or regulations.
Government regulations could limit or delay our ability to market or sell our products.
In January 2011, the President of the United States signed the Reduction of Lead in Drinking Water
Act, which will reduce the permissable weighted average lead content in faucets, fittings and valves
intended for use in potable water applications from 8% to 0.25% nationwide beginning in January
2014. The new law is consistent with current legislation in California and Vermont that went into effect
in January 2010. We introduced lead-free products for sale in California and Vermont and offer a large
selection of lead-free compliant valves and fittings. Complying with these new requirements on a
nationwide basis will pose a significant challenge for us. The transition to comply with the expected
requirements may cause our material costs to increase as suppliers of alternative lead-free metals are
currently limited. We may not succeed in passing through these cost increases to our customers. We
may also experience technical challenges in our manufacturing process in converting our present
manufacturing operations to 100% lead-free products. In addition, we could have difficulty providing
sufficient quantities of our lead-free compliant products to meet nationwide demand and we could be
left with potentially obsolete traditional leaded product inventories if customers convert to lead-free
offerings faster than anticipated. These requirements could have a material effect on our financial
condition and results of operation.
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 business through
acquisitions that will provide us with complementary 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. For example, in February 2011,
we announced our intention to purchase Danfoss Socla (Socla) and certain related business assets.
Socla is a manufacturer of a wide range of water protection valves and flow control solutions for the
water market and the heating, ventilation and air conditioning market. The company is based in France
and its products are distributed worldwide for municipal, industrial, commercial and residential use. If
we consummate this acquisition, we expect to spend significant time and effort in integrating the Socla
business and in identifying, completing and integrating other future 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 risks, including, but not limited to:
• 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;
• adverse short-term effects on our reported operating results;
• diversion of management’s attention;
• investigations of, or challenges to, acquisitions by competition authorities;
• loss of key personnel at acquired companies; and
12
• 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. If 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. Like other manufacturers and distributors of products designed to control and
regulate fluids and gases, we 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:
• Unexpected geo-political events in foreign countries in which we operate could adversely affect
manufacturing and our ability to fulfill customer orders. Currently, there is political and
economic unrest in Tunisia where we operate a low-cost manufacturing facility. Although our
manufacturing operation has not been materially affected to date, we can give no assurance that
future operations will not be adversely affected by unforeseen political events in that country;
13
• trade protection measures and import or export licensing requirements, which could increase our
costs of doing business internationally;
• potentially negative consequences from changes in tax laws, which could have an adverse impact
on our profits;
• difficulty in staffing and managing widespread operations, which could reduce our productivity;
• costs of compliance with differing labor regulations, especially in connection with restructuring
our overseas operations;
• 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
• unexpected changes in regulatory requirements, which may be costly and require time to
implement.
• Foreign exchange rate fluctuations could also materially affect our reported results. A portion of
our sales and certain portions of our costs, assets and liabilities are denominated in currencies
other than U.S. dollars and the percentage of our revenues denominated in a particular currency
may not match the percentage of our expenses denominated in that currency. Approximately
44.1% of our sales during the year ended December 31, 2010 were from sales outside of the
U.S. compared to 45.1% for the year ended December 31, 2009. We cannot predict whether
such currencies as the euro, Canadian dollar or Chinese yuan will appreciate or depreciate
against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will
have a positive or negative impact on our reported results.
Our ability to achieve savings through our restructuring plans may be adversely affected by local regulations
or factors beyond the control of management.
We have implemented a number of restructuring plans, the most recent being the announced
shutdown of two manufacturing facilities in North Carolina. Management’s plans include a number of
steps that we believe are necessary to reduce operating costs and increase efficiencies throughout our
manufacturing, sales and distribution footprint. Although we have considered the impact of local
regulations, negotiations with employee representatives, the timing of capital expenditures necessary to
prepare facilities and the related costs associated with these activities, factors beyond the control of
management may affect the timing and therefore affect 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.
Future operating results could be negatively affected by the resolution of various uncertain tax positions and
by potential changes to tax incentives
In the ordinary course of our business, there are many transactions and calculations where the
ultimate tax determination is uncertain. Significant judgment is required in determining our worldwide
provision for income taxes. We periodically assess our exposures related to our worldwide provision for
income taxes and believe that we have appropriately accrued taxes for contingencies. Any reduction of
these contingent liabilities or additional assessment would increase or decrease income, respectively, in
the period such determination was made. Our income tax filings are regularly under audit by tax
authorities and the final determination of tax audits could be materially different than that which is
reflected in historical income tax provisions and accruals. As issues arise during tax audits we adjust
our tax accrual accordingly. Additionally, we benefit from certain tax incentives offered by various
jurisdictions. If we are unable to meet the requirements of such incentives, our inability to use these
benefits could have a material negative effect on future earnings.
14
We are currently a decentralized company, which presents certain risks.
We are currently a decentralized company, which sometimes places significant control and
decision-making powers in the hands of local management. This presents various risks such as the risk
of being slower to identify or react to problems affecting a key business. Additionally, implementing a
company-wide initiative, such as adopting an integrated information system, are often more challenging
and costly to implement.
The requirements to evaluate goodwill and indefinite-lived intangible assets for impairment may result in a
write-off of all or a portion of our recorded amounts, which would negatively affect our operating results and
financial condition.
As of December 31, 2010, our balance sheet included goodwill and indefinite-lived intangible assets
of $428.0 million and $46.6 million, respectively. In lieu of amortization, we are required to perform an
annual impairment review of both goodwill and indefinite-lived intangible assets. In performing our
annual reviews in 2010 and 2009, we recognized a non-cash pre-tax charge of approximately
$1.4 million and $3.3 million, respectively, as an impairment of some of the indefinite-lived intangible
assets. In performing our annual goodwill review in 2008, 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 have not experienced goodwill impairment in our remaining reporting units to date, there
can be no assurances that future goodwill impairment will not occur. We perform our annual test for
indications of goodwill and indefinite-lived intangible assets impairment in the fourth quarter of our
fiscal year or sooner if indicators of impairment exist.
The loss or financial instability of a major customer could have an adverse effect on our results of operations.
In 2010, our top ten customers accounted for approximately 22% of our total net sales with no one
customer accounting for more than 10% of our total net sales. Our customers generally are not
obligated to purchase any minimum volume of products from us and are able to terminate their
relationships with us at any time. In addition, increases in the prices of our products could result in a
reduction in orders for our customers. A significant reduction in orders from, or change in terms of
contracts with, any significant customers could have a material adverse effect on our future results of
operations. Furthermore, some of our major customers are facing financial challenges due to market
declines and heavy debt levels; should these challenges become acute, our results could be materially
adversely affected due to reduced orders and/or payment delays or defaults.
Certain indebtedness may limit our ability to pay dividends, incur additional debt and make acquisitions and
other investments.
Our revolving credit facility and other senior indebtedness contain operational and financial
covenants that restrict our ability to make distributions to stockholders, incur additional debt and make
acquisitions and other investments unless we satisfy certain financial tests and comply with various
financial ratios. If we do not maintain compliance with these covenants, our creditors could declare a
default under our revolving credit facility or senior notes and our indebtedness could be declared
immediately due and payable. Our ability to comply with the provisions of our indebtedness may be
affected by changes in economic or business conditions beyond our control. Further, one of our
strategies is to increase our revenues and profitability and expand our business through acquisitions. We
may require capital in excess of our available cash and the unused portion of our revolving credit
facility to make large acquisitions, which we would generally obtain from access to the credit markets.
There can be no assurance that if a large acquisition is identified that we would have access to
sufficient capital to complete such acquisition. Given the current condition of the credit markets,
should we require additional debt financing above our existing credit limit, we cannot be assured such
financing would be available to us or available to us on reasonable economic terms.
15
We are negotiating with the SEC and DOJ with respect to potential violations of the Foreign Corrupt Practices
Act, and the results of this negotiation could have a material adverse effect on our business prospects,
operations, financial condition and cash flow.
As previously disclosed, we conducted an investigation into payments made by employees of a
former subsidiary of the Company in China to individuals associated with state-owned agencies that
may violate the FCPA. We voluntarily disclosed this matter to the SEC and DOJ. We have engaged in
negotiations with the staff of the SEC and DOJ to resolve potential violations of the FCPA relating to
these payments. If violations are found, we may be subject to criminal and/or civil sanctions, including
substantial fines. Negotiated dispositions of these types of violations also often result in an
acknowledgement of wrongdoing by the entity and the appointment of a monitor on terms agreed upon
with the DOJ and the SEC to review and monitor current and future business practices with the goal
of assuring future FCPA compliance, which could cause us to incur significant costs. The amount of any
fines or monetary penalties which could be assessed would depend on, among other factors, findings
regarding the amount, timing, nature and scope of any improper payments, whether any such payments
were authorized by or made with knowledge of Watts or its affiliates, the amount of gross pecuniary
gain or loss involved, and the level of cooperation provided to the government authorities during the
investigation. Any determination that we have violated the FCPA could result in sanctions that could
have a material adverse effect on our business prospects, operations, financial condition and cash flow.
One of our stockholders can exercise substantial influence over our Company.
Our Class B Common Stock entitles its holders to ten votes for each share and our Class A
Common Stock entitles its holders to one vote per share. As of February 1, 2011, Timothy P. Horne
beneficially owned approximately 19.0% 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 99.3% of our outstanding shares of Class B Common
Stock, which represents approximately 69.4% of the total outstanding voting power. As long as
Mr. Horne controls shares representing at least a majority of the total voting power of our outstanding
stock, Mr. Horne will be able to unilaterally determine the outcome of most stockholder votes, and
other stockholders will not be able to affect the outcome of any such votes.
Conversion and sale of a significant number of shares of our Class B Common Stock could adversely affect
the market price of our Class A Common Stock.
As of February 1, 2011, there were outstanding 30,102,677 shares of our Class A Common Stock
and 6,953,680 shares of our Class B Common Stock. Shares of our Class B Common Stock may be
converted into Class A Common Stock at any time on a one for one basis. Under the terms of a
registration rights agreement with respect to outstanding shares of our Class B Common Stock, the
holders of our Class B Common Stock have rights with respect to the registration of the underlying
Class A Common Stock. Under these registration rights, the holders of Class B Common Stock may
require, on up to two occasions, that we register their shares for public resale. If we are eligible to use
Form S-3 or a similar short-form registration statement, the holders of Class B Common Stock may
require that we register their shares for public resale up to two times per year. If we elect to register
any shares of Class A Common Stock for any public offering, the holders of Class B Common Stock
are entitled to include shares of Class A Common Stock into which such shares of Class B Common
Stock may be converted in such registration. However, we may reduce the number of shares proposed
to be registered in view of market conditions. We will pay all expenses in connection with any
registration, other than underwriting discounts and commissions. If all of the available registered shares
are sold into the public market the trading price of our Class A Common Stock could decline.
Item 1B. UNRESOLVED STAFF COMMENTS.
None.
16
Item 2. PROPERTIES.
As of December 31, 2010, we maintained approximately 32 principal manufacturing, warehouse
and distribution centers worldwide, including our corporate headquarters located in North Andover,
Massachusetts. Additionally, we maintain numerous sales offices and other smaller manufacturing
facilities and warehouses. The principal properties in each of our three geographic segments and their
location, principal use and ownership status are set forth below:
North America:
Location
Principal Use
Owned/Leased
North Andover, MA . . . . . Corporate Headquarters
Burlington, ON, Canada . . Manufacturing/Distribution
Chesnee, SC . . . . . . . . . . . Manufacturing
Dunnellon, FL . . . . . . . . . Warehouse
Export, PA . . . . . . . . . . . . Manufacturing
Fort Myers, FL . . . . . . . . . Manufacturing
Franklin, NH . . . . . . . . . . Manufacturing/Distribution
Kansas City, KS . . . . . . . . Manufacturing
St. Pauls, NC . . . . . . . . . . Manufacturing
San Antonio, TX . . . . . . . Warehouse
Spindale, NC . . . . . . . . . . Manufacturing/Distribution
Calgary, AB, Canada . . . . Distribution Center
Kansas City, MO . . . . . . . Manufacturing/Distribution
Peoria, AZ . . . . . . . . . . . . Manufacturing/Distribution
Reno, NV . . . . . . . . . . . . Distribution Center
Springfield, MO . . . . . . . . Manufacturing/Distribution
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Europe, Middle East and Africa:
Location
Principal Use
Owned/Leased
Eerbeek, Netherlands . . . . European Headquarters/Manufacturing
Biassono, Italy . . . . . . . . . Manufacturing
Brescia, Italy . . . . . . . . . . Manufacturing
Hautvillers, France . . . . . . Manufacturing
Landau, Germany . . . . . . . Manufacturing
Plovdiv, Bulgaria . . . . . . . Manufacturing
Vildjberg, Denmark . . . . . Manufacturing
Gardolo, Italy . . . . . . . . . . Manufacturing
G¨odersdorf, Austria . . . . . Manufacturing
Monastir, Tunisia . . . . . . . Manufacturing
Rosi`eres, France . . . . . . . . Manufacturing
Sorgues, France . . . . . . . . Manufacturing
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Leased
Leased
Leased
China:
Location
Principal Use
Owned/Leased
Shanghai, China . . . . . . . . Asian Headquarters
Ningbo, Beilun Port, China . Distribution Center
Ningbo, Beilun, China . . . . Manufacturing
Taizhou, Yuhuan, China . . Manufacturing
Leased
Leased
Owned
Owned
17
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 are currently operating at levels that our management considers
below normal capacity due to the current worldwide recession. As part of our continuous
manufacturing footprint review, management plans to further consolidate its 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.
18
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 2010 and 2009 and cash dividends paid per share.
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . .
High
$32.85
36.55
35.04
37.12
2010
Low
$27.96
28.12
27.77
32.53
Dividend
High
$0.11
0.11
0.11
0.11
$25.90
22.49
32.36
32.38
2009
Low
$15.76
19.30
19.67
28.15
Dividend
$0.11
0.11
0.11
0.11
There is no established public trading market for our Class B Common Stock, which is held by
members of the Horne family. The principal holders of such stock are subject to restrictions on transfer
with respect to their shares. Each share of our Class B Common Stock (10 votes per share) is
convertible into one share of Class A Common Stock (1 vote per share).
On February 8, 2011, we declared a quarterly dividend of eleven cents ($0.11) per share on each
outstanding share of Class A Common Stock and Class B Common Stock.
Aggregate common stock dividend payments in 2010 were $16.4 million, which consisted of
$13.3 million and $3.1 million for Class A shares and Class B shares, respectively. Aggregate common
stock dividend payments in 2009 were $16.2 million, which consisted of $13.0 million and $3.2 million
for Class A shares and Class B shares, 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 18, 2011 was 170.
The number of record holders of our Class B Common Stock as of February 18, 2011 was 6.
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, 2010.
The following table includes information with respect to repurchases we made of our Class A
Common Stock during the quarter ended December 31, 2010.
Issuer Purchases of Equity Securities
Period
(a) Total
Number of
Shares (or
Units)
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Purchased Share (or Unit) Plans or Programs(1)
(b) Average
Price Paid per
(d) Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs(1)
October 4, 2010 - October 31, 2010 . . . .
November 1, 2010 - November 28, 2010 .
November 29, 2010 - December 31, 2010 .
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, we announced that we had suspended our stock repurchase program. As of
December 31, 2008, we had repurchased 2.45 million shares of stock for a total cost of $68.1 million.
We did not repurchase any shares of stock in 2010 or in 2009.
19
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, 2005
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
$160
$140
$120
$100
$80
$60
$40
$20
$0
12/05
12/06
12/07
12/08
12/09
12/10
Watts Water Technologies, Inc.
S&P 500
Russell 2000
23FEB201113110411
*
$100 invested on 12/31/05 in stock or index, including reinvestment of dividends. Fiscal year ending
December 31.
Cumulative Total Return
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
Watts Water Technologies, Inc . . . . . . . . . . . . . .
S & P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Russell 2000 . . . . . . . . . . . . . . . . . . . . . . . . . .
100.00
100.00
100.00
137.08
115.80
118.37
100.54
122.16
116.51
85.77
76.96
77.15
108.18
97.33
98.11
129.82
111.99
124.46
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.
20
Item 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below should be read in conjunction with our consolidated
financial statements, related Notes thereto and ‘‘Management’s Discussion and Analysis of Financial
Condition and Results of Operations’’ included herein.
FIVE-YEAR FINANCIAL SUMMARY
(Amounts in millions, except per share and cash dividend information)
Year Ended
Year Ended
12/31/10(1)(6) 12/31/09(2)(6) 12/31/08(3)(6) 12/31/07(4)(6) 12/31/06(5)(6)
Year Ended
Year Ended
Year Ended
$1,274.6
$1,225.9
$1,431.4
$1,356.3
$1,211.3
Statement of operations data:
Net sales . . . . . . . . . . . . . . . . . . . . . . . .
Net income from continuing operations
attributable to Watts Water
Technologies, Inc.
. . . . . . . . . . . . . . .
Income (loss) from discontinued
63.1
41.0
operations, net of taxes . . . . . . . . . . . .
(4.3)
(23.6)
Net income attributable to Watts Water
Technologies, Inc.
. . . . . . . . . . . . . . .
58.8
17.4
DILUTED EPS
Income (loss) per share attributable to
Watts Water Technologies, Inc.:
Continuing operations
. . . . . . . . . . . .
Discontinued operations . . . . . . . . . . .
NET INCOME . . . . . . . . . . . . . . . . .
Cash dividends declared per common
1.69
(0.12)
1.57
1.10
(0.63)
0.47
45.2
1.4
46.6
1.23
0.04
1.26
75.7
1.7
77.4
1.94
0.04
1.99
74.6
(0.9)
73.7
2.22
(0.03)
2.19
share . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.44
$
0.44
$
0.44
$
0.40
$
0.36
Balance sheet data (at year end):
Total assets . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, net of current portion . .
$1,646.1
$ 378.0
$1,599.2
$ 304.0
$1,660.1
$ 409.8
$1,729.3
$ 432.2
$1,660.9
$ 441.7
(1) For the year ended December 31, 2010, net income includes the following net pre-tax costs:
intangible impairments, severance costs, asset write-downs and other costs in North America of
$0.2 million, $2.5 million, $1.2 million and $0.4 million respectively; intangible impairments,
severance costs, asset write-downs and other costs in Europe of $1.2 million, $3.0 million,
$1.8 million and $4.4 million respectively; severance costs and other costs in China of $0.2 million
and $0.6 million respectively. Additionally, net income includes a tax charge of $1.5 million, or
$0.04 per share, relating to the repatriation of earnings recognized upon our decision to dispose of
a Chinese subsidiary. The after-tax cost of these items was $11.8 million.
(2) For the year ended December 31, 2009, net income includes the following net pre-tax costs:
intangible impairments, severance costs, asset write-downs and other costs in North America of
$2.6 million, $1.4 million, $2.4 million and $0.4 million respectively; intangible impairments,
severance costs, asset write-downs and other costs in Europe of $0.7 million, $5.2 million,
$0.3 million and $0.4 million respectively; severance costs, asset write-downs and income from the
gain on the sale of Tianjin Tanggu Watts Valve Co. Ltd. (TWT) in China of $1.3 million,
$7.4 million, and $1.1 million respectively. Additionally, net income includes a tax charge of
$3.9 million, or $0.11 per share, relating to previously realized tax benefits, which are expected to
be recaptured as a result of our decision to restructure our operations in China. The after-tax cost
of these items was $20.7 million.
(3) 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
21
$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.
(4) 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.
(5) 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 former 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.
(6) In September 2009, the Company’s Board of Directors approved the sale of its investment in Watts
Valve (Changsha) Co., Ltd. (CWV) and subsequently sold CWV in January 2010. Results from
operation and estimated loss on disposal are included net of tax for CWV in discontinued
operations for 2010, 2009, 2008, 2007 and 2006. In May 2009, the Company liquidated its TEAM
Precision Pipework, Ltd. (TEAM) business. Results from operation and loss on disposal are
included net of tax from the deconsolidation of TEAM in discontinued operations for 2010, 2009,
2008, 2007 and 2006. 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 2010, 2009, 2008, 2007 and 2006 relate to
legal and settlement costs associated with the James Jones Litigation. Discontinued operating
losses for 2010 includes an estimated settlement reserve in connection with the Foreign Corrupt
Practices Act (FCPA) investigation at CWV (see Note 15) and in 2010 and 2009, includes legal
costs associated with the FCPA investigation. Income (loss) for total discontinued operations, net
of taxes, consists of ($4.3) million, ($23.6) million, $1.4 million, $1.7 million and ($0.9) million for
the years ended December 31, 2010, 2009, 2008, 2007 and 2006, respectively.
22
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 a presence in Asia. For over
136 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:
• water quality products, including backflow preventers and check valves for preventing reverse
flow within water lines and fire protection systems and point-of-use and point-of-entry water
filtration and reverse osmosis systems for both commercial and residential applications;
• a wide range of water pressure regulators for both commercial and residential applications;
• drainage products for commercial, industrial, marine and residential applications;
• water supply products for commercial and residential applications;
• temperature and pressure relief valves for water heaters, boilers and associated systems;
• thermostatic mixing valves for tempering water in commercial and residential applications;
• systems for under-floor radiant applications and hydraulic pump groups for gas boiler
manufacturers and renewable energy applications, including thermal control and solar and heat
pump control packages; and
• flexible stainless steel connectors for natural and liquid propane gas in commercial food service
and residential applications.
Our business is reported in three geographic segments: North America, Europe and China. We
distribute our products through three primary distribution channels: wholesale, do-it-yourself (DIY) and
original equipment manufacturers (OEMs).
We believe that the factors relating to our future growth include our ability to continue to make
selective acquisitions, both in our core markets as well as in new complementary markets, regulatory
requirements relating to the quality and conservation of water, safe use of water, increased demand for
clean water, continued enforcement of plumbing and building codes and a healthy economic
environment. We have completed 34 acquisitions since divesting our industrial and oil and gas business
in 1999. Our acquisition strategy focuses on businesses that manufacture preferred brand name
products that address our themes of water quality, water conservation, water safety and water flow
control and related complementary markets. We target businesses that will provide us with one or more
of the following: an entry into new markets, an increase in shelf space with existing customers, a new or
improved technology or an expansion of the breadth of our water quality, water conservation, water
safety and water flow control products for the commercial, industrial and residential markets.
Products representing a majority of our sales are subject to regulatory standards and code
enforcement, which typically require that these products meet stringent performance criteria. Together
with our commissioned manufacturers’ representatives, we have consistently advocated for the
development and enforcement of such plumbing codes. We are focused on maintaining stringent quality
control and testing procedures at each of our manufacturing facilities in order to manufacture products
in compliance with code requirements and take advantage of the resulting demand for compliant
products. We believe that the product development, product testing capability and investment in plant
and equipment needed to manufacture products in compliance with code requirements, represent a
barrier to entry for competitors.
23
Despite a struggling commercial marketplace, low residential activity and some foreign exchange
headwinds, we were able to grow sales organically by 4% and grow income from continuing operations
by 54%. We define organic sales growth as the increase or decrease in sales for the current period
compared to the prior period, excluding the impact of the change in foreign currency exchange, and
excluding sales in the: (1) current period from business and product line acquisitions that are included
in our actual results of operations for less than twelve months, and (2) prior period from business and
product line divestitures that are included in our actual results of operations for the twelve-month
period prior to the divestiture. We saw growth in the repair and remodeling markets throughout the
year, we continued our restructuring programs to right size our manufacturing footprint and we
sustained our continuous improvement initiatives to gain productivity in our operations.
There were two major trends which affected our results during 2010. Stronger first half sales were
partially offset by declines in the second half in the DIY market in North America and OEM market in
Europe. We believe first half sales were enhanced by the anticipated expiration of the home buying
credit in the U.S., some minor inventory restocking within the wholesale and retail channels,
incremental lead-free compliant product sales in California and Vermont, which started in earnest in
the fourth quarter of 2009, and stronger OEM and drain sales in Europe that resulted from heavier
destocking by these customers in the fourth quarter of 2009. Sales grew organically by 7% as compared
to the same period in 2009 in each of the first two quarters of 2010, whereas we experienced a 5%
organic sales increase in the third quarter and a 1% decline in the fourth quarter.
The second major trend we experienced in 2010 was increasing commodity costs, especially with
copper-based materials. The spot price of copper increased by 33.2% from December 31, 2009 to
December 31, 2010. Through productivity gains and some selective pricing, we were able to offset much
of the commodity cost increase. As the year progressed, however, our gross margins were negatively
affected, especially in certain European markets. We have announced plans to increase our pricing in
2011 to customers in most of our key markets in reaction to the increased commodity costs, and, a
number of our competitors have also announced similar price increases. We are not able to determine
whether our 2011 pricing initiatives will be successful in the marketplace.
We continually review our business and implement restructuring plans as needed. We have recently
announced plans in the U.S. and Europe which will shut down and consolidate certain of our
operations. We expect that these announced programs will be completed by the end of 2011. Please see
Note 4 of the Notes to Consolidated Financial Statements for a more detailed explanation of our
restructuring activities.
In March 2010, in connection with our manufacturing footprint consolidation, we closed the
operations of Tianjin Watts Valve Company Ltd. (TWVC) and relocated its manufacturing to other
facilities. On April 12, 2010, we signed a definitive equity transfer agreement with a third party to sell
our equity ownership and remaining assets of TWVC. The sale is now expected to be finalized in the
first quarter of 2011, subject to receiving all applicable government approvals. We expect to receive net
proceeds of approximately $5.9 million from the sale, of which we have already received approximately
$4.3 million in deposits. Also, at the time of closing, we anticipate recognizing a gain of approximately
$11.0 million, or $0.29 per share, relating to a favorable tax adjustment and a favorable cumulative
translation adjustment.
In 2009, our Board of Directors approved the sale of our Watts Valve (Changsha) Co., Ltd.
(CWV) subsidiary. We also liquidated our TEAM Precision Pipework, Ltd. (TEAM) subsidiary through
an administration process under United Kingdom law, as more fully described in Note 3 of Notes to
Consolidated Financial Statements. We classified CWV’s and TEAM’s results of operations and any
related losses as discontinued operations for all periods presented in this report.
24
Acquisitions
During 2010, we made two acquisitions with an estimated aggregate purchase price of
$36.1 million, including the estimated fair value of contingent consideration. We also made a payment
of approximately $0.5 million on an earn-out of a previously acquired company.
On April 13, 2010, we acquired 100% of the outstanding stock of Blue Ridge Atlantic
Enterprises, Inc. (BRAE) located in Oakboro, North Carolina. BRAE is a provider of engineered rain
water harvesting solutions and addresses the commercial, industrial and residential markets. BRAE had
annual sales prior to the acquisition of approximately $2.0 million.
On June 28, 2010, we acquired all of the outstanding stock of Austroflex
Rohr-Isoliersysteme GmbH (Austroflex). Austroflex is an Austrian-based manufacturer of pre-insulated
flexible pipe systems for district heating, solar applications and under-floor radiant heating systems. The
acquisition of Austroflex provides us with a full range of pre-insulated PEX tubing, pre-insulated solar
tubes, under-floor heating insulation, and distribution capability and positions us as a major supplier of
pre-insulated pipe systems in Europe. Austroflex had annual sales prior to the acquisition of
approximately $23.0 million.
The results of operations for BRAE are included in our North America segment and the results of
operations of Austroflex are included in our Europe segment since their respective acquisition dates
and were not material to our consolidated financial statements.
Recent Developments
On February 9, 2011, we announced our intention to acquire Danfoss Socla and the related water
control business of Danfoss A/S. This announcement was made in response to the public disclosure of
related regulatory filings made with German merger control authorities. The proposed acquisition is
subject to the signing of a definitive purchase agreement and is conditioned on the receipt of customary
regulatory approvals. The proposed purchase price is expected to be in the range of A115 million to
A120 million.
On February 8, 2011, we declared a quarterly dividend of eleven cents ($0.11) per share on each
outstanding share of Class A Common Stock and Class B Common Stock.
On February 7, 2011, our Board of Directors elected Merilee Raines to serve as a member of our
Board of Directors. Ms. Raines was also appointed by the Board to serve as a member of each of the
Audit Committee and the Nominating and Corporate Governance Committee of the Board of
Directors.
On February 7, 2011, Kenneth J. McAvoy, one of our directors, informed the Board of his decision
not to stand for re-election at our 2011 annual meeting of stockholders, which will be held on May 11,
2011. Mr. McAvoy advised the Board that his decision was made for personal reasons and was not the
result of any dispute or disagreement with us on any matter relating to our operations, policies or
practices. Mr. McAvoy currently serves as a member of each of the Audit Committee and the
Nominating and Corporate Governance Committee.
Our Corporate Governance Guidelines provide that no member of the Board shall be nominated
by the Board to serve as a director after he has passed his 72nd birthday, unless the Board has voted to
waive the mandatory retirement age of such person as a director. Gordon W. Moran, a member of our
Board, has passed his 72nd birthday, and therefore Mr. Moran will also not stand for re-election at our
2011 annual meeting of stockholders.
On January 26, 2011, Patrick S. O’Keefe resigned from his positions of Chief Executive Officer,
President and Director. In connection with Mr. O’Keefe’s resignation, we entered into a separation
agreement with Mr. O’Keefe. Pursuant to the separation agreement, Mr. O’Keefe will continue
employment with us from January 26, 2011 through August 3, 2011 and during this period he will
receive the greater of either aggregate compensation of $100,000 or short-term disability benefits if his
25
claim under our short-term disability plan is approved. Following the termination of Mr. O’Keefe’s
employment with us on August 3, 2011, Mr. O’Keefe will be entitled to receive the following payments
and benefits: (i) a cash severance payment of approximately $2.9 million, equal to two years of
Mr. O’Keefe’s 2010 annual salary plus two years of bonus at Mr. O’Keefe’s target bonus amount for
2010, payable 50% in an initial lump sum payment within ten days after August 3, 2011 and the
balance in monthly installments over the following 24 months; (ii) accelerated vesting of all unvested
stock options and restricted stock awards (effective February 3, 2011), and an extension in the time of
exercise for the shorter of three years following Mr. O’Keefe’s termination date or the original term of
the option, such modification of his options and restricted stock awards will result in a non-cash charge
of approximately $3.0 million; (iii) other ancillary costs for vacation, auto and professional fees which
total approximately $0.1 million. Total pre-tax costs under the separation agreement are approximately
$6.1 million and will be recorded in our consolidated statement of operations in the first quarter of
2011. In addition, in accordance with the provisions of our Management Stock Purchase Plan
Mr. O’Keefe will be paid the unvested portion, including interest and accrued dividends, of his
restricted stock units six months after his termination date. The total amount expected to be paid under
the Management Stock Purchase Plan is approximately $1.5 million.
On January 26, 2011, our Board of Directors appointed David J. Coghlan to serve as Chief
Executive Officer, President and as a member of our Board of Directors.
On January 4, 2011, the President of United States signed the Reduction of Lead in Drinking Water
Act, which will reduce the permissable weighted average lead content in faucets, fittings and valves used
in potable water applications from 8% to 0.25% nationwide effective in January 2014. The new law is
consistent with current laws in California and Vermont that went into effect in January 2010.
Results of Operations
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Net Sales. Our business is reported in three geographic segments: North America, Europe and
China. Our net sales in each of these segments for the years ended December 31, 2010 and 2009 were
as follows:
Year Ended
December 31, 2010
Year Ended
December 31, 2009
Net Sales
% Sales
Net Sales
% Sales
Change
Change to
Consolidated
Net Sales
(Dollars in millions)
North America . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 785.5
468.3
20.8
61.6% $ 738.5
36.8
466.5
1.6
20.9
60.2% $47.0
1.8
38.1
(0.1)
1.7
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,274.6
100.0% $1,225.9
100.0% $48.7
3.8%
0.2
—
4.0%
The change in net sales was attributable to the following:
North
North
North
America Europe China
Total
America Europe China Total
America Europe China
Change As a %
of Consolidated Net Sales
Change As a %
of Segment Net Sales
Organic . . . . . . . . . .
Foreign exchange . . . .
Acquisitions . . . . . . .
$38.8
7.0
1.2
$ 11.7
(20.5)
10.6
$(0.2) $ 50.3
(13.4)
0.1
— 11.8
(Dollars in millions)
3.2%
0.6
—
1.0% —% 4.2% 5.3%
(1.7) — (1.1)
0.9
—
0.9
0.9
0.2
2.5% (1.0)%
(4.4)
2.3
0.5
—
Total
. . . . . . . . . . . .
$47.0
$ 1.8
$(0.1) $ 48.7
3.8%
0.2% —% 4.0% 6.4%
0.4% (0.5)%
Organic net sales in 2010 into the North American wholesale market increased by 6.1% compared
to 2009. This increase was primarily due to increased unit sales of our plumbing and heating and
26
backflow product lines. Organic sales into the North American DIY market in 2010 increased 2.5%
compared to 2009, primarily from increased product sales volume associated with repair and
remodeling activity and new product introductions.
Organic net sales increased in the European wholesale market by 5.3% compared to 2009. This
increase was primarily due to a stronger repair and remodeling market, strong sales in our drain
product line and higher sales into Eastern Europe. Organic sales into the European OEM market in
2010 were essentially flat with 2009 primarily due to increased sales in hydronic under-floor manifold
packages offset by heat pump and solar packages whose lower sales were driven by renewable energy
subsidies which had expired. Organic sales into the European DIY market in 2010 increased 6.4%
compared to 2009, primarily from initial new store sales to a major retail customer.
The net decrease in sales due to foreign exchange was primarily due to the depreciation of the
euro, partially offset by the appreciation of the Canadian dollar against the U.S. dollar. We cannot
predict whether these currencies will continue to appreciate or depreciate against the U.S. dollar in
future periods or whether future foreign exchange rate fluctuations will have a positive or negative
impact on our net sales.
Acquired net sales growth in Europe and North America was due to the inclusion of Austroflex
and BRAE, respectively.
Gross Profit. Gross profit and gross profit as a percent of net sales (gross margin) for 2010 and
2009 were as follows:
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
December 31,
2010
2009
(Dollars in millions)
$464.9
$435.1
36.5%
35.5%
Gross margin increased 1.0 percentage point in 2010 compared to 2009. North America’s gross
margin improvement was primarily attributable to increased sales volumes, better absorption at the
factories and productivity gains from our Lean and Six Sigma cost savings initiatives, partially offset by
increased raw materials costs and inefficiencies due to the relocation of manufacturing operations
related to our restructuring program in the U.S. Europe’s gross margin remained relatively flat as
better product mix, with the discontinuance of various low-margin products, increased sales volumes
and better absorption at the factories was offset by increased commodity costs and inefficiencies from
our restructuring program in France.
Selling, General and Administrative Expenses. Selling, general and administrative expenses, or
SG&A expenses, for 2010 increased $13.2 million, or 4.1%, compared to 2009. The increase in SG&A
expenses was attributable to the following:
Organic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12.4
(3.3)
4.1
$13.2
3.8%
(1.0)
1.3
4.1%
(in millions)
% Change
The organic increase in SG&A expenses was primarily due to increased personnel-related costs,
due diligence and other acquisition costs, IT costs, including a new enterprise resource planning system
(ERP system) and related licensing costs, legal costs and increased variable selling expenses due to
higher sales volumes, partially offset by reduced product liability costs. The decrease in SG&A expenses
27
from foreign exchange was primarily due to the depreciation of the euro against the U.S. dollar. Total
SG&A expenses, as a percentage of sales, remained constant at 26.4% in each of 2010 and 2009.
Restructuring and Other Charges.
In 2010, we recorded a charge of $12.6 million primarily for
severance and other costs incurred as part of our previously announced restructuring programs, as
compared to $16.1 million for 2009. Included in the 2009 restructuring and other charges was a
$1.1 million gain from the 2008 disposition of Tianjin Tanggu Watts Valve Co. Ltd. (TWT). The gain
was deferred until all legal and regulatory matters relating to the sale of TWT were resolved. For a
more detailed description of our current restructuring plans, see Notes 4 and 5 of Notes to
Consolidated Financial Statements in this Annual Report on Form 10-K.
Goodwill and Other Indefinite-Lived Intangible Asset Impairment Charges. We recorded $1.4 million
and $3.3 million in 2010 and 2009, respectively, for intangible impairment charges related to certain
trademarks and technology. See Note 2 of Notes to Consolidated Financial Statements in this Annual
Report on Form 10-K, for additional information regarding these impairments.
Operating Income. Operating income by geographic segment for 2010 and 2009 was as follows:
Year Ended
December 31,
2010
December 31,
2009
Change
% Change to
Consolidated
Operating
Income
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$106.4
43.7
(0.5)
(35.4)
$114.2
(Dollars in millions)
$ 78.6
51.0
(6.6)
(30.8)
$27.8
(7.3)
6.1
(4.6)
$ 92.2
$22.0
30.2%
(7.9)
6.6
(5.0)
23.9%
The change in operating income was attributable to the following:
North
North
North
America Europe China Corp. Total America Europe China Corp. Total America Europe China
Corp.
. . . . .
$24.7
$ 0.5
$(0.7) $(4.8) $19.7
26.8% 0.5% (0.7)% (5.2)% 21.4% 31.4%
1.0% (10.6)% 15.6%
(Dollars in millions)
Change as a % of
Consolidated Operating Income
Change as a % of
Segment Operating Income
Organic
Foreign
exchange . . .
Acquisitions . . .
Restructuring,
goodwill and
other . . . . . .
1.4
(0.6)
(2.6)
(1.4)
—
—
— (1.2)
— (2.0)
1.5
(0.7)
(2.8)
(1.5)
—
—
— (1.3)
— (2.2)
1.8
(0.7)
(5.1)
(2.7)
—
—
—
—
2.3
(3.8)
6.8
0.2
5.5
2.6
(4.1)
7.3
0.2
6.0
2.9
(7.5)
103.0
(0.7)
Total
. . . . . . .
$27.8
$(7.3)
$ 6.1
$(4.6) $22.0
30.2% (7.9)% 6.6% (5.0)% 23.9% 35.4% (14.3)% 92.4% 14.9%
The increase in consolidated organic operating income was due primarily to increased unit volume
sales and stronger gross margins, partially offset by increased SG&A expenses. The North America
margin increase was primarily due to increased sales volumes, better factory absorption levels and the
impact of cost savings initiatives. In 2009, our corporate segment recorded the recovery of past legal
expenses, which did not re-occur in 2010.
The net decrease in operating income from foreign exchange was primarily due to the depreciation
of the euro against the U.S. dollar, partially offset by the appreciation of the Canadian dollar against
the U.S. dollar. We cannot predict whether these currencies will appreciate or depreciate against the
U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or
negative impact on our operating income.
28
Interest Expense.
Interest expense increased $0.8 million, or 3.6%, in 2010 compared to 2009,
primarily due to the issuance of the $75.0 million of senior notes and higher facility fees on our new
revolving credit agreement partially offset by the payment of our $50.0 million of outstanding notes.
See Note 11 of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, for
additional information regarding financing arrangements.
Other, net. Other, net increased $0.9 million, or 75.0%, in 2010 compared to 2009, primarily
because foreign currency transactions resulted in net gains in 2010, while in 2009 net losses were
recognized.
Income Taxes. Our effective tax rate for continuing operations decreased to 33.2% in 2010 from
43.3% in 2009. The decrease was primarily due to reversal of a valuation allowance in Europe recorded
during 2010. Also, in 2009 we had a significant write-down of assets at one of our Chinese facilities on
which we derived no tax benefit. Additionally, we recorded the reversal of previously recognized tax
benefits in China in 2009. These China-related items did not recur in 2010. This favorable impact was
partially offset by higher European taxes due to mix of income by country and recognition of tax
expense for the repatriation of earnings of TWVC in China upon our decision to dispose of the entity.
Net Income From Continuing Operations attributable to Watts Water Technologies, Inc. Net income
from continuing operations for 2010 was $63.1 million, or $1.69 per common share, compared to
$41.0 million, or $1.10 per common share, for 2009. Results for 2010 include an after-tax charge of
$11.2 million, or $0.29 per common share, for restructuring and other charges related primarily to
severance and accelerated depreciation compared to an after-tax restructuring and other charge of
$18.1 million, or $0.49 per common share, for 2009. The release of the valuation allowance on net
operating losses in Europe as noted above contributed a tax benefit of $0.08 per common share to
2010. Results for 2010 and 2009 included a non-cash net after-tax charge of $0.9 million, or $0.03 per
share, and $2.6 million, or $0.07 per share, respectively, to write off certain intangible assets. The
depreciation of the euro, partially offset by the appreciation of Canadian dollar against the U.S. dollar,
resulted in a negative impact on our operations of $0.04 per common share for 2010 compared to the
comparable period in 2009. We cannot predict whether the euro, Canadian dollar or Chinese yuan will
appreciate or depreciate against the U.S. dollar in future periods or whether future foreign exchange
rate fluctuations will have a positive or negative impact on our net income.
Income (Loss) From Discontinued Operations. The loss from discontinued operations in 2010 was
primarily attributable to estimated profits disgorgement and legal costs related to the FCPA
investigation of our former subsidiary in China. The loss from discontinued operations in 2009 was
primarily attributable to the deconsolidation of TEAM and the loss on the disposal and loss from
operations of CWV offset by the resolution of the James Jones Litigation as described in Note 3 of
Notes to Consolidated Financial Statements.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net Sales. Our net sales in each of these segments for the years ended December 31, 2009 and
2008 were as follows:
Year Ended
December 31, 2009
Year Ended
December 31, 2008
Net Sales
% Sales
Net Sales
% Sales
Change
Change to
Consolidated
Net Sales
(Dollars in millions)
North America . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 738.5
466.5
20.9
60.2% $ 866.2
38.1
532.0
1.7
33.2
60.5% $(127.7)
(65.5)
37.2
(12.3)
2.3
(8.9)%
(4.6)
(0.9)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,225.9
100.0% $1,431.4
100.0% $(205.5)
(14.4)%
29
The change in net sales was attributable to the following:
North
North
North
America Europe China
Total
America Europe China
Total
America Europe China
Change As a % of
Consolidated Net Sales
Change As a % of
Segment Net Sales
Organic . . . . . . . . . . . . . . $(123.1)
(4.6)
Foreign exchange . . . . . . . .
—
Acquisitions
. . . . . . . . . . .
—
Disposal . . . . . . . . . . . . . .
(Dollars in millions)
(8.6)% (5.3)% (0.4)% (14.3)% (14.2)% (14.2)% (17.2)%
$(75.3) $ (5.7) $(204.1)
(0.3)
(22.0)
0.3
(17.7)
27.5
—
27.5
—
(6.9) —
(6.9)
—
0.9
(3.3)
5.2
—
— (20.7)
(1.5)
1.9
(0.5)
(1.2)
1.9
—
—
—
(0.5)
(0.5)
—
—
Total . . . . . . . . . . . . . . . . $(127.7)
$(65.5) $(12.3) $(205.5)
(8.9)% (4.6)% (0.9)% (14.4)% (14.7)% (12.3)% (37.0)%
The organic decline in net sales in North America was primarily due to decreased unit sales of our
plumbing and heating, backflow and gas connector product lines. Organic sales into the North
American wholesale market in 2009 declined by 17.9% compared to 2008. This was primarily due to
decreased unit sales across most of our product lines. Organic sales into the North American DIY
market in 2009 increased 0.6% compared to 2008 primarily due to incremental product line penetration
at certain retail customers and selected market share gains being offset by lower sales to certain
customers.
Organic net sales declined in Europe primarily due to decreased sales in the European wholesale
and OEM markets. Our sales into the European wholesale market in 2009 decreased by 13.5% and our
sales into the European OEM market decreased by 15.7% compared to 2008 primarily due to the
markets in Italy and Germany being soft. Acquired sales growth in Europe was due to the inclusion of
Bl¨ucher Metal A/S (Bl¨ucher), which was acquired on May 30, 2008.
Organic net sales declined in China primarily due to decreased sales in the Chinese export
markets. China sales were also negatively affected as compared to 2008 from the disposal of TWT
during the fourth quarter of 2008.
The decreases in net sales due to foreign exchange in North America and Europe were primarily
due to the depreciation of the Canadian dollar and the euro, respectively, against the U.S. dollar.
Gross Profit. Gross profit and gross profit as a percent of net sales (gross margin) for 2009 and
2008 were as follows:
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
December 31,
2009
2008
(Dollars in millions)
$435.1
$481.8
35.5%
33.7%
Gross profit declined due to decreased sales volume, partially offset by increased gross margin.
Gross margin increased by 180 basis points in 2009 compared to 2008 primarily due to lower raw
material costs and fewer acquisition charges. Our European gross margin increased in 2009 compared
to 2008 primarily due to the inclusion of higher margin Bl¨ucher sales and reduced acquisition costs,
offset partially by plant under-absorption. Our China segment’s gross margin increased as a result of
operational improvements at one of our more significant facilities and the divestiture of TWT. Our
North American margin also increased for 2009 when compared to 2008 due to lower raw material
costs and cost savings initiatives offset by recessionary unit volume sales declines and plant under
absorption.
30
Selling, General and Administrative Expenses. SG&A expenses for 2009 decreased $32.1 million, or
9.0%, compared to 2008. The decrease in SG&A expenses was attributable to the following:
Organic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(31.1)
(4.7)
9.0
(5.3)
$(32.1)
(8.7)%
(1.3)
2.5
(1.5)
(9.0)%
(in millions) % Change
The organic decrease in SG&A expenses was primarily due to decreased variable selling expenses
due to decreased sales, various cost savings measures, lower product liability costs and the net
settlement of two lawsuits, partially offset by increased legal and pension expenses. The decrease in
SG&A expenses from foreign exchange was primarily due to the depreciation of the euro against the
U.S. dollar and to a lesser extent the Canadian dollar against the U.S. dollar. The increase in SG&A
expenses from acquisitions was due to the inclusion of Bl¨ucher. The reduction due to the disposal
relates to the sale of TWT. Total SG&A expenses, as a percentage of sales, were 26.4% in 2009
compared to 24.8% in 2008.
Restructuring and Other Charges.
In 2009, we recorded a net charge of $16.1 million primarily for
asset impairments, severance and relocation costs in North America, Europe and China. Included in
the 2009 restructuring and other charges was a $1.1 million gain from the 2008 disposition of TWT.
The gain was deferred until all legal and regulatory matters relating to the sale of TWT were resolved.
In 2008, we recorded $5.6 million for severance and relocation costs in North America and China. See
Note 4 of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, for
additional information regarding our restructuring plans.
Goodwill and Other Indefinite-Lived Intangible Asset Impairment Charges. We recorded $3.3 million
in 2009 for intangible impairment charges related to certain trademarks and technology. The goodwill
impairment charge in 2008 of approximately $22.0 million related to our water quality business unit in
North America. See Note 2 of Notes to Consolidated Financial Statements in this Annual Report on
Form 10-K, for additional information regarding these impairments.
Operating Income. Operating income by geographic segment for 2009 and 2008 was as follows:
Years Ended
December 31,
2009
December 31,
2008
Change
% Change to
Consolidated
Operating
Income
11.0%
(14.9)
1.1
(3.7)
(Dollars in millions)
$ 67.8
65.7
(7.7)
(27.2)
$ 10.8
(14.7)
1.1
(3.6)
$ 98.6
$ (6.4)
(6.5)%
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 78.6
51.0
(6.6)
(30.8)
$ 92.2
31
The change in operating income was attributable to the following:
Change as a % of
Consolidated Operating Income
Change as a % of
Segment Operating Income
North
North
North
America Europe China Corp. Total America Europe China Corp. Total America Europe China Corp.
$ (8.2)
$ (9.4) $ 1.6
$(3.4) $(19.4)
(8.3)% (9.5)% 1.6% (3.5)% (19.7)% (12.1)% (14.4)% 20.8% (12.5)%
(Dollars in millions)
(0.7)
—
—
(1.3) —
—
2.4
5.8
—
— (2.0)
2.4
—
5.8
—
(0.7)
—
—
(1.3) —
—
2.4
5.9
—
—
—
—
(2.0)
2.4
5.9
(1.0)
—
—
(2.0)
3.7
—
—
—
75.3
—
—
—
19.7
(6.4)
(6.3)
(0.2)
6.8
20.0
(6.5)
(6.4)
(0.2)
6.9
29.1
(9.7)
(81.8)
(0.7)
Organic . . . . .
Foreign
exchange . . .
Acquisitions . . .
Disposal
. . . . .
Restructuring,
goodwill
and other . . .
Total
. . . . . . .
$10.8
$(14.7) $ 1.1
$(3.6) $ (6.4)
11.0% (14.9)% 1.1% (3.7)% (6.5)% 16.0% (22.4)% (14.3)% (13.2)%
The decrease in consolidated organic operating income was due primarily to recessionary unit
volume sales declines partially offset by stronger gross margins from lower raw material costs and from
reductions in variable SG&A expenses such as commissions and shipping costs and from cost savings
derived from various cost reduction programs. Corporate costs increased due to increased legal and
pension costs, partially offset by the recovery of past legal expenses. The Bl¨ucher acquisition accounts
for the net increase in operating profits from acquisitions. China’s improved organic operating profit
was due to operational improvements at one of our more significant facilities. China’s operating profit
from disposal was due to the divestiture of TWT.
The net decrease in operating income from foreign exchange was primarily due to the depreciation
of the euro against the U.S. dollar and, to a lesser extent, the Canadian dollar against the U.S. dollar.
Interest Income.
Interest income decreased $4.2 million, or 82.4%, in 2009 compared to 2008.
This decrease was primarily a result of lower market interest rates.
Interest Expense.
Interest expense decreased $4.2 million, or 16.0%, in 2009 compared to 2008,
primarily due to a decrease in the average variable rates charged on the revolving credit facility and to
a reduction in the amounts outstanding under the revolving credit facility.
Other (Income) Expense. Other expense decreased $10.7 million in 2009 compared to 2008,
primarily because foreign currency transactions resulted in gains in 2009, while in 2008 losses were
realized as a result of foreign currency movements primarily in Europe.
Income Taxes. Our effective rate for continuing operations increased to 43.3% in 2009 from
36.3% in 2008. The increase was primarily due to previously realized tax benefits in China, which are
expected to be recaptured as a result of our decision to restructure our operations and intangible asset
impairments that were not tax deductible. In North America, less tax-exempt interest income was
generated in 2009 as compared with 2008.
Net Income From Continuing Operations attributable to Watts Water Technologies, Inc. Net income
from continuing operations attributable to Watts Water Technologies, Inc. in 2009 was $41.0 million, or
$1.10 per common share, compared to $45.2 million, or $1.23 per common share, in 2008. Results for
2009 included after-tax charges totaling $18.1 million, or $0.49 per share, related to restructuring
programs compared to an after-tax charge of $3.9 million, or $0.10 per share, for 2008. Also, results for
2009 included a non-cash net after-tax charge of $2.6 million, or $0.07 per share, to write off certain
intangible assets. In 2008, net loss and loss from continuing operations attributable to Watts Water
Technologies, Inc. included a non-cash after-tax charge of $17.3 million, or $0.47 per share, to write-off
goodwill for one reporting unit. The depreciation of the euro and Canadian dollar against the U.S.
dollar resulted in a negative impact on our operations of $0.03 per common share in 2009 compared
to 2008.
32
Income (Loss) From Discontinued Operations. The income (loss) from discontinued operations was
primarily attributable to the deconsolidation of TEAM, the loss on the disposal and loss from
operations of CWV and legal costs related to the FCPA investigation offset by the resolution of the
James Jones Litigation as described in Note 3 of Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
2010 Cash Flows
In 2010, we generated $113.4 million of cash from operating activities as compared to
$204.6 million in 2009. We generated approximately $91.0 million of free cash flow (a non-GAAP
financial measure, which we reconcile below, defined as net cash provided by continuing operating
activities minus capital expenditures plus proceeds from sale of assets), compared to free cash flow of
$181.2 million in 2009. Free cash flow as a percentage of net income from continuing operations
attributable to Watts Water Technologies, Inc. was 144.2% in 2010 as compared to 442.0% in 2009. The
2009 free cash flow results were affected by the reduction of investment in accounts receivable and
inventory driven by the worldwide recession. This is the third consecutive year that we generated free
cash flows in excess of net income.
In 2010, we used $57.2 million of net cash from investing activities primarily for the purchase of
Austroflex and for capital equipment. We expect to invest approximately $30.0 million in capital
equipment in 2011 as part of our ongoing commitment to improve our manufacturing capabilities. We
elected to participate in a settlement offer from UBS, AG (UBS) for all of our outstanding auction
rate securities (ARS) investments. Under the terms of the settlement offer, we were issued rights by
UBS entitling the holder to require UBS to purchase the underlying ARS at par value during the
period from June 30, 2010, through July 2, 2012. We elected to exercise this right in 2010 and received
$6.5 million from UBS in settlement of all outstanding ARS investments. In addition, during 2010, we
invested in nine-month certificates of deposits totaling approximately $4.0 million.
In 2010, we generated $6.9 million of net cash from financing activities primarily from issuing
$75.0 million, 10-year private placement notes in June (the Notes), partially offset by the repayment of
$50.0 million in private placement notes and $16.4 million of dividend payments.
The Notes were issued pursuant to a Note Purchase Agreement (the 2010 Note Purchase
Agreement). We will pay interest on the outstanding balance of the Notes at the rate of 5.05% per
annum, payable semi-annually on June 18 and December 18 until the principal on the Notes shall
become due and payable. We may, at our option, upon notice, subject to the terms of the 2010 Note
Purchase Agreement, prepay at any time all or part of the Notes in an amount not less than $1 million
by paying the principal amount plus a make-whole amount (as defined in the 2010 Note Purchase
Agreement).
The 2010 Note Purchase Agreement includes operational and financial covenants, with which we
are required to comply, including, among others, maintenance of certain financial ratios and restrictions
on additional indebtedness, liens and dispositions. Events of defaults under the 2010 Note Purchase
Agreement include failure to comply with the financial and operational covenants, as well as
bankruptcy and other insolvency events. If an event of default occurs and is continuing, then a majority
of the note holders have the right to accelerate and require us to repay all the outstanding notes under
the 2010 Note Purchase Agreement. In limited circumstances, such acceleration is automatic. As of
December 31, 2010 we were in compliance with all covenants related to the 2010 Note Purchase
Agreement.
On June 18, 2010, we entered into a credit agreement (the Credit Agreement) among the
Company, certain subsidiaries of the Company who become borrowers under the Credit Agreement,
Bank of America, N.A., as Administrative Agent, swing line lender and letter of credit issuer, and the
other lenders referred to therein. The Credit Agreement provides for a $300 million, five-year, senior
unsecured revolving credit facility which may be increased by an additional $150 million under certain
33
circumstances and subject to the terms of the Credit Agreement. The Credit Agreement has a sublimit
of up to $75 million in letters of credit.
Borrowings outstanding under the Credit Agreement bear interest at a fluctuating rate per annum
equal to (i) in the case of Eurocurrency rate loans, the British Bankers Association LIBOR rate plus
an applicable percentage, ranging from 1.70% to 2.30%, determined by reference to our consolidated
leverage ratio plus, in the case of certain lenders, a mandatory cost calculated in accordance with the
terms of the Credit Agreement, or (ii) in the case of base rate loans and swing line loans, the highest
of (a) the federal funds rate plus 0.5%, (b) the rate of interest in effect for such day as announced by
Bank of America, N.A. as its ‘‘prime rate,’’ and (c) the British Bankers Association LIBOR rate plus
1.0%, plus an applicable percentage, ranging from 0.70% to 1.30%, determined by reference to our
consolidated leverage ratio. In addition to paying interest under the Credit Agreement, we are also
required to pay certain fees in connection with the credit facility, including, but not limited to, a facility
fee and letter of credit fees.
The Credit Agreement matures on June 18, 2015. We may repay loans outstanding under the
Credit Agreement from time to time without premium or penalty, other than customary breakage costs,
if any, and subject to the terms of the Credit Agreement.
Covenant compliance
Under the Credit Agreement, we are required to satisfy and maintain specified financial ratios and
other financial condition tests. The financial ratios include a consolidated interest coverage ratio based
on consolidated earnings before income taxes, interest expense, depreciation, and amortization
(Consolidated EBITDA) to consolidated interest expense, as defined in the Credit Agreement. Our
Credit Agreement defines Consolidated EBITDA to exclude unusual or non-recurring charges and
gains. We are also required to maintain a consolidated leverage ratio of consolidated funded debt to
Consolidated EBITDA. Consolidated funded debt, as defined in the Credit Agreement, includes all
long and short-term debt, capital lease obligations and any trade letters of credit that are outstanding.
Finally, we are required to maintain a consolidated net worth that exceeds a minimum net worth
calculation. Consolidated net worth is defined as the total stockholders’ equity as reported adjusted for
any cumulative translation adjustments and goodwill impairments.
As of December 31, 2010, our actual financial ratios calculated in accordance with our Credit
Agreement compared to the required levels under the Credit Agreement were as follows:
Actual Ratio
Required Level
Minimum level
Interest Charge Coverage Ratio . . . . . . . . . . . . . .
7.30 to 1.00
3.50 to 1.00
Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . .
0.64 to 1.00
3.25 to 1.00
Maximum level
Minimum level
Consolidated Net Worth . . . . . . . . . . . . . . . . . . .
$906.1 million
$716.8 million
As of December 31, 2010, our actual financial ratio calculated in accordance with our senior note
agreements compared to the required ratios therein was as follows:
Fixed Charge Coverage Ratio . . . . . . . . . . . . . . . .
5.33 to 1.00
2.00 to 1.00
In addition to the above financial ratios, the Credit Agreement and senior note agreements contain
affirmative and negative covenants that include limitations on disposition or sale of assets, prohibitions
Actual Ratio
Required Level
Minimum level
34
on assuming or incurring any liens on assets with limited exceptions and limitations on making
investments other than those permitted by the agreements.
We have several note agreements as further detailed in Note 11 of Notes to Consolidated
Financial Statements. These note agreements require us to maintain a fixed charge coverage ratio of
consolidated EBITDA plus consolidated rent expense during the period to consolidated fixed charges.
Consolidated fixed charges are the sum of consolidated interest expense for the period and
consolidated rent expense.
As of December 31, 2010, we were in compliance with all covenants related to the Credit
Agreement and had $265.3 million of unused and available credit under the Credit Agreement and
$34.7 million of stand-by letters of credit outstanding on the Credit Agreement. There were no
borrowings under the Credit Agreement at December 31, 2010.
We generated $5.5 million of net cash from operating activities of discontinued operations in 2010
primarily due to realization of a tax deduction related to the James Jones settlement.
We generated $5.1 million of net cash from investing activities of discontinued operations in 2010
primarily from cash received from the sale of CWV.
Working capital (defined as current assets less current liabilities) as December 31, 2010 was
$578.4 million compared to $489.8 million as of December 31, 2009. The increase was primarily due to
a cash increase driven by higher operating earnings and net cash received through debt issuance and
retirement. The ratio of current assets to current liabilities was 3.1 to 1 as of December 31, 2010
compared to 2.6 to 1 as of December 31, 2009.
2009 Cash Flows
In 2009, we generated $204.6 million of cash from operating activities as compared to
$145.0 million in 2008. We generated approximately $181.2 million of free cash flow, which compares
favorably to free cash flow of $119.9 million in 2008. Free cash flow as a percentage of net income
from continuing operations attributable to Watts Water Technologies, Inc. was 442.0% in 2009 as
compared to 265.3% in 2008 primarily due to better working capital management, temporary decreases
in commodity costs, cost containment measures and careful monitoring of our capital spending.
In 2009, we used $21.3 million of net cash from investing activities primarily for purchases of
capital equipment. We received proceeds of $1.7 million from the sale of auction rate securities. We
received $1.1 million of cash for a purchase price settlement related to a prior-year acquisition. We
paid $0.4 million for earn-out payments related to an acquisition from prior years.
As of December 31, 2009, we held $5.4 million in investments in ARS with a total par value of
$6.6 million. These auction rate securities were all long-term debt obligations secured by municipal
bonds and student loans. During the fourth quarter of 2008, we elected to participate in a settlement
offer by UBS. We exercised our rights under the settlement in June 2010 as previously discussed.
We used $77.2 million of net cash from financing activities during 2009. This was primarily due to
payments of debt and dividend payments.
We used $21.2 million of net cash from operating activities of discontinued operations in 2009
primarily due to the settlement of $15.3 million related to the James Jones litigation. In addition,
separate from the settlement, we paid our outside counsel an additional $5.0 million for services
rendered in connection with the litigation.
We used $0.3 million of net cash from investing activities of discontinued operations in 2009
primarily due to purchasing capital equipment.
35
2008 Cash Flows
In 2008, we generated $145.0 million of cash from operating activities as compared to $90.0 million
in 2007. With management’s enhanced focus in 2008 on working capital management, net working
capital cash outflows decreased from $22.8 million in 2007, to a net working capital cash inflow of
$45.5 million in 2008, a $68.3 million positive change. Better overall management of our inventory,
accounts receivable and accounts payable drove the improvement in working capital. This change was
offset to some extent by lower income from continuing operations.
We used $170.0 million of net cash for investing activities in 2008. We used approximately
$167.9 million of net cash to fund the acquisition of Bl¨ucher and we spent $7.6 million for acquisition
costs related to prior years acquisitions. We received proceeds of $33.3 million from the sale of auction
rate securities. We invested $26.2 million in capital equipment as part of our ongoing commitment to
improve our manufacturing capabilities.
We used $92.4 million of net cash from financing activities in 2008. This was primarily due to
payments for our stock repurchase program, payments of debt and dividend payments, partially offset
by increased borrowings under our line of credit.
We generated $0.8 million of net cash from operating activities of discontinued operations in 2008
primarily attributable to TEAM and CWV partially offset by approximately $1.2 million for defense
and other legal costs we incurred in the James Jones Litigation. We also received $1.3 million for
reimbursements of defense costs.
We used $2.2 million of net cash from investing activities of discontinued operations in 2008
primarily due to acquisition costs related to TEAM and to purchase capital equipment.
Non-GAAP Financial Measures
Our net debt to capitalization ratio (a non-GAAP financial measure, as reconciled below, defined
as short and long-term interest-bearing liabilities less cash and cash equivalents as a percentage of the
sum of short and long term interest-bearing liabilities less cash and cash equivalents plus total
stockholders’ equity) decreased to 5.2% for 2010 from 9.9% for 2009. The decrease resulted from
increased cash partially offset by increased long-term debt.
We believe free cash flow to be an appropriate supplemental measure of our operating
performance because it provides investors with a measure of our ability to generate cash, to repay debt
and to fund acquisitions. Other companies may define free cash flow differently. Free cash flow does
not represent cash generated from operating activities in accordance with GAAP. Therefore it should
not be considered an alternative to net cash provided by operations as an indication of our
performance. Free cash flow should also not be considered an alternative to net cash provided by
operations as defined by GAAP. The cash conversion rate of free cash flow to net income from
continuing operations is also a measure of our performance in cash flow generation.
36
A reconciliation of net cash provided by continuing operations to free cash flow and calculation of
our cash conversion rate is provided below:
Net cash provided by continuing operations . . . . . . . . .
Less: additions to property, plant, and equipment . . . . .
Plus: proceeds from the sale of property, plant, and
Years Ended December 31,
2010
2009
2008
$113.4
(24.6)
(in millions)
$204.6
(24.2)
$145.0
(26.2)
equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.2
0.8
1.1
Free cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 91.0
$181.2
$119.9
Net income from continuing operations attributable to
Watts Water Technologies, Inc—as reported . . . . . . .
$ 63.1
$ 41.0
$ 45.2
Cash conversion rate of free cash flow to net income
from continuing operation . . . . . . . . . . . . . . . . . . . .
144.2% 442.0% 265.3%
The 2009 free cash flow results were driven by the worldwide recession, which caused a reduction
of investment in accounts receivable and inventory.
Our net debt to capitalization ratio is also a non-GAAP financial measure used by management.
Management believes it to be an appropriate supplemental measure because it helps investors
understand our ability to meet our financing needs and as a basis to evaluate our financial structure.
Our computation may not be comparable to other companies that may define net debt to capitalization
differently.
A reconciliation of long-term debt (including current portion) to net debt and our net debt to
capitalization ratio is provided below:
December 31,
2010
2009
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . .
Plus: long-term debt, net of current portion . . . . . . . . . . . . . . .
Less: cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .
$
(in millions)
0.7
378.0
(329.2)
$ 50.9
304.0
(258.2)
Net debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 49.5
$ 96.7
A reconciliation of capitalization is provided below:
Net debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2010
2009
(in millions)
$ 49.5
901.5
$951.0
$ 96.7
879.6
$976.3
Net debt to capitalization ratio . . . . . . . . . . . . . . . . . . . . . . . . .
5.2%
9.9%
37
Contractual Obligations
Our contractual obligations as of December 31, 2010 are presented in the following table:
Contractual Obligations
Payments Due by Period
Total
Less than
1 year
1-3 years
3-5 years
(in millions)
More than
5 years
Long-term debt obligations, including current
maturities(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . . . . . . . . .
Capital lease obligations(a) . . . . . . . . . . . . . . . . . . .
Pension contributions(b) . . . . . . . . . . . . . . . . . . . . .
Interest(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnout payments(a) . . . . . . . . . . . . . . . . . . . . . . .
Other(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$378.7
29.3
11.6
31.0
121.1
2.4
40.4
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$614.5
$ 0.7
8.2
1.2
10.7
21.6
0.5
33.7
$76.6
$ 76.4
11.4
2.3
6.5
40.8
—
4.5
$141.9
$ 1.5
6.6
2.4
1.9
34.5
1.9
1.2
$50.0
$300.1
3.1
5.7
11.9
24.2
—
1.0
$346.0
(a) as recognized in the consolidated balance sheet
(b) expected pension contributions include amounts to fully fund the defined benefit pension plan
through 2012. Potential funding for service costs beyond 2012 are not included in contractual
obligations. Those costs are currently estimated at $5.0 million per year.
(c) assumes no borrowings against the Credit Agreement
(d) includes commodity, capital expenditure commitments and other benefits at December 31, 2010
We maintain letters of credit that guarantee our performance or payment to third parties in
accordance with specified terms and conditions. Amounts outstanding were approximately $34.9 million
as of December 31, 2010 and $37.0 million as of December 31, 2009. Our letters of credit are primarily
associated with insurance coverage and, to a lesser extent, foreign purchases and generally expire within
one year of issuance. These instruments may exist or expire without being drawn down, therefore they
do not necessarily represent future cash flow obligations.
Off-Balance Sheet Arrangements
Except for operating lease commitments, we have no off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
Application of Critical Accounting Policies and Key Estimates
The preparation of our consolidated financial statements in accordance with U.S. GAAP requires
management to make judgments, assumptions and estimates that affect the amounts reported. A critical
accounting estimate is an assumption about highly uncertain matters and could have a material effect
on the consolidated financial statements if another, also reasonable, amount were used, or, a change in
the estimate is reasonably likely from period to period. We base our assumptions on historical
experience and on other estimates that we believe are reasonable under the circumstances. Actual
results could differ significantly from these estimates. There were no changes in our accounting policies
or significant changes in our accounting estimates during 2010.
We periodically discuss the development, selection and disclosure of the estimates with our Audit
Committee. Management believes the following critical accounting policies reflect its more significant
estimates and assumptions.
38
Revenue recognition
We recognize revenue when all of the following criteria are met: (1) we have entered into a
binding agreement, (2) the product has shipped and title has passed, (3) the sales price to the customer
is fixed or is determinable and (4) collectability is reasonably assured. We recognize revenue based
upon a determination that all criteria for revenue recognition have been met, which, based on the
majority of our shipping terms, is considered to have occurred upon shipment of the finished product.
Some shipping terms require the goods to be received by the customer before title passes. In those
instances, revenues are not recognized until the customer has received the goods. We record estimated
reductions to revenue for customer returns and allowances and for customer programs. Provisions for
returns and allowances are made at the time of sale, derived from historical trends and form a portion
of the allowance for doubtful accounts. Customer programs, which are primarily annual volume
incentive plans, allow customers to earn credit for attaining agreed upon purchase targets from us. We
record estimated reductions to revenue, made at the time of sale, for customer programs based on
estimated purchase targets.
Allowance for doubtful accounts
The allowance for doubtful accounts is established to represent our best estimate of the net
realizable value of the outstanding accounts receivable. The development of our allowance for doubtful
accounts varies by region but in general is based on a review of past due amounts, historical write-off
experience, as well as aging trends affecting specific accounts and general operational factors affecting
all accounts. In North America, management specifically analyzes individual accounts receivable and
establishes specific reserves against financially troubled customers. In addition, factors are developed
utilizing historical trends in bad debts, returns and allowances. The ratio of these factors to sales on a
rolling twelve-month basis is applied to total outstanding receivables (net of accounts specifically
identified) to establish a reserve. In Europe, management develops its bad debt allowance through an
aging analysis of all their accounts. In China, management specifically analyzes individual accounts
receivable and establishes specific reserves as needed along with providing reserves based on aging
analysis.
We uniformly consider current economic trends and changes in customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts. We also aggressively monitor the
creditworthiness of our largest customers, and periodically review customer credit limits to reduce risk.
If circumstances relating to specific customers change or unanticipated changes occur in the general
business environment, our estimates of the recoverability of receivables could be further adjusted.
Inventory valuation
Inventories are stated at the lower of cost or market with costs determined primarily on a first-in
first-out basis. We utilize both specific product identification and historical product demand as the basis
for determining our excess or obsolete inventory reserve. We identify all inventories that exceed a range
of one to four years in sales. This is determined by comparing the current inventory balance against
unit sales for the trailing twelve months. New products added to inventory within the past twelve
months are excluded from this analysis. A portion of our products contain recoverable materials,
therefore the excess and obsolete reserve is established net of any recoverable amounts. Changes in
market conditions, lower-than-expected customer demand or changes in technology or features could
result in additional obsolete inventory that is not saleable and could require additional inventory
reserve provisions.
In certain countries, additional inventory reserves are maintained for potential shrinkage
experienced in the manufacturing process. The reserve is established based on the prior year’s inventory
losses adjusted for any change in the gross inventory balance.
39
Goodwill and other intangibles
We have made numerous acquisitions over the years which included the recognition of a significant
amount of goodwill. Goodwill is tested for impairment annually or more frequently if an event or
circumstance indicates that an impairment loss may have been incurred. Application of the goodwill
impairment test requires judgment, including the identification of reporting units, assignment of assets
and liabilities to reporting units, and determination of the fair value of each reporting unit. In 2010, we
estimated the fair value of our reporting units using a weighting of the income approach based on the
present value of estimated future cash flows and the market approach using guideline companies and
selected transactions. We believe this approach yields the most appropriate evidence of fair value as
our reporting units are not easily compared to other corporations involved in similar businesses.
Intangible assets such as purchased technology are generally recorded in connection with a
business acquisition. Values assigned to intangible assets are determined by an independent valuation
firm based on our estimates and judgments regarding expectations of the success and life cycle of
products and technology acquired. As of our October 31, 2010 testing date, we determined we had
eight reporting units in continuing operations, one which had no goodwill and one which was acquired
in 2010. Since we acquired BRAE in April 2010, the estimated fair value of BRAE is derived from the
fair value at the date of acquisition as the acquisition closed just six months prior to our testing date.
We review goodwill for impairment utilizing a two-step process. The first step of the impairment
test requires a comparison of the fair value of each of our reporting units to the respective carrying
value. If the carrying value of a reporting unit is less than its fair value, no indication of impairment
exists and a second step is not performed. If the carrying amount of a reporting unit is higher than its
fair value, there is an indication that an impairment may exist and a second step must be performed. In
the second step, the impairment is computed by comparing the implied fair value of the reporting
unit’s goodwill with the carrying amount of the goodwill. If the carrying amount of the reporting unit’s
goodwill is greater than the implied fair value of its goodwill, an impairment loss must be recognized
for the excess and charged to operations.
Inherent in our development of the present value of future cash flow projections are assumptions
and estimates derived from a review of our operating results, business plans, expected growth rates,
cost of capital and tax rates. We also make certain assumptions about future economic conditions and
other market data. We develop our assumptions based on our historical results including sales growth,
operating profits, working capital levels and tax rates.
We believe that the discounted cash flow model is sensitive to the selected discount rate. We use
third-party valuation specialists to help develop appropriate discount rates for each reporting unit. We
use standard valuation practices to arrive at a weighted average cost of capital based on the market and
guideline public companies. The higher the discount rate, the lower the discounted cash flows. While
we believe that our estimates of future cash flows are reasonable, different assumptions could
significantly affect our valuations and result in impairments in the future.
During 2010 and 2009, we recognized non-cash pre-tax charges of approximately $1.4 million and
$3.3 million, respectively, as an impairment of some of the indefinite-lived intangible assets.
During the fourth quarter of 2008, we recognized an aggregate non-cash goodwill impairment
charge of $22.0 million related to our water quality and conditioning reporting unit within our North
America segment. The charge reflected the challenges of the residential construction cycle, as well as
the broader economic and credit environment.
As of our October 31, 2010 testing date, we had approximately $438.8 million of goodwill on our
balance sheet. Our impairment testing indicated that the fair values of the reporting units exceeded the
40
carrying values, thereby resulting in no impairment. The results of this impairment analysis are
summarized in the table below:
Goodwill balance at
October 31, 2010
Book value of
reporting unit at
October 31, 2010
(in millions)
Estimated fair value at
October 31, 2010
Reporting unit
Regulator . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bl¨ucher . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dormont . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Orion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$125.0
159.3
80.1
39.2
24.6
8.0
$312.4
366.7
147.0
73.1
33.6
30.2
$700.3
472.7
178.4
120.0
39.3
93.7
The underlying analyses supporting our fair value assessment related to our outlook of the
business’ long-term performance, which included key assumptions as to the appropriate discount rate
and long-term growth rate. In connection with our October 31, 2010 impairment test, we utilized
discount rates ranging from 11.5% to 15.0% and long-term terminal growth rates from 3% to 5%
beyond our planning periods.
The Orion reporting unit’s operating results are being hindered by the downturn in the commercial
and institutional end markets in the U.S., where Orion sells a majority of its products. Should Orion’s
sales decline because the commercial marketplace deteriorates more than our current expectations,
then the reporting unit’s goodwill may be at risk for impairment in the future. Orion’s goodwill balance
as of December 31, 2010 was $24.6 million. As of October 31, 2010, our last impairment analysis date,
the fair value of the Orion reporting unit exceeded the carrying value by 17%.
Product liability and workers’ compensation costs
Because of retention requirements associated with our insurance policies, we are generally
self-insured for potential product liability claims and for workers’ compensation costs associated with
workplace accidents. For product liability cases in the U.S., management estimates expected settlement
costs by utilizing loss reports provided by our third-party administrators as well as developing internal
historical trend factors based on our specific claims experience. Management utilizes the internal trend
factors that reflect final expected settlement costs. In other countries, we maintain insurance coverage
with relatively high deductible payments, as product liability claims tend to be smaller than those
experienced in the U.S. Changes in the nature of claims or the actual settlement amounts could affect
the adequacy of this estimate and require changes to the provisions. Because the liability is an estimate,
the ultimate liability may be more or less than reported.
Workers’ compensation liabilities in the U.S. are recognized for claims incurred (including claims
incurred but not reported) and for changes in the status of individual case reserves. At the time a
workers’ compensation claim is filed, a liability is estimated to settle the claim. The liability for
workers’ compensation claims is determined based on management’s estimates of the nature and
severity of the claims and based on analysis provided by third-party administrators and by various state
statutes and reserve requirements. We have developed our own trend factors based on our specific
claims experience, discounted based on risk-free interest rates. In other countries where workers’
compensation costs are applicable, we maintain insurance coverage with limited deductible payments.
Because the liability is an estimate, the ultimate liability may be more or less than reported and is
subject to changes in discount rates.
We determine the trend factors for product liability and workers’ compensation liabilities based on
consultation with outside actuaries.
41
We maintain excess liability insurance with outside insurance carriers to minimize our risks related
to catastrophic claims in excess of all self-insured positions. Any material change in the aforementioned
factors could have an adverse impact on our operating results.
Legal contingencies
We are a defendant in numerous legal matters including those involving environmental law and
product liability as discussed in more detail in Part I, Item 1. ‘‘Business—Product Liability,
Environmental and Other Litigation Matters.’’ As required by GAAP, we determine whether an
estimated loss from a loss contingency should be accrued by assessing whether a loss is deemed
probable and the loss amount can be reasonably estimated, net of any applicable insurance proceeds.
Estimates of potential outcomes of these contingencies are developed in consultation with outside
counsel. While this assessment is based upon all available information, litigation is inherently uncertain
and the actual liability to fully resolve this litigation cannot be predicted with any assurance of
accuracy. Final resolution of these matters could possibly result in significant effects on our results of
operations, cash flows and financial position.
Pension benefits
We account for our pension plans in accordance with GAAP, which involves recording a liability or
asset based on the projected benefit obligation and the fair value of plan assets. Assumptions are made
regarding the valuation of benefit obligations and the performance of plan assets. The primary
assumptions are as follows:
• Weighted average discount rate—this rate is used to estimate the current value of future
benefits. This rate is adjusted based on movement in long-term interest rates.
• Expected long-term rate of return on assets—this rate is used to estimate future growth in
investments and investment earnings. The expected return is based upon a combination of
historical market performance and anticipated future returns for a portfolio reflecting the mix of
equity, debt and other investments indicative of our plan assets.
• Rates of increase in compensation levels—this rate is used to estimate projected annual pay
increases, which are used to determine the wage base used to project employees’ pension
benefits at retirement.
We determine these assumptions based on consultation with outside actuaries and investment
advisors. Any variance in these assumptions could have a significant impact on future recognized
pension costs, assets and liabilities.
Income taxes
We estimate and use our expected annual effective income tax rates to accrue income taxes.
Effective tax rates are determined based on budgeted earnings before taxes, including our best estimate
of permanent items that will affect the effective rate for the year. Management periodically reviews
these rates with outside tax advisors and changes are made if material variances from expectations are
identified.
We recognize deferred taxes for the expected future consequences of events that have been
reflected in the consolidated financial statements. Deferred tax assets and liabilities are determined
based on differences between the book values and tax bases of particular assets and liabilities, using tax
rates in effect for the years in which the differences are expected to reverse. A valuation allowance is
provided to offset any net deferred tax assets if, based upon the available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized. We consider estimated future
taxable income and ongoing prudent tax planning strategies in assessing the need for a valuation
allowance.
42
New Accounting Standards
In October 2009, the Financial Accounting Standards Board (FASB) issued an accounting standard
update to improve disclosures related to fair value measurements. This update requires new disclosures
when significant transfers in and out of the various fair value levels occur. This update requires a
reconciliation for fair value measurements using significant unobservable inputs (level 3) be prepared
on a gross basis, separately presenting information about purchases, sales, issuance and settlements. In
addition, this update amends current disclosure requirements for postretirement benefit plan assets.
This update is effective for interim and annual periods beginning after December 15, 2009, except for
disclosures regarding level 3 fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of this
standard did not have a material impact on our consolidated financial statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We use derivative financial instruments primarily to reduce exposure to adverse fluctuations in
foreign exchange rates, interest rates and costs of certain raw materials used in the manufacturing
process. We do not enter into derivative financial instruments for trading purposes. As a matter of
policy, all derivative positions are used to reduce risk by hedging underlying economic exposure. The
derivatives we use are instruments with liquid markets.
Our consolidated earnings, which are reported in United States dollars, are subject to translation
risks due to changes in foreign currency exchange rates. This risk is concentrated in the exchange rate
between the U.S. dollar and the euro; the U.S. dollar and the Canadian dollar; and the U.S. dollar and
the Chinese yuan.
Our foreign subsidiaries transact most business, including certain intercompany transactions, in
foreign currencies. Such transactions are principally purchases or sales of materials and are
denominated in European currencies or the U.S. or Canadian dollar. We use foreign currency forward
exchange contracts to manage the risk related to intercompany purchases that occur during the course
of a year and certain open foreign currency denominated commitments to sell products to third parties.
For 2010, we recorded a $0.5 million gain in other income associated with the change in the fair value
of such contracts.
We have historically had a low exposure on the cost of our debt to changes in interest rates.
Information about our long-term debt including principal amounts and related interest rates appears in
Note 11 of Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for
the year ended December 31, 2010.
We purchase significant amounts of bronze ingot, brass rod, cast iron, steel and plastic, which are
utilized in manufacturing our many product lines. Our operating results can be adversely affected by
changes in commodity prices if we are unable to pass on related price increases to our customers. We
manage this risk by monitoring related market prices, working with our suppliers to achieve the
maximum level of stability in their costs and related pricing, seeking alternative supply sources when
necessary and passing increases in commodity costs to our customers, to the maximum extent possible,
when they occur.
During 2008, we entered into a series of copper swap contracts to fix the price per pound of
copper for one customer which expired in 2009. These swaps are classified as economic hedges, as
more fully explained in Note 16 of Notes to the Consolidated Financial Statements. For the year ended
December 31, 2009 we recorded a $0.3 million gain associated with the copper swaps in other expense.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements listed in section (a) (1) of ‘‘Part IV, Item 15. Exhibits and Financial
Statement Schedules’’ of this annual report are incorporated herein by reference.
43
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Item 9A. CONTROLS AND PROCEDURES.
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, or
Exchange Act, as of the end of the period covered by this report, we carried out an evaluation under
the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. In designing
and evaluating our disclosure controls and procedures, we recognize that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management necessarily applies its judgment in evaluating and
implementing possible controls and procedures. The effectiveness of our disclosure controls and
procedures is also necessarily limited by the staff and other resources available to us and the
geographic diversity of our operations. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective, in that they provide reasonable assurance that
information required to be disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms and are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act are accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
There was no change in our internal control over financial reporting that occurred during the
quarter ended December 31, 2010, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. In connection with these rules, we will continue to
review and document our disclosure controls and procedures, including our internal control over
financial reporting, and may from time to time make changes aimed at enhancing their effectiveness
and to ensure that our systems evolve with our business.
44
Management’s Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. The
Company’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management, including our Chief Executive Officer and Chief Financial Officer, assessed the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.
Based on our assessment and those criteria, management believes that the Company maintained
effective internal control over financial reporting as of December 31, 2010.
The audited consolidated financial statements of the Company include the results of Austroflex
Rohr-Isoliersysteme GmbH, including total assets of $41.7 million and total revenues of $10.6 million,
which the Company acquired on June 28, 2010, but management’s assessment does not include an
assessment of the internal control over financial reporting of this entity.
The independent registered public accounting firm that audited the Company’s consolidated
financial statements included elsewhere in this Annual Report on Form 10-K has issued an audit report
on the Company’s internal control over financial reporting. That report appears immediately following
this report.
45
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Watts Water Technologies, Inc.:
We have audited Watts Water Technologies, Inc.’s internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Watts Water
Technologies, Inc.’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Watts Water Technologies, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2010, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Watts Water Technologies, Inc. acquired Austroflex Rohr-Isoliersysteme GmbH during 2010, and
management excluded from its assessment of the effectiveness of Watts Water Technologies, Inc.’s
internal control over financial reporting as of December 31, 2010, Austroflex
Rohr-Isoliersysteme GmbH’s internal control over financial reporting associated with total assets of
$41.7 million and total revenues of $10.6 million included in the consolidated financial statements of
Watts Water Technologies, Inc. and subsidiaries as of and for the year ended December 31, 2010. Our
audit of internal control over financial reporting of Watts Water Technologies, Inc. also excluded an
evaluation of the internal control over financial reporting of Austroflex Rohr-Isoliersysteme GmbH.
46
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Watts Water Technologies, Inc. and
subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations,
stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the
three-year period ended December 31, 2010, and our report dated March 1, 2011 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Boston, Massachusetts
March 1, 2011
Item 9B. OTHER INFORMATION.
None.
47
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information with respect to the executive officers of the Company is set forth in Part I, Item 1 of
this Report under the caption ‘‘Executive Officers and Directors’’ and is incorporated herein by
reference. The information provided under the captions ‘‘Information as to Nominees for Director,’’
‘‘Corporate Governance,’’ and ‘‘Section 16(a) Beneficial Ownership Reporting Compliance’’ in our
definitive Proxy Statement for our 2011 Annual Meeting of Stockholders to be held on May 11, 2011 is
incorporated herein by reference.
We have adopted a Code of Business Conduct and Ethics applicable to all officers, employees and
Board members. The Code of Business Conduct and Ethics is posted in the Investor Relations section
of our website, www.wattswater.com. We will provide you with a print copy of our Code of Business
Conduct and Ethics free of charge on written request to Kenneth R. Lepage, Secretary, Watts Water
Technologies, Inc., 815 Chestnut Street, North Andover, MA 01845. Any amendments to, or waivers of,
the Code of Business Conduct and Ethics which apply to our chief executive officer, chief financial
officer, corporate controller or any person performing similar functions will be disclosed on our website
promptly following the date of such amendment or waiver.
Item 11. EXECUTIVE COMPENSATION.
The information provided under the captions ‘‘Director Compensation,’’ ‘‘Corporate Governance,’’
‘‘Compensation Discussion and Analysis,’’ ‘‘Executive Compensation,’’ ‘‘Compensation Committee
Interlocks and Insider Participation,’’ and ‘‘Compensation Committee Report’’ in our definitive Proxy
Statement for our 2011 Annual Meeting of Stockholders to be held on May 11, 2011 is incorporated
herein by reference.
The ‘‘Compensation Committee Report’’ contained in our Proxy Statement shall not be deemed
‘‘soliciting material’’ or ‘‘filed’’ with the Securities and Exchange Commission or otherwise subject to
the liabilities of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated
by reference in any filings under the Securities Act of 1933 or the Exchange Act, except to the extent
we specifically request that such information be treated as soliciting material or specifically incorporate
such information by reference into a document filed under the Securities Act or Exchange Act.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information appearing under the caption ‘‘Principal Stockholders’’ in our definitive Proxy
Statement for our 2011 Annual Meeting of Stockholders to be held on May 11, 2011 is incorporated
herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2010, about the shares of Class A
Common Stock that may be issued upon the exercise of stock options issued under the Company’s 2004
Stock Incentive Plan, 1991 Directors’ Non-Qualified Stock Option Plan, 1996 Stock Option Plan and
2003 Non-Employee Directors’ Stock Option Plan and the settlement of restricted stock units granted
48
under our Management Stock Purchase Plan as well as the number of shares remaining for future
issuance under our 2004 Stock Incentive Plan and Management Stock Purchase Plan.
Equity Compensation Plan Information
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
Weighted-average exercise
price of outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance
under equity compensation
plan (excluding securities
reflected in column (a))
(c)
1,664,585(1)
$26.38
2,003,598(2)
None
1,664,585(1)
None
$26.38
None
2,003,598(2)
Plan Category
Equity compensation
plans approved by
security holders . . . . . .
Equity compensation
plans not approved by
security holders . . . . . .
. . . . . . . . . . . . . . .
Total
(1) Represents 1,303,262 outstanding options under the 1991 Directors’ Non-Qualified Stock Option
Plan, 1996 Incentive Stock Option Plan, 2003 Non-Employee Directors’ Stock Option Plan and
2004 Stock Incentive Plan, and 361,323 outstanding restricted stock units under the Management
Stock Purchase Plan.
(2) Includes 1,317,665 shares available for future issuance under the 2004 Stock Incentive Plan, and
685,933 shares available for future issuance under the Management Stock Purchase Plan.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The information provided under the captions ‘‘Corporate Governance’’ and ‘‘Policies and
Procedures for Related Person Transactions’’ in our definitive Proxy Statement for our 2011 Annual
Meeting of Stockholders to be held on May 11, 2011 is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information provided under the caption ‘‘Ratification of Independent Registered Public
Accounting Firm’’ in our definitive Proxy Statement for our 2011 Annual Meeting of Stockholders to
be held on May 11, 2011 is incorporated herein by reference.
49
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements
PART IV
The following financial statements are included in a separate section of this Report commencing
on the page numbers specified below:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . .
Consolidated Statements of Operations for the years ended December 31,
2010, 2009 and 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2010 and 2009 . . . . . . . . .
Consolidated Statements of Stockholders’ Equity and Comprehensive
Income (Loss) for the years ended December 31, 2010, 2009 and 2008 . .
Consolidated Statements of Cash Flows for the years ended December 31,
53
54
55
56
2010, 2009 and 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements
57
58-99
(a)(2) Schedules
Schedule II—Valuation and Qualifying Accounts for the years ended
December 31, 2010, 2009 and 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100
All other required schedules for which provision is made in the applicable accounting regulations
of the Securities and Exchange Commission are included in the Notes to the Consolidated Financial
Statements.
(a)(3) Exhibits
The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this
Annual Report on Form 10-K.
50
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
WATTS WATER TECHNOLOGIES, INC.
By:
/S/ DAVID J. COGHLAN
David J. Coghlan
Chief Executive Officer
President and Director
DATED: March 1, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature
Title
Date
/S/ DAVID J. COGHLAN
David J. Coghlan
Chief Executive Officer,
President and Director
March 1, 2011
/S/ WILLIAM C. MCCARTNEY
William C. McCartney
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
March 1, 2011
/S/ ROBERT L. AYERS
Robert L. Ayers
/S/ KENNETT F. BURNES
Kennett F. Burnes
/S/ RICHARD J. CATHCART
Richard J. Cathcart
/S/ RALPH E. JACKSON, JR.
Ralph E. Jackson, Jr.
/S/ KENNETH J. MCAVOY
Kenneth J. McAvoy
Director
Director
Director
Director
Director
51
March 1, 2011
March 1, 2011
March 1, 2011
March 1, 2011
March 1, 2011
Signature
Title
Date
/S/ JOHN K. MCGILLICUDDY
John K. McGillicuddy
/S/ GORDON W. MORAN
Gordon W. Moran
/S/ MERILEE RAINES
Merilee Raines
Chairman of the Board
March 1, 2011
Director
Director
March 1, 2011
March 1, 2011
52
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Watts Water Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Watts Water Technologies, Inc.
and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of
operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years
in the three-year period ended December 31, 2010. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement Schedule II—Valuation and
Qualifying Accounts. These consolidated financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Watts Water Technologies, Inc. and subsidiaries as of
December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Watts Water Technologies, Inc.’s internal control over financial
reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 1, 2011 expressed an unqualified opinion on the effectiveness of
the Company’s internal control over financial reporting.
/s/ KPMG LLP
Boston, Massachusetts
March 1, 2011
53
Watts Water Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in millions, except per share information)
Years Ended December 31,
2010
2009
2008
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,274.6
809.7
$1,225.9
790.8
$1,431.4
949.6
GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other indefinite-lived intangible asset impairment charges
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND NONCONTROLLING INTEREST . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . .
Income (loss) from discontinued operations, net of taxes . . . . . . . . . . .
NET INCOME BEFORE NONCONTROLLING INTEREST . . . . . . .
Plus: Net loss attributable to the noncontrolling interest . . . . . . . . . . . .
NET INCOME ATTRIBUTABLE TO WATTS WATER
TECHNOLOGIES, INC.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income from continuing operations attributable to Watts Water
Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic EPS
Income (loss) per share attributable to Watts Water Technologies, Inc.:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of shares . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS
Income (loss) per share attributable to Watts Water Technologies, Inc.:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of shares . . . . . . . . . . . . . . . . . . . . . . . . . .
464.9
336.7
12.6
1.4
114.2
(1.0)
22.8
(2.1)
19.7
94.5
31.4
63.1
(4.3)
58.8
—
58.8
63.1
1.69
(0.12)
1.58
37.3
1.69
(0.12)
1.57
37.4
$
$
$
$
$
$
435.1
323.5
16.1
3.3
92.2
(0.9)
22.0
(1.2)
19.9
72.3
31.3
41.0
(23.6)
17.4
—
17.4
41.0
1.11
(0.64)
0.47
37.0
1.10
(0.63)
0.47
37.1
481.8
355.6
5.6
22.0
98.6
(5.1)
26.2
9.5
30.6
68.0
24.7
43.3
1.4
44.7
1.9
46.6
45.2
1.23
0.04
1.27
36.6
1.23
0.04
1.26
36.8
$
$
$
$
$
$
$
$
$
$
$
$
Dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.44
$
0.44
$
0.44
The accompanying notes are an integral part of these consolidated financial statements.
54
Watts Water Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in millions, except share information)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade accounts receivable, less allowance for doubtful accounts of $8.9 million in
2010 and $7.5 million in 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPERTY, PLANT AND EQUIPMENT, NET . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER ASSETS:
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2010
2009
$ 329.2
4.0
$ 258.2
6.5
186.9
265.6
18.4
41.1
10.0
1.8
857.0
197.5
428.0
152.6
0.9
10.1
181.3
266.7
22.1
35.4
11.3
23.1
804.6
206.5
425.1
151.2
3.0
8.8
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,646.1
$1,599.2
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 113.9
115.6
42.6
0.7
5.8
$ 102.3
105.9
45.9
50.9
9.8
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LONG-TERM DEBT, NET OF CURRENT PORTION . . . . . . . . . . . . . . . . . . . . . .
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
STOCKHOLDERS’ EQUITY:
Preferred Stock, $0.10 par value; 5,000,000 shares authorized; no shares issued or
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class A Common Stock, $0.10 par value; 80,000,000 shares authorized; 1 vote per
share; issued and outstanding, 30,102,677 shares in 2010 and 29,506,523 shares in
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B Common Stock, $0.10 par value; 25,000,000 shares authorized; 10 votes per
share; issued and outstanding, 6,953,680 shares in 2010 and 7,193,880 shares in
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
278.6
378.0
40.1
47.9
—
3.0
0.7
405.2
492.9
(0.3)
901.5
314.8
304.0
43.0
57.8
—
3.0
0.7
393.7
452.1
30.1
879.6
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . .
$1,646.1
$1,599.2
The accompanying notes are an integral part of these consolidated financial statements.
55
Watts Water Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)
(Amounts in millions, except share information)
Class A
Common Stock
Class B
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Other
Total
Retained Comprehensive Stockholders’
Earnings
Income (Loss)
Equity
Balance at December 31, 2007 . . . . . . . . . 30,600,056
$ 3.1
7,293,880
$0.7
$377.6
$465.4
$ 68.7
$915.5
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . .
Cumulative translation adjustment . . . .
Pension plan loss arising during the
year, net of tax of $9.7 million . . . . .
Comprehensive loss . . . . . . . . . . . . .
Shares of Class A Common Stock issued
upon the exercise of stock options . . . .
Stock-based compensation . . . . . . . . . .
Issuance of shares of restricted Class A
Common Stock . . . . . . . . . . . . . . .
. . . .
Net change in restricted stock units
Repurchase and retirement of Class A
Common Stock . . . . . . . . . . . . . . .
Common Stock dividends . . . . . . . . . . .
85,512
73,542
109,689
(1,618,624)
(0.2)
46.6
(51.8)
(16.7)
1.6
5.3
2.4
(44.1)
(16.2)
Balance at December 31, 2008 . . . . . . . . . 29,250,175
$ 2.9
7,293,880
$0.7
$386.9
$451.7
$ 0.2
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . .
Cumulative translation adjustment . . . .
Pension plan gain arising during the
year, net of tax of $1.4 million . . . . .
Comprehensive income . . . . . . . . . . .
Shares of Class B Common Stock
17.4
26.2
3.7
converted to Class A Common Stock . .
100,000
(100,000)
Shares of Class A Common Stock issued
upon the exercise of stock options . . . .
Stock-based compensation . . . . . . . . . .
Issuance of net shares of restricted
Class A Common Stock . . . . . . . . . .
Net change in restricted stock units
. . . .
Common Stock dividends . . . . . . . . . . .
30,194
0.1
58,454
67,700
0.4
4.9
1.5
(0.4)
(0.4)
(16.2)
46.6
(51.8)
(16.7)
(21.9)
1.6
5.3
2.4
(44.3)
(16.2)
$842.4
17.4
26.2
3.7
47.3
0.5
4.9
(0.4)
1.1
(16.2)
Balance at December 31, 2009 . . . . . . . . . 29,506,523
$ 3.0
7,193,880
$0.7
$393.7
$452.1
$ 30.1
$879.6
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . .
Cumulative translation adjustment
. . .
Pension plan loss arising during the
year, net of tax of $2.5 million . . . . .
Comprehensive income . . . . . . . . . . .
Shares of Class B Common Stock
58.8
(26.7)
(3.7)
converted to Class A Common Stock . .
240,200
(240,200)
Shares of Class A Common Stock issued
upon the exercise of stock options . . . .
Stock-based compensation . . . . . . . . . .
Issuance of net shares of restricted
Class A Common Stock . . . . . . . . . .
Net change in restricted stock units . . . .
Common Stock dividends . . . . . . . . . . .
185,470
93,601
76,883
3.4
4.7
3.4
(0.5)
(1.1)
(16.4)
58.8
(26.7)
(3.7)
28.4
3.4
4.7
(0.5)
2.3
(16.4)
Balance at December 31, 2010 . . . . . . . . 30,102,677
$ 3.0
6,953,680
$0.7
$405.2
$492.9
$ (0.3)
$901.5
The accompanying notes are an integral part of these consolidated financial statements.
56
Watts Water Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in millions)
OPERATING ACTIVITIES
Net income attributable to Watts Water Technologies, Inc.
. . . . . . . . . . . . . . . . . . . . . . . .
Less: Income (loss) from discontinued operations, net of taxes . . . . . . . . . . . . . . . . . . . . . .
Net income from continuing operations attributable to Watts Water Technologies, Inc.
Adjustments to reconcile income from continuing operations to net cash provided by continuing
. . . . . . .
operating activities:
Years Ended December 31,
2010
2009
2008
$ 58.8
(4.3)
63.1
$ 17.4
(23.6)
41.0
$ 46.6
1.4
45.2
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal and impairment of goodwill, property, plant and equipment and other
. . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of effects from business acquisitions and
divestures:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . .
30.5
14.3
2.6
4.7
(6.9)
(8.2)
0.8
9.0
3.5
33.7
13.1
12.1
4.9
9.4
38.3
71.5
(7.6)
(11.8)
31.5
12.2
24.0
5.3
(18.7)
20.9
15.1
8.3
1.2
Net cash provided by continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
113.4
204.6
145.0
INVESTING ACTIVITIES
Additions to property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCING ACTIVITIES
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from share transactions under employee stock plans . . . . . . . . . . . . . . . . . . . . . . .
Tax expense (benefit) of stock awards exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments to repurchase common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) operating activities of discontinued operations . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities of discontinued operations . . . . . . . . . . . . . .
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(24.6)
2.2
(4.0)
6.5
(1.0)
(36.3)
(57.2)
75.0
(50.9)
(1.2)
3.4
0.2
(3.2)
—
(16.4)
6.9
(2.7)
5.5
5.1
71.0
258.2
(24.2)
0.8
—
1.7
0.7
(0.3)
(21.3)
1.7
(61.5)
(1.3)
0.4
(0.3)
—
—
(16.2)
(77.2)
8.0
(21.2)
(0.3)
92.6
165.6
(26.2)
1.1
(2.7)
33.3
—
(175.5)
(170.0)
22.9
(54.9)
(1.3)
1.6
—
—
(44.5)
(16.2)
(92.4)
(5.9)
0.8
(2.2)
(124.7)
290.3
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . .
$329.2
$ 258.2
$165.6
NON CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of businesses:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of stock under management stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH PAID FOR:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 47.6
36.3
$ 11.3
$
2.1
$ 21.4
$ 20.3
$ — $231.5
175.5
—
$ — $ 56.0
$
1.5
$
1.6
$ 22.0
$ 26.9
$ 36.6
$ 45.1
The accompanying notes are an integral part of these consolidated financial statements.
57
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) Description of Business
Watts Water Technologies, Inc. (the Company) designs, manufactures and sells an extensive line of
water safety and flow control products primarily for the water quality, water conservation, water safety
and water flow control markets located predominantly in North America and Europe with a presence
in China.
(2) Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority and
wholly owned subsidiaries. Upon consolidation, all significant intercompany accounts and transactions
are eliminated.
Cash Equivalents
Cash equivalents consist of instruments with remaining maturities of three months or less at the
date of purchase and consist primarily of U.S treasury bills and money market funds, for which the
carrying amount is a reasonable estimate of fair value.
Investment Securities
Investment securities at December 31, 2010 consisted primarily of certificates of deposit with
original maturities of greater than three months and at December 31, 2009 consisted of auction rate
securities (ARS) whose underlying investments were in municipal bonds and student loans and
investments in rights issued by UBS, AG (UBS). The securities were purchased at par value. The rights
issued by UBS were received in connection with a settlement agreement. See Note 16 for additional
information regarding the rights issued by UBS. The Company classified its debt securities and
investment in rights from UBS as trading securities.
Trading securities are recorded at fair value. The Company determines the fair value by obtaining
market value when available from quoted prices in active markets. In the absence of quoted prices, the
Company uses other inputs to determine the fair value of the investments. All changes in the fair value
as well as any realized gains and losses from the sale of the securities are recorded when incurred to
the consolidated statements of operations as other income or expense.
Allowance for Doubtful Accounts
Allowance for doubtful accounts includes reserves for bad debts, sales returns and allowances and
cash discounts. The Company analyzes the aging of accounts receivable, individual accounts receivable,
historical bad debts, concentration of receivables by customer, customer credit worthiness, current
economic trends, and changes in customer payment terms. The Company specifically analyzes individual
accounts receivable and establishes specific reserves against financially troubled customers. In addition,
factors are developed in certain regions utilizing historical trends of sales and returns and allowances
and cash discount activities to derive a reserve for returns and allowances and cash discounts.
Concentration of Credit
The Company sells products to a diversified customer base and, therefore, has no significant
concentrations of credit risk. In 2010 and 2009, no customer accounted for 10% or more of the
Company’s total sales.
58
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
Inventories
Inventories are stated at the lower of cost (using primarily the first-in, first-out method) or market.
Market value is determined by replacement cost or net realizable value. Historical usage is used as the
basis for determining the reserve for excess or obsolete inventories.
Goodwill and Other Intangible Assets
Goodwill is recorded when the consideration paid for acquisitions exceeds the fair value of net
tangible and intangible assets acquired. Goodwill and other intangible assets with indefinite useful lives
are not amortized, but rather are tested annually for impairment. The test was performed as of
October 31, 2010.
Assets held for sale
The Company accounts for assets held for sale when management has committed to a plan to sell
the asset or group of assets, is actively marketing the asset or group of assets, the asset or group of
assets can be sold in its current condition in a reasonable period of time and the plan is not expected
to change. As of December 31, 2010, the Company is actively marketing one property and one group of
assets and expects to complete the sale of these assets or group of assets in the next twelve months. In
2010 and 2009, the Company recorded estimated losses of $1.0 million and $7.8 million, respectively, to
reduce these assets or group of assets down to their estimated fair value, less any costs to sell. These
amounts are recorded as a component of restructuring and other costs in the consolidated statements
of operations. See Note 4 for additional information associated with the Company’s restructuring
charges.
Impairment of Goodwill and Long-Lived Assets
The changes in the carrying amount of goodwill by geographic segment are as follows:
North
Discontinued
America Europe China Operations
Total
(in millions)
(22.0)
Gross balance at January 1, 2009 . . . . . . . . . . . . . . . . . . . . $210.3 $221.3 $7.9
Accumulated impairment losses . . . . . . . . . . . . . . . . . . . . .
— —
Net goodwill at January 1, 2009 . . . . . . . . . . . . . . . . . . . . . $188.3 $221.3 $7.9
— —
Adjustments to goodwill during the period . . . . . . . . . . . . .
— —
Goodwill related to discontinued operations . . . . . . . . . . . .
7.5 —
Effect of change in exchange rates used for translation . . . .
Net change in goodwill
7.5 —
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross balance at December 31, 2009 . . . . . . . . . . . . . . . . . $210.4 $228.8 $7.9
Accumulated impairment losses . . . . . . . . . . . . . . . . . . . . .
— —
Net goodwill at December 31, 2009 . . . . . . . . . . . . . . . . . . $188.4 $228.8 $7.9
12.3 —
Goodwill acquired during the period . . . . . . . . . . . . . . . . .
— —
Adjustments to goodwill during the period, net . . . . . . . . . .
0.2
Effect of change in exchange rates used for translation . . . .
0.2
Net change in goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross balance at December 31, 2010 . . . . . . . . . . . . . . . . . $213.8 $228.1 $8.1
— —
Accumulated impairment losses . . . . . . . . . . . . . . . . . . . . .
Net goodwill at December 31, 2010 . . . . . . . . . . . . . . . . . . $191.8 $228.1 $8.1
(0.6)
—
0.7
0.1
(13.0)
(0.7)
2.7
0.5
0.2
3.4
(22.0)
(22.0)
59
$ 13.8
—
$ 13.8
—
(14.5)
0.7
(13.8)
$453.3
(22.0)
$431.3
(0.6)
(14.5)
8.9
(6.2)
$ — $447.1
(22.0)
$ — $425.1
15.0
0.5
(12.6)
2.9
$ — $450.0
(22.0)
$ — $428.0
—
—
—
—
—
—
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
In 2008, the Company completed an assessment of the fair value of the net assets of its water
quality business unit, which includes a number of businesses that were purchased over time, and
recorded a pre-tax goodwill impairment charge of $22.0 million due to sales declining from prior year
levels and from the Company’s expectations of lower commercial and residential project activity. The
Company estimated the fair value of the reporting unit using the expected present value of future cash
flows.
In February 2009, the Company reached a settlement with the seller regarding a purchase price
adjustment to the Core Industries, Inc. acquisition that resulted in the Company receiving $1.1 million.
In May 2009, the Company deconsolidated TEAM Precision Pipework, Ltd. (TEAM). As a result of
the deconsolidation, the Company reduced goodwill by $8.4 million associated with TEAM. See Note 3
for additional information relating to the deconsolidation of TEAM. In September 2009, the
Company’s Board of Directors approved a plan to dispose of its investment in Watts Valve
(Changsha) Co., Ltd. (CWV), a former subsidiary of the Company located in China. The Company
classified the net assets of CWV as a discontinued operation and recorded a decrease in the net assets
to their estimated fair value less costs to sell. As a result, the Company reduced goodwill by
$6.1 million associated with CWV. See Note 3 and Note 5 for additional information relating to CWV.
Goodwill is tested for impairment at least annually or more frequently if events or circumstances
indicate that it is ‘‘more likely than not’’ that goodwill might be impaired, such as a change in business
conditions. The Company performs its annual goodwill impairment assessment in the fourth quarter of
each year.
Intangible assets with estimable lives and other long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset or asset
group may not be recoverable. Recoverability of intangible assets with estimable lives and other
long-lived assets is measured by a comparison of the carrying amount of an asset or asset group to
future net undiscounted pretax cash flows expected to be generated by the asset or asset group. If these
comparisons indicate that an asset is not recoverable, the impairment loss recognized is the amount by
which the carrying amount of the asset or asset group exceeds the related estimated fair value.
Estimated fair value is based on either discounted future pretax operating cash flows or appraised
values, depending on the nature of the asset. The Company determines the discount rate for this
analysis based on the weighted average cost of capital based on the market and guideline public
companies for the related businesses and does not allocate interest charges to the asset or asset group
being measured. Judgment is required to estimate future operating cash flows.
In connection with the restructuring plan announced in February 2009, the Company concluded
that it is more likely than not that the carrying amount of certain assets held and used may not be
recoverable. Specifically, the Company identified a long-lived asset group primarily consisting of
buildings and land use rights in China. The Company used an undiscounted future cash flow model to
test the long-lived asset group based on the primary asset identified, the current economic outlook and
the estimated fair value from the ultimate disposition of the asset group. The inputs used in this
analysis are unobservable inputs (level 3). Based on the analysis performed, the Company recorded a
$5.5 million impairment charge for one asset group in China during the quarter ended September 27,
2009. This charge is reported in restructuring and other charges in the consolidated statements of
operations.
60
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
In connection with the plan to dispose of CWV, certain long-lived assets were reduced by
$3.9 million to reflect their estimated fair value less cost to sell. This charge was recorded in
discontinued operations as part of the $8.5 million loss on disposal.
Intangible assets include the following:
2010
Gross
Carrying
Amount
Accumulated
Amortization
Patents . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . .
Technology . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . .
Total amortizable intangibles . . . . .
Indefinite-lived intangible assets . . . . .
$ 16.6
120.5
19.8
13.1
170.0
46.6
$ (9.6)
(43.1)
(5.6)
(5.7)
(64.0)
—
December 31,
Net
Carrying
Amount
Gross
Carrying
Amount
$
(in millions)
7.0
77.4
14.2
7.4
$ 17.3
103.6
15.0
13.9
106.0
46.6
149.8
51.2
2009
Accumulated
Amortization
Net
Carrying
Amount
$ (8.5)
(31.5)
(4.2)
(5.6)
(49.8)
—
$
8.8
72.1
10.8
8.3
100.0
51.2
Total . . . . . . . . . . . . . . . . . . . . . . .
$216.6
$(64.0)
$152.6
$201.0
$(49.8)
$151.2
Aggregate amortization expense for amortized intangible assets for 2010, 2009 and 2008 was
$14.3 million, $13.1 million and $12.2 million, respectively. Additionally, future amortization expense on
amortizable intangible assets is expected to be $15.4 million for 2011, $13.5 million for 2012,
$12.4 million for 2013, $12.4 million for 2014, and $12.1 million for 2015. Amortization expense is
provided on a straight-line basis over the estimated useful lives of the intangible assets. The weighted-
average remaining life of total amortizable intangible assets is 9.6 years. Patents, customer relationships,
technology and other amortizable intangibles have weighted-average remaining lives of 7.9 years,
7.5 years, 14.5 years and 24.5 years, respectively. Indefinite-lived intangible assets primarily include
trade names and trademarks.
Adjustments to indefinite-lived intangible assets during the year ended December 31, 2010 relate
primarily to an additional trade name related to the Austroflex Rohr-Isoliersysteme GmbH acquisition
offset by an impairment of a trade name in our European segment and a reclassification of $4.4 million
of trade names in our North American segment to amortizable intangibles.
Adjustments to indefinite-lived intangible assets during the year ended December 31, 2009 relate
primarily to a reclassification of one technology related intangible asset and the results from the annual
impairment analysis evaluation performed as of October 25, 2009. The Company had previously
classified a technology intangible asset as an indefinite-lived intangible asset as it could not determine
the time horizon over which that asset was expected to be used. During 2009, the Company concluded
that this technology asset no longer had an indefinite life due in part to recent competition and
changes in regulations. As a result, the Company increased technology amortizable intangible assets
and reduced indefinite-lived intangible assets by approximately $7.5 million. The Company uses a
royalty relief method to evaluate the current fair value of its trademarks and technology. Due to the
decreases in sales experienced in several of its brands and technology in 2009 as well as the estimated
outlook for future sales of these brands and technology, the Company recorded a pre-tax charge of
$3.3 million to decrease these assets to their estimated fair value.
61
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided on a straight-line
basis over the estimated useful lives of the assets, which range from 10 to 40 years for buildings and
improvements and 3 to 15 years for machinery and equipment.
Taxes, Other than Income Taxes
Taxes assessed by governmental authorities on sale transactions are recorded on a net basis and
excluded from sales, in the Company’s consolidated statements of operations.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date.
The Company accounts for tax benefits when the item in question meets the more-likely-than-not
(greater than 50% likelihood of being sustained upon examination by the taxing authorities) threshold.
During 2010, the Company reduced its unrecognized tax benefits by approximately $0.3 million
resulting from voluntary disclosure agreements. The Company estimates that it is reasonably possible
that a portion of the currently remaining unrecognized tax benefit may be recognized by the end of
2011 as a result of the conclusion of federal and foreign income tax audits. The amount of expense
accrued for penalties and interest is $0.8 million worldwide.
As of December 31, 2010, the Company had gross unrecognized tax benefits of approximately
$3.8 million approximately $3.5 million of which, if recognized, would affect the effective tax rate. The
difference between the amount of unrecognized tax benefits and the amount that would affect the
effective tax rate consists of the federal tax benefit of state income tax items.
A reconciliation of the beginning and ending amount of unrecognized tax benefits and a separate
analysis of accrued interest related to the unrecognized tax benefits is as follows:
Balance at January 1, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . .
Decreases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in millions)
$ 2.8
1.4
(0.3)
(0.1)
$ 3.8
62
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
In February 2011, the Company completed its audit by the Internal Revenue Service for the 2007
and 2008 tax years and no material adjustments were made. The Company conducts business in a
variety of locations throughout the world resulting in tax filings in numerous domestic and foreign
jurisdictions. The Company is subject to tax examinations regularly as part of the normal course of
business. The Company’s major jurisdictions are the U.S., Canada, China, Netherlands, U.K., Germany,
Italy and France. With few exceptions the Company is no longer subject to U.S. federal, state and local,
or non-U.S. income tax examinations for years before 2004.
The Company accounts for interest and penalties related to uncertain tax positions as a component
of income tax expense.
The statute of limitations in our major jurisdictions is open in the U.S. for the year 2007 and later;
in Canada for 2006 and later; and in the Netherlands for 2006 and later.
Foreign Currency Translation
The financial statements of subsidiaries located outside the United States generally are measured
using the local currency as the functional currency. Balance sheet accounts, including goodwill, of
foreign subsidiaries are translated into United States dollars at year-end exchange rates. Income and
expense items are translated at weighted average exchange rates for each period. Net translation gains
or losses are included in other comprehensive income, a separate component of stockholders’ equity.
The Company does not provide for U.S. income taxes on foreign currency translation adjustments since
it does not provide for such taxes on undistributed earnings of foreign subsidiaries. Gains and losses
from foreign currency transactions of these subsidiaries are included in net earnings.
Stock-Based Compensation
The Company records compensation expense in the financial statements for share-based awards
based on the grant date fair value of those awards. Stock-based compensation expense includes an
estimate for pre-vesting forfeitures and is recognized over the requisite service periods of the awards on
a straight-line basis, which is generally commensurate with the vesting term. The benefits associated
with tax deductions in excess of recognized compensation cost are reported as a financing cash flow.
At December 31, 2010, the Company had three stock-based compensation plans with total
unrecognized compensation costs related to unvested stock-based compensation arrangements of
approximately $11.1 million and a total weighted average remaining term of 2.5 years. For 2010, 2009
and 2008, the Company recognized compensation costs related to stock-based programs of
approximately $4.7 million, $4.9 million and $5.3 million, respectively, in selling, general and
administrative expenses. The Company recorded approximately $0.6 million, $0.6 million and
$0.7 million of tax benefits during 2010, 2009 and 2008, respectively, for the compensation expense
relating to its stock options. For 2010, 2009 and 2008, the Company recorded approximately
$1.2 million, $1.2 million and $1.1 million, respectively, of tax benefit for its other stock-based plans.
For 2010, 2009 and 2008, the recognition of total stock-based compensation expense impacted both
basic and diluted net income per common share by $0.08, $0.08 and $0.10, respectively.
Net Income Per Common Share
Basic net income per common share is calculated by dividing net income by the weighted average
number of common shares outstanding. The calculation of diluted income per share assumes the
conversion of all dilutive securities (see Note 13).
63
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
Net income attributable to Watts Water Technologies, Inc. and number of shares used to compute
net income per share, basic and assuming full dilution, are reconciled below:
Years Ended December 31,
2010
2009
2008
Per
Share
Income Shares Amount Income Shares Amount Income Shares Amount
Per
Share
Per
Share
Net
Net
Net
Basic EPS . . . . . . . . . . . . . . . . . . . . . . . $58.8
Dilutive securities, principally common
(Amounts in millions, except per share information)
37.0
$ 0.47
$17.4
$46.6
$1.58
36.6
37.3
$ 1.27
stock options . . . . . . . . . . . . . . . . . . .
— 0.1
(0.1)
— 0.1
—
— 0.2
(0.01)
Diluted EPS . . . . . . . . . . . . . . . . . . . . . $58.8
37.4
$1.57
$17.4
37.1
$ 0.47
$46.6
36.8
$ 1.26
The computation of diluted net income per share for the years ended December 31, 2010, 2009
and 2008 excludes the effect of the potential exercise of options to purchase approximately 0.5 million,
0.9 million and 1.0 shares, respectively, because the exercise price of the option was greater than the
average market price of the Class A Common Stock, as the effect would have been anti-dilutive.
During the year ended December 31, 2008, the Company repurchased approximately 1.6 million
shares of its Class A Common Stock.
Derivative Financial Instruments
In the normal course of business, the Company manages risks associated with commodity prices,
foreign exchange rates and interest rates through a variety of strategies, including the use of hedging
transactions, executed in accordance with the Company’s policies. The Company’s hedging transactions
include, but are not limited to, the use of various derivative financial and commodity instruments. As a
matter of policy, the Company does not use derivative instruments unless there is an underlying
exposure. Any change in value of the derivative instruments would be substantially offset by an
opposite change in the value of the underlying hedged items. The Company does not use derivative
instruments for trading or speculative purposes.
Derivative instruments may be designated and accounted for as either a hedge of a recognized
asset or liability (fair value hedge) or a hedge of a forecasted transaction (cash flow hedge). For a fair
value hedge, both the effective and ineffective portions of the change in fair value of the derivative
instrument, along with an adjustment to the carrying amount of the hedged item for fair value changes
attributable to the hedged risk, are recognized in earnings. For a cash flow hedge, changes in the fair
value of the derivative instrument that are highly effective are deferred in accumulated other
comprehensive income or loss until the underlying hedged item is recognized in earnings.
If a fair value or cash flow hedge were to cease to qualify for hedge accounting or be terminated,
it would continue to be carried on the balance sheet at fair value until settled, but hedge accounting
would be discontinued prospectively. If a forecasted transaction were no longer probable of occurring,
amounts previously deferred in accumulated other comprehensive income would be recognized
immediately in earnings. On occasion, the Company may enter into a derivative instrument that does
not qualify for hedge accounting because it is entered into to offset changes in the fair value of an
underlying transaction which is required to be recognized in earnings (natural hedge). These
instruments are reflected in the Consolidated Balance Sheets at fair value with changes in fair value
recognized in earnings.
64
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
Foreign currency derivatives include forward foreign exchange contracts primarily for Canadian
dollars. Metal derivatives included commodity swaps for copper. During 2009 and 2008, the Company
used a copper swap as a means of hedging exposure to metal prices (see Note 16).
Portions of the Company’s outstanding debt are exposed to interest rate risks. The Company
monitors its interest rate exposures on an ongoing basis to maximize the overall effectiveness of its
interest rates.
Shipping and Handling
Shipping and handling costs included in selling, general and administrative expense amounted to
$33.5 million, $31.4 million and $39.4 million for the years ended December 31, 2010, 2009 and 2008,
respectively.
Research and Development
Research and development costs included in selling, general, and administrative expense amounted
to $18.6 million, $17.8 million and $17.5 million for the years ended December 31, 2010, 2009 and
2008, respectively.
Revenue Recognition
The Company recognizes revenue when all of the following criteria have been met: the Company
has entered into a binding agreement, the product has been shipped and title passes, the sales price to
the customer is fixed or is determinable, and collectability is reasonably assured. Provisions for
estimated returns and allowances are made at the time of sale, and are recorded as a reduction of sales
and included in the allowance for doubtful accounts in the Consolidated Balance Sheets. The Company
records provisions for sales incentives (primarily volume rebates), as an adjustment to net sales, at the
time of sale based on estimated purchase targets.
Basis of Presentation
Certain amounts in the 2009 consolidated financial statements have been reclassified to permit
comparison with the 2010 presentation. These reclassifications had no effect on reported results of
operations or stockholders’ equity.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Standards
In October 2009, the Financial Accounting Standards Board (FASB) issued an accounting standard
update to improve disclosures related to fair value measurements. This update requires new disclosures
when significant transfers in and out of the various fair value levels occur. This update requires a
reconciliation for fair value measurements using significant unobservable inputs (level 3) be prepared
65
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
on a gross basis, separately presenting information about purchases, sales, issuance and settlements. In
addition, this update amends current disclosure requirements for postretirement benefit plan assets.
This update is effective for interim and annual periods beginning after December 15, 2009, except for
disclosures regarding level 3 fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of this
standard did not have a material impact on the Company’s consolidated financial statements.
(3) Discontinued Operations
In September 2009, the Company’s Board of Directors approved the sale of its investment in
CWV. CWV manufactured large diameter hydraulic-actuated butterfly valves for thermo-power and
hydro-power plants, water distribution projects and water works projects in China. Management
determined that CWV’s business no longer fit strategically with the Company. The Company completed
the sale of CWV in January 2010. During 2009, the Company evaluated the classification of the assets
and liabilities of CWV and concluded that the net assets qualified as discontinued operations. The
Company evaluated the fair value (less cost to sell) of the net assets of CWV and recorded a pre-tax
loss of approximately $8.5 million in 2009, based on the final agreement with the buyer. The Company
concluded that the future cash flows associated with CWV would be completely eliminated from the
continuing operations of the Company. As such, the Company classified CWV’s results of operations
and the loss from the disposition as discontinued operations for all periods presented.
In May 2009, the Company liquidated its TEAM business, located in Ammanford, U.K. TEAM
custom designed and manufactured manipulated pipe and hose tubing assemblies and served the
heating, ventilation and air conditioning and automotive markets in Western Europe. Management
determined the business no longer fit strategically with the Company and that a sale of TEAM was not
feasible. On May 22, 2009, the Company appointed an administrator for TEAM under the United
Kingdom Insolvency Act of 1986. During the administration process, the administrator had sole control
over, and responsibility for, TEAM’s operations, assets and liabilities. The Company deconsolidated
TEAM when the administrator obtained control of TEAM. The deconsolidation resulted in the
recognition of a $18.1 million pre-tax non-cash loss. The Company evaluated the operations of TEAM
and determined that it would not have a continuing involvement in TEAM’s operations and cash flows.
As a result of the loss of control, TEAM’s cash flows and operations were eliminated from the
continuing operations of the Company. As such, the Company classified TEAM’s results of operations
and the loss from deconsolidation as discontinued operations for all periods presented.
Discontinued operating losses for 2010 primarily includes an estimated reserve in connection with
the Foreign Corrupt Practices Act (FCPA) investigation at CWV (see Note 15) and legal costs
associated with the FCPA investigation. The discontinued operating expense for 2009 and 2008 are
related to the operations and write-off of TEAM, operations and estimated loss on the net assets of
CWV and legal costs, net of reserve adjustments, associated with the now concluded James Jones
Litigation (see Note 15).
66
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(3) Discontinued Operations (Continued)
Condensed operating statements for discontinued operations are summarized below:
Operating income (loss)—TEAM . . . . . . . . . . . . . . . . . . . . .
Operating income (loss)—CWV . . . . . . . . . . . . . . . . . . . . . .
Costs and expenses—Municipal Water Group . . . . . . . . . . . .
Write down of net assets—CWV . . . . . . . . . . . . . . . . . . . . .
Adjustments to reserves for litigation—Municipal Water
Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal—TEAM . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended
December 31,
2010
2009
2008
(in millions)
$ — $ (0.3) $ 0.4
(5.7)
2.0
(5.3)
—
(1.1)
(0.3)
(0.1)
(8.5) —
(0.1)
(0.1)
(6.0)
1.7
9.5
—
(18.0) —
(22.9)
(0.7)
1.3
0.1
Income (loss) from discontinued operations, net of taxes . . . .
$(4.3) $(23.6) $ 1.4
The Company did not recognize any tax benefits on the write down of net assets of CWV as the
Company does not believe that it is more likely than not that the tax benefits would be realized.
Revenues reported in discontinued operations are as follows:
Years Ended December 31,
2010
2009
2008
(in millions)
Revenues—CWV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenues—TEAM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
$ — $11.5
2.6
Total revenues—discontinued operations . . . . . . . . . . . . . . .
$ — $14.1
$14.0
13.9
$27.9
The carrying amounts of major classes of assets and liabilities at December 31, 2010 and
December 31, 2009 associated with discontinued operations are as follows:
December 31,
2010
December 31,
2009
(in millions)
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Property, plant & equipment, net
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets of discontinued operations . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . .
Deferred taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities of discontinued operations . . . . . . . . . . . . . . . .
$ —
—
0.4
—
1.4
—
$1.8
$ —
5.8
—
$5.8
$ 4.2
4.2
2.3
1.3
9.6
1.5
$23.1
$ 2.1
7.2
0.5
$ 9.8
67
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(4) Restructuring and Other (Income) Charges
The Company’s Board of Directors (Board) approves all major restructuring programs that involve
the discontinuance of significant product lines or the shutdown of facilities and related capital
expenditures. From time to time, the Company takes additional restructuring actions, including
involuntary terminations that are not part of a major program. The Company accounts for these costs
in the period that the individual employees are notified or the liability is incurred. These costs are
included in restructuring and other charges in the Company’s consolidated statements of operations. A
summary of the pre-tax cost by restructuring program is as follows:
Years Ended
December 31,
2010
2009
2008
(in millions)
Restructuring costs:
2007 Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.0
1.8
11.1
0.2
$ 3.2
9.3
4.6
1.8
$ 3.8
—
—
2.1
Total restructuring costs incurred . . . . . . . . . . . . . . . . . . . . .
Gain on sale of TWT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14.1
18.9
5.9
— (1.1) —
—
— (0.2)
Net restructuring costs and other charges . . . . . . . . . . . . . . .
$14.1
$17.8
$ 5.7
The Company recorded net pre-tax restructuring and other charges in its business segments as
follows:
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China (net of non-controlling interest) . . . . . . . . . . . . . . . . . .
(in millions)
$ 4.3
5.9
7.6
$ 4.1
9.2
0.8
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14.1
$17.8
$4.5
0.2
1.0
$5.7
Years Ended
December 31,
2010
2009
2008
In 2010, pre-tax costs of $1.5 million were recorded in cost of goods sold primarily for accelerated
depreciation associated with the 2010 actions described below. Additionally, net pre-tax costs of
$12.6 million were recorded in restructuring and other charges and are detailed below:
Involuntary termination benefits . . . . . . . . . . . . . . . . . . . . . .
Asset write-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility exit and other costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges . . . . . . . . . . . . . . . . . . . . . .
2010
Actions
2009
Actions
2007
Actions Other
Total
(in millions)
$4.9
0.3
4.4
$9.6
$0.7
0.1
1.0
$1.8
$ — $0.1
—
1.0
0.1
—
$ 5.7
1.4
5.5
$1.0
$0.2
$12.6
68
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(4) Restructuring and Other (Income) Charges (Continued)
In 2009, pre-tax costs of $1.7 million were recorded in costs of goods sold primarily for accelerated
depreciation. Additionally, net pre-tax costs of $16.1 million were recorded in restructuring and other
charges and are detailed below:
Involuntary termination benefits . . . . . . . . . . . . . . . . . . . . . .
Asset write-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility exit and other costs . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges . . . . . . . . . . . . . . . . . . . . . .
2010
Actions
2009
Actions
2007
Actions
Other
Total
$4.2
—
0.4
$4.6
(in millions)
$0.5
2.6
0.1
$ 1.6
—
$ 8.0
8.4
(0.9)* (0.3)
$3.2
$ 0.7
$16.1
$1.7
5.8
0.1
$7.6
*
Includes a $1.1 million gain from the disposition of Tianjin Tanggu Watts Valve Co. Ltd. (TWT).
The TWT gain was deferred from the year ended December 31, 2008 until local government
approvals were finalized.
Also, during 2009, the Company recorded a tax charge of $3.9 million related to previously
realized tax benefits in China, which are expected to be recaptured as a result of the Company’s
decision to restructure its operations in 2009. This tax charge is part of the 2009 actions.
In 2008, pre-tax costs of $0.3 million were recorded in costs of goods sold primarily for accelerated
depreciation. Additionally, net pre-tax costs of $5.6 million were recorded in restructuring and other
charges and are detailed below:
Involuntary termination benefits . . . . . . . . . . . . . . . . . . . . . .
Asset write-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility exit and other costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges . . . . . . . . . . . . . . . . . . . . . .
2007
Actions Other
Total
(in millions)
$2.1
$3.5
— 0.4
— 1.7
$2.1
$5.6
$1.4
0.4
1.7
$3.5
The Company also recognized income of $0.2 million in non-controlling interest representing the
40% liability of its then Chinese joint venture partner in the restructuring plan.
Other in 2008 includes severance charges from a reduction-in-force in the U.S. that occurred and
was completed in 2008.
The following information outlines the Company’s current restructuring plans.
2007 Actions
During 2007, the Company undertook a review of certain product lines and its overall
manufacturing capacity and initiated a Board approved global restructuring program. The Company
also discontinued certain product lines. This program included the shutdown of several manufacturing
facilities and the right-sizing of another facility. The restructuring program and charges for certain
product line discontinuances was expected to include pre-tax charges totaling approximately
$12.9 million. Charges were primarily for asset write-downs and expected net losses on asset disposals,
severance costs and facility exit and other costs.
69
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(4) Restructuring and Other (Income) Charges (Continued)
In 2009, the Company reviewed the remaining activities associated with the 2007 actions related to
Europe. Due in large part to this review, the Company concluded that no further charges for Europe
would be incurred under this program. In February 2010, the Board approved a new program for
Europe that was launched in 2010, and included some of the components identified in the 2007 actions.
The following table presents the total pre-tax charges incurred for the global restructuring program and
product line discontinuances initiated in 2007 by the Company’s reportable segments:
Total Expected
Costs
Incurred through
December 31, 2010
(in millions)
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China (exclusive of non-controlling interest) . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5.7
3.9
3.3
$12.9
$ 9.6
0.6
2.9
$13.1
North America incurred restructuring costs in excess of the planned amount primarily due to the
write-down of a vacated facility to its estimated fair value. As part of the 2007 plan, the Company
closed one facility and consolidated the operations into an existing facility. The plan, when created,
called for the sale of the building once vacated. The plan did not anticipate the significant downturn in
the commercial real estate market, which occurred shortly after the consolidation was completed in
2008. As a result of the continued poor commercial real estate market conditions, in 2010 and 2009,
the Company recorded a reduction in the carrying cost of the building to its estimated fair value, less
the estimated costs to sell, of $1.0 million and $2.3 million, respectively. The remaining excess was
primarily as a result of higher costs incurred to complete the consolidation of the two facilities than
originally anticipated.
The following table summarizes incurred cost for 2007 restructuring actions by segment:
Costs incurred
Year Ended
December 31,
2010
Costs incurred
Year Ended
December 31,
2009
Costs incurred
Year Ended
December 31,
2008
North America . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . .
China (exclusive of minority interest) . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.0
—
—
$1.0
(in millions)
$2.8
0.4
—
$3.2
$2.3
0.2
1.3
$3.8
70
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(4) Restructuring and Other (Income) Charges (Continued)
Details of the Company’s 2007 restructuring actions through December 31, 2010 are as follows:
Severance
Asset write-
downs
Product line
discontinuance
Facility exit
and other
Total
Balance as of December 31, 2007 . . . . . . . . . .
Net pre-tax restructuring charges . . . . . . . . . .
Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2008 . . . . . . . . . . . .
Net pre-tax restructuring charges . . . . . . . . . .
Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2009 . . . . . . . . . . . .
Net pre-tax restructuring charges . . . . . . . . . .
Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.1
1.5
(1.6)
—
0.5
(0.5)
—
—
—
$ —
0.6
(0.6)
—
2.6
(2.6)
—
1.0
(1.0)
(in millions)
$ —
—
—
—
—
—
—
—
—
$ —
1.7
(1.7)
—
0.1
(0.1)
—
—
—
$ 0.1
3.8
(3.9)
—
3.2
(3.2)
—
1.0
(1.0)
Balance at December 31, 2010 . . . . . . . . . . . .
$ —
$ —
$ —
$ —
$ —
The following table summarizes the incurred cost for 2007 restructuring actions by type:
Severance
Asset write-
downs
Product line
discontinuance
Facility exit
and other
Total
Costs incurred—2007 . . . . . . . . . . . . . . . . . . . . . . .
Costs incurred—2008 . . . . . . . . . . . . . . . . . . . . . . .
Costs incurred—2009 . . . . . . . . . . . . . . . . . . . . . . .
Costs incurred—2010 . . . . . . . . . . . . . . . . . . . . . . .
Total costs at December 31, 2010 . . . . . . . . . . . . . . .
$0.6
1.5
0.5
—
$2.6
$1.3
0.6
2.6
1.0
$5.5
(in millions)
$3.1
—
—
—
$3.1
$0.1
1.7
0.1
—
$1.9
$ 5.1
3.8
3.2
1.0
$13.1
Other consists primarily of relocation costs.
2009 Actions
In February 2009, the Board approved a plan to expand the Company’s program to consolidate its
manufacturing footprint in North America and China. The final plan provided for the closure of two
additional plants, with those operations being moved to existing facilities in either North America or
China or relocated to a new central facility in the United States. Another facility had originally been
identified for closure, but its operations had improved substantially and therefore was removed from
the program.
The footprint consolidation pre-tax charge was estimated at approximately $11.7 million, including
severance charges, relocation costs and asset write-downs. One-time tax charges of approximately
$3.9 million were incurred as part of the relocations. Approximately 225 positions were eliminated by
this program. Additionally, the Company spent approximately $3.3 million in capital expenditures to
consolidate operations.
71
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(4) Restructuring and Other (Income) Charges (Continued)
The following table summarizes the total estimated pre-tax charges expected, incurred and
remaining cost for the footprint consolidation-restructuring program initiated in 2009 by the Company’s
reportable segments:
Total Expected
Costs
Incurred through
December 31, 2010
Remaining Costs
North America . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . .
$ 2.7
9.2
$11.9
(in millions)
$ 1.9
9.2
$11.1
$0.8
—
$0.8
The Company does not expect to incur additional costs, as the project is substantially complete.
Details of the Company’s footprint consolidation-restructuring program through December 31,
2010 are as follows:
Severance
Asset write-
downs
Facility exit
and other
Total
(in millions)
Balance at December 31, 2008 . . . . . . . . . . . . . . . .
Net pre-tax restructuring charges . . . . . . . . . . . . . .
Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2009 . . . . . . . . . . . . . . . .
Net pre-tax restructuring charges . . . . . . . . . . . . . .
Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
1.7
(1.7)
—
0.7
(0.7)
$ —
7.5
(7.5)
—
0.1
(0.1)
$ —
0.1
(0.1)
—
1.0
(1.0)
$ —
9.3
(9.3)
—
1.8
(1.8)
Balance at December 31, 2010 . . . . . . . . . . . . . . . .
$ —
$ —
$ —
$ —
2010 Actions
On February 8, 2010, the Board approved a restructuring program with respect to the Company’s
operating facilities in France. The restructuring program is expected to include the consolidation of five
facilities into two facilities. The consolidation of the three facilities includes two manufacturing sites
and one distribution center. The program was originally expected to include pre-tax charges totaling
approximately $12.5 million, including costs for severance, relocation, clean-up and certain asset write-
downs, and result in the elimination of approximately 95 positions. The Company revised its forecast to
$15.5 million primarily for additional severance and legal costs. Total net after-tax charges for this
restructuring program are expected to be approximately $9.7 million (including $1.1 million in non-cash
charges), with costs being incurred through 2011. The Company expects to spend approximately
$6.6 million in capital expenditures to consolidate operations. The Company recorded certain severance
costs related to this program in 2009 as the amounts related to contractual or statutory obligations.
The following table summarizes the total expected, incurred and remaining pre-tax costs for the
2010 Europe footprint consolidation-restructuring program by the Company’s reportable segments:
Europe . . . . . . . . . . . . . . . . . . . . . .
$15.5
$13.7
$1.8
Total Expected
Costs
Incurred through
December 31, 2010
Remaining Costs
(in millions)
72
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(4) Restructuring and Other (Income) Charges (Continued)
Details of the Company’s Europe footprint consolidation-restructuring program through
December 31, 2010 are as follows:
Severance
Asset write-
downs
Facility exit
and other
Total
(in millions)
Balance at December 31, 2008 . . . . . . . . . . . . . . .
Net pre-tax restructuring charges . . . . . . . . . . . . . .
Utilization and foreign currency impact . . . . . . . . .
Balance at December 31, 2009 . . . . . . . . . . . . . . .
Net pre-tax restructuring charges . . . . . . . . . . . . .
Utilization and foreign currency impact . . . . . . . . .
$ —
4.2
—
4.2
2.9
(1.7)
$ —
—
—
—
1.7
(1.7)
$ —
0.4
(0.4)
—
4.5
(4.5)
$ —
4.6
(0.4)
4.2
9.1
(7.9)
Balance at December 31, 2010 . . . . . . . . . . . . . . . .
$ 5.4
$ —
$ —
$ 5.4
The following table summarizes expected, incurred and remaining costs for 2010 Europe footprint
consolidation-restructuring actions by type:
Severance
Asset write-
downs
Facility exit
and other
Total
(in millions)
Expected costs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs incurred—2009 . . . . . . . . . . . . . . . . . . . . . .
Costs incurred—2010 . . . . . . . . . . . . . . . . . . . . . .
Remaining costs at December 31, 2010 . . . . . . . . . .
$ 8.9
(4.2)
(2.9)
$ 1.8
$ 1.7
—
(1.7)
$ —
$ 4.9
(0.4)
(4.5)
$ —
$15.5
(4.6)
(9.1)
$ 1.8
The additional costs that incurred in the Company’s Europe footprint consolidation-restructuring
program primarily came from the unexpected number of employees that elected to make use of the
severance plan, including some higher paid employees.
On September 13, 2010, the Board approved a restructuring program with respect to certain of the
Company’s operating facilities in the United States. The restructuring program includes the shutdown
of two manufacturing facilities in North Carolina. Operations at these facilities will be consolidated into
the Company’s manufacturing facilities in New Hampshire, Missouri and other locations. The program
is expected to include pre-tax charges totaling approximately $4.9 million, including costs for severance,
shutdown costs and equipment write-downs. Additionally, the Company is expecting pre-tax training
and pre-production set-up costs of approximately $2.0 million. The total net after-tax charge for this
restructuring program is expected to be approximately $4.1 million (including $0.4 million in non-cash
charges), with costs being incurred through 2011. The Company expects to spend approximately
$1.2 million in capital expenditures to consolidate operations. The restructuring program is expected to
be completed by the end of the third quarter of 2011.
73
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(4) Restructuring and Other (Income) Charges (Continued)
The following table summarizes the total expected, incurred and remaining pre-tax costs for the
2010 North America footprint consolidation-restructuring program by the Company’s reportable
segments:
Total Expected
Costs
Incurred through
December 31, 2010
Remaining Costs at
December 31, 2010
(in millions)
North America . . . . . . . . . . . . . .
$4.9
$2.0
$2.9
Details of the Company’s 2010 North America footprint consolidation-restructuring program
through December 31, 2010 are as follows:
Severance
Asset write-
downs
Facility exit
and other
Balance at December 31, 2009 . . . . . . . . . . . . . . . .
Net pre-tax restructuring charges . . . . . . . . . . . . . .
Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2010 . . . . . . . . . . . . . . . .
$ —
2.0
—
$2.0
(in millions)
$—
—
—
$—
$—
—
—
$—
Total
$ —
2.0
—
$2.0
The following table summarizes expected, incurred and remaining costs for 2010 North America
footprint consolidation-restructuring actions by type:
Expected costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs incurred—2010 . . . . . . . . . . . . . . . . . . . . . .
Remaining costs at December 31, 2010 . . . . . . . . . .
$ 1.9
(2.0)
$(0.1)
$0.6
—
$0.6
$2.4
—
$2.4
$ 4.9
(2.0)
$ 2.9
Severance
Asset write-
downs
Facility exit
and other
Total
(in millions)
(5) Business Acquisitions and Disposition
On June 28, 2010, the Company acquired 100% of the outstanding stock of Austroflex
Rohr-Isoliersysteme GmbH (Austroflex) for approximately $33.7 million. Austroflex is an Austrian-
based manufacturer of pre-insulated flexible pipe systems for district heating, solar applications and
under-floor radiant heating systems. The acquisition of Austroflex provides the Company with a full
range of pre-insulated PEX tubing, pre-insulated solar tubes, under-floor heating insulation, and
distribution capability and positions the Company as a major supplier of pre-insulated pipe systems in
Europe. The Company completed a purchase price allocation that resulted in the recognition of
$17.2 million of intangible assets and $12.3 million of goodwill. Intangible assets were based on fair
value estimates and are comprised primarily of customer relationships with estimated useful lives of
8 years and trade names with indefinite lives. Goodwill is expected to be tax deductible up to a certain
limit established under Austrian tax rules. Austroflex had annual sales prior to the acquisition of
approximately $23.0 million.
On April 13, 2010, the Company acquired 100% of the outstanding stock of Blue Ridge Atlantic
Enterprises, Inc. (BRAE) located in Oakboro, North Carolina for up to $5.3 million, net of cash
acquired. Of the total purchase price, $0.5 million was paid at closing and the remaining $4.8 million is
contingent upon BRAE achieving a certain performance metric during the year ending December 31,
74
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(5) Business Acquisitions and Disposition (Continued)
2014, and, to the extent achieved, is expected to be paid in cash in 2015. The Company recognized a
liability of $1.9 million as an estimate of the acquisition date fair value of the contingent consideration,
which is based on the net present value of $3.7 million which is derived from the weighted probability
of achievement of the performance metric as of the date of the acquisition. Failure to meet the
performance metric would reduce this liability to $0, while complete achievement would increase this
liability to the full remaining purchase price of $4.8 million. Any change in the fair value of the
acquisition-related contingent consideration subsequent to the acquisition date is recognized in earnings
in the period the estimated fair value changes. The excess fair value of the consideration transferred
over the fair value of the net assets acquired of $2.7 million was allocated to goodwill and trade name.
None of the goodwill is expected to be tax deductible. BRAE is a provider of engineered rain water
harvesting solutions and addresses the commercial, industrial and residential markets. BRAE had
annual sales prior to the acquisition of approximately $2.0 million.
On May 30, 2008, the Company acquired all of the outstanding stock of Bl¨ucher Metal A/S
(Bl¨ucher) for approximately $183.5 million. The purchase price consisted of $170.1 million in cash and
the assumption of debt of $13.4 million, net of cash acquired. Bl¨ucher is a leading provider of stainless
steel drainage systems in Europe to the residential, commercial and industrial market places and is a
worldwide leader in providing stainless steel drainage products to the marine industry. Bl¨ucher provides
the Company with a new product platform in Europe while allowing the Company to offer a broader
product line to its existing customer base. The Company completed a purchase price allocation that
resulted in the recognition of $64.5 million in intangible assets and $89.5 million in goodwill. Intangible
assets are comprised primarily of customer relationships and patents with estimated lives of 10 years
and trade names with indefinite lives. The consolidated results of operations include the results of
Bl¨ucher since the acquisition date of May 30, 2008.
During the second quarter of 2008, the Company completed the acquisition of the remaining 40%
ownership of its joint venture in China, TWT, for $3.3 million in cash. TWT manufactured products to
support the U.S. operations as well as to sell into the local China market. In the third quarter of 2008,
the Company relocated the business supporting the U.S. from TWT into an existing operation in China.
The Company then entered into an agreement to sell TWT. Under this agreement, the Company
determined that the risks and rewards of ownership of TWT were effectively transferred to the buyer as
of October 18, 2008. The Company further determined that it was no longer the beneficiary of the
operating results of TWT and therefore deconsolidated TWT as of October 18, 2008. The Company
recognized a $1.1 million gain from the sale in 2009 upon the final approval of the transfer by Chinese
government authority. See Note 3 for additional information concerning dispositions.
The results of operations for BRAE are included in the Company’s North America segment and
the results of operations of Austroflex and Bl¨ucher are included in the Company’s Europe segment
since their respective acquisition dates and were not material to the Company’s consolidated financial
statements.
Certain acquisition agreements from prior years contain earn-out provisions. In 2010, 2009 and
2008, the Company accrued approximately $0.5 million, $0.5 million and $0.4 million, respectively, for
earn-out provisions which were charged to goodwill and were paid in the year following each earn-out.
The calculations are typically based on a multiple of future gross margins or operating earnings as
defined in the agreements.
75
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(6) Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consists of the following:
Balance December 31, 2008 . . . . . . . . . . . . . . . . . .
Change in period . . . . . . . . . . . . . . . . . . . . . . . . .
Balance December 31, 2009 . . . . . . . . . . . . . . . . . .
Change in period . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign
Currency
Translation
$ 25.4
26.2
51.6
(26.7)
Balance December 31, 2010 . . . . . . . . . . . . . . . . . .
$ 24.9
(7) Inventories, net
Inventories consist of the following:
Defined Benefit
Pension Plans
(in millions)
$(25.2)
3.7
(21.5)
(3.7)
$(25.2)
Accumulated
Other
Comprehensive
Income (Loss)
$ 0.2
29.9
30.1
(30.4)
$ (0.3)
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2010
2009
(in millions)
$ 85.4
36.4
143.8
$ 88.0
36.5
142.2
$265.6
$266.7
Raw materials, work-in-process and finished goods are net of valuation reserves of $23.9 million
and $25.7 million as of December 31, 2010 and 2009, respectively. Finished goods of $14.7 million and
$13.8 million as of December 31, 2010 and 2009, respectively, were consigned.
(8) Property, Plant and Equipment
Property, plant and equipment consists of the following:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2010
2009
(in millions)
$ 13.3
132.1
297.8
7.3
$ 13.7
128.7
300.4
12.1
450.5
(253.0)
454.9
(248.4)
$ 197.5
$ 206.5
76
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(9) Income Taxes
The significant components of the Company’s deferred income tax liabilities and assets are as
follows:
Deferred income tax liabilities:
Excess tax over book depreciation . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets:
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carry-forward . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension—accumulated other comprehensive income . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2010
2009
(in millions)
$13.7
29.3
12.8
55.8
$16.4
30.5
9.5
56.4
17.9
8.1
9.4
15.8
15.6
66.8
(9.1)
57.7
21.6
10.0
6.3
13.4
10.3
61.6
(9.8)
51.8
Net deferred tax assets (liabilities) . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.9
$ (4.6)
The provision for income taxes from continuing operations is based on the following pre-tax
income:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended
December 31,
2010
2009
2008
(in millions)
$21.5
50.8
$ 0.9
67.1
$72.3
$68.0
$43.5
51.0
$94.5
77
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(9) Income Taxes (Continued)
The provision for income taxes from continuing operations consists of the following:
Current tax expense:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax expense (benefit):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended
December 31,
2010
2009
2008
(in millions)
$12.0
20.5
2.9
35.4
$ 1.9
23.5
0.6
$ 7.5
24.2
1.9
26.0
33.6
1.6
(5.9)
0.3
(4.0)
6.8
(3.3)
1.8
5.3
(0.2)
(7.4)
(1.3)
(8.9)
$31.4
$31.3
$24.7
Actual income taxes reported from continuing operations are different than would have been
computed by applying the federal statutory tax rate to income from continuing operations before
income taxes. The reasons for this difference are as follows:
Computed expected federal income expense . . . . . . . . . . . . .
State income taxes, net of federal tax benefit
. . . . . . . . . . . .
Foreign tax rate differential . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended
December 31,
2010
2009
2008
(in millions)
$25.3
1.5
2.5
—
—
2.0
$33.0
2.1
(3.3)
—
—
(0.4)
$23.8
0.4
(6.9)
4.2
3.2
—
$31.4
$31.3
$24.7
At December 31, 2010, the Company has foreign net operating loss carry forwards of $31.5 million
for income tax purposes; $1.0 million of the losses can be carried forward indefinitely, $7.6 million of
the losses expire in 2015, $4.6 million expire in 2016, and $18.3 million expire between 2017-2019. The
net operating losses consist of $1.0 million related to Austrian operations, $22.9 million to Netherland
operations, and $7.6 related to Chinese operations.
At December 31, 2010, the Company had a valuation allowance of $9.1 million. In the U.S.,
$6.9 million relates to capital losses as management believes it is not more likely than not that the
Company would use such losses within the applicable carryforward period. In China, a valuation
allowance of $2.2 million relates to the deferred tax assets of TWVC, a Chinese subsidiary, that the
Company believes will not be utilized. The Company does not have a valuation allowance on other
deferred tax assets, as management believes that it is more likely than not that the Company will
recover the net deferred tax assets.
78
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(9) Income Taxes (Continued)
Enacted changes in income tax laws had no material effect on the Company in 2010, 2009 or 2008.
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately
$313.0 million at December 31, 2010, $320.3 million at December 31, 2009, and $311.7 million at
December 31, 2008. Those earnings are considered to be indefinitely reinvested and, accordingly, no
provision for U.S. federal and state income taxes has been recorded thereon. Upon distribution of
those earnings, in the form of dividends or otherwise, the Company will be subject to withholding taxes
payable to the various foreign countries. Determination of the amount of U.S. income tax liability that
would be incurred is not practicable because of the complexities associated with its hypothetical
calculation; however, unrecognized foreign tax credits may be available to reduce some portion of any
U.S. income tax liability. Withholding taxes of approximately $7.2 million would be payable upon
remittance of all previously unremitted earnings at December 31, 2010.
(10) Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
Commissions and sales incentives payable . . . . . . . . . . . . . . . . . . .
Accrued product liability and workers’ compensation . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(11) Financing Arrangements
Long-term debt consists of the following:
5.85% notes due April 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.87% notes due May 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.47% notes due May 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.05% notes due June 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other—consists primarily of European borrowings (at interest rates
ranging from 4.1% to 6.0%) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less Current Maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2010
2009
(in millions)
$ 35.9
29.4
43.0
7.3
$ 37.2
32.5
34.2
2.0
$115.6
$105.9
December 31,
2010
2009
(in millions)
$225.0
—
75.0
75.0
$225.0
50.0
75.0
—
3.7
378.7
0.7
4.9
354.9
50.9
$378.0
$304.0
79
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(11) Financing Arrangements (Continued)
Principal payments during each of the next five years and thereafter are due as follows (in
millions): 2011—$0.7; 2012—$0.7; 2013—$75.7; 2014—$0.7; 2015—$0.8 and thereafter—$300.1.
The Company maintains letters of credit that guarantee its performance or payment to third
parties in accordance with specified terms and conditions. Amounts outstanding were approximately
$34.9 million as of December 31, 2010 and $37.0 million as of December 31, 2009. The Company’s
letters of credit are primarily associated with insurance coverage and to a lesser extent foreign
purchases. The Company’s letters of credit generally expire within one year of issuance and are drawn
down against the revolving credit facility. These instruments may exist or expire without being drawn
down. Therefore, they do not necessarily represent future cash flow obligations.
On June 18, 2010, the Company entered into a note purchase agreement with certain institutional
investors (the 2010 Note Purchase Agreement). Pursuant to the 2010 Note Purchase Agreement, the
Company issued senior notes of $75.0 million in principal, due June 18, 2020. The Company will pay
interest on the outstanding balance of the Notes at the rate of 5.05% per annum, payable
semi-annually on June 18 and December 18 until the principal on the Notes shall become due and
payable. The Company may, at its option, upon notice, and subject to the terms of the 2010 Note
Purchase Agreement, prepay at any time all or part of the Notes in an amount not less than $1 million
by paying the principal amount plus a make-whole amount (as defined in the 2010 Note Purchase
Agreement).
The 2010 Note Purchase Agreement includes operational and financial covenants, with which the
Company is required to comply, including, among others, maintenance of certain financial ratios and
restrictions on additional indebtedness, liens and dispositions. Events of defaults under the 2010 Note
Purchase Agreement include failure to comply with the financial and operational covenants, as well as
bankruptcy and other insolvency events. If an event of default occurs and is continuing, then a majority
of the note holders have the right to accelerate and require the Company to repay all the outstanding
notes under the 2010 Note Purchase Agreement. In limited circumstances, such acceleration is
automatic. As of December 31, 2010, the Company was in compliance with all covenants related to the
2010 Note Purchase Agreement.
On June 18, 2010, the Company entered into a credit agreement (the Credit Agreement) among
the Company, certain subsidiaries of the Company who become borrowers under the Credit
Agreement, Bank of America, N.A., as Administrative Agent, swing line lender and letter of credit
issuer, and the other lenders referred to therein. The Credit Agreement provides for a $300 million,
five-year, senior unsecured revolving credit facility which may be increased by an additional
$150 million under certain circumstances and subject to the terms of the Credit Agreement. The Credit
Agreement has a sublimit of up to $75.0 million in letters of credit. The Credit Agreement replaced the
2006 unsecured revolving credit facility.
Borrowings outstanding under the Credit Agreement bear interest at a fluctuating rate per annum
equal to (i) in the case of Eurocurrency rate loans, the British Bankers Association LIBOR rate plus
an applicable percentage, ranging from 1.70% to 2.30%, determined by reference to the Company’s
consolidated leverage ratio plus, in the case of certain lenders, a mandatory cost calculated in
accordance with the terms of the Credit Agreement, or (ii) in the case of base rate loans and swing line
loans, the highest of (a) the federal funds rate plus 0.5%, (b) the rate of interest in effect for such day
as announced by Bank of America, N.A. as its ‘‘prime rate,’’ and (c) the British Bankers Association
LIBOR rate plus 1.0%, plus an applicable percentage, ranging from 0.70% to 1.30%, determined by
reference to the Company’s consolidated leverage ratio. In addition to paying interest under the Credit
80
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(11) Financing Arrangements (Continued)
Agreement, the Company is also required to pay certain fees in connection with the credit facility,
including, but not limited to, a facility fee and letter of credit fees. The Credit Agreement expires on
June 18, 2015. The Company may repay loans outstanding under the Credit Agreement from time to
time without premium or penalty, other than customary breakage costs, if any, and subject to the terms
of the Credit Agreement.
Under the Credit Agreement, the Company is required to satisfy and maintain specified financial
ratios and other financial condition tests. As of December 31, 2010, the Company was in compliance
with all covenants related to the Credit Agreement and had $265.3 million of unused and available
credit under the Credit Agreement and $34.7 million of stand-by letters of credit outstanding on the
Credit Agreement. There were no borrowings under the Credit Agreement at December 31, 2010.
On April 27, 2006, the Company completed a private placement of $225.0 million of 5.85% senior
unsecured notes due April 2016 (the 2006 Note Purchase Agreement). The 2006 Note Purchase
Agreement includes operational and financial covenants, with which the Company is required to
comply, including, among others, maintenance of certain financial ratios and restrictions on additional
indebtedness, liens and dispositions. Events of default under the 2006 Note Purchase Agreement
include failure to comply with its financial and operational covenants, as well as bankruptcy and other
insolvency events. The Company may, at its option, upon notice to the noteholders, prepay at any time
all or part of the Notes in an amount not less than $1.0 million by paying the principal amount plus a
make-whole amount, which is dependent upon the yield of respective U.S. Treasury Securities. As of
December 31, 2010, the Company was in compliance with all covenants related to the 2006 Note
Purchase Agreement. The payment of interest on the senior unsecured notes is due semi-annually on
April 30th and October 30th of each year.
On May 15, 2003, the Company completed a private placement of $125.0 million of senior
unsecured notes consisting of $50.0 million principal amount of 4.87% senior notes due 2010 and
$75.0 million principal amount of 5.47% senior notes due May 2013. The payment of interest on the
senior unsecured notes was due semi-annually on May 15th and November 15th of each year. In May
2010, the Company repaid $50.0 million in principal of 4.87% senior notes due upon maturity. As of
December 31, 2010, the Company was in compliance with all covenants related to the note purchase
agreement.
(12) Common Stock
The Class A Common Stock and Class B Common Stock have equal dividend and liquidation
rights. Each share of the Company’s Class A Common Stock is entitled to one vote on all matters
submitted to stockholders and each share of Class B Common Stock is entitled to ten votes on all such
matters. Shares of Class B Common Stock are convertible into shares of Class A Common Stock, on a
one-to-one basis, at the option of the holder. As of December 31, 2010, the Company has reserved a
total of 3,668,183 of Class A Common Stock for issuance under its stock-based compensation plans and
6,953,680 shares for conversion of Class B Common Stock to Class A Common Stock.
In November 2007, the Company announced that its Board of Directors had authorized a
repurchase of up to 3.0 million shares of its Class A Common Stock. As of December 31, 2010, the
Company had repurchased 2.45 million shares of stock for a total cost of $68.1 million. The Company
has not repurchased any shares of stock since 2008.
81
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(13) Stock-Based Compensation
The Company maintains three stock incentive plans under which key employees and outside
directors have been granted incentive stock options (ISOs) and nonqualified stock options (NSOs) to
purchase the Company’s Class A Common Stock. Only one plan, the 2004 Stock Incentive Plan, is
currently available for the grant of new equity awards. Stock options granted under prior plans became
exercisable over a five-year period at the rate of 20% per year and expire ten years after the date of
grant. Under the 2004 Stock Incentive Plan, options become exercisable over a four-year period at the
rate of 25% per year and expire ten years after the grant date. ISOs and NSOs granted under the plans
may have exercise prices of not less than 100% and 50% of the fair market value of the Class A
Common Stock on the date of grant, respectively. The Company’s current practice is to grant all
options at fair market value on the grant date. At December 31, 2010, 2,003,598 shares of Class A
Common Stock were authorized for future grants of new equity awards under the Company’s stock
incentive plans.
The Company grants shares of restricted stock to key employees and non-employee members of
the Company’s Board of Directors under the 2004 Stock Incentive Plan, which vest either immediately,
over a one-year period, or over a three-year period at the rate of one-third per year. The restricted
stock awards are amortized to expense on a straight-line basis over the vesting period.
The Company also has a Management Stock Purchase Plan that allows for the granting of
restricted stock units (RSUs) to key employees. On an annual basis, key employees may elect to receive
a portion of their annual incentive compensation in RSUs instead of cash. Each RSU provides the key
employee with the right to purchase a share of Class A Common Stock at 67% of the fair market value
on the date of grant. RSUs vest ratably over a three-year period from the grant date. An aggregate of
2,000,000 shares of Class A Common Stock may be issued under the Management Stock Purchase Plan.
2004 Stock Incentive Plan
At December 31, 2010, total unrecognized compensation cost related to the unvested stock options
was approximately $5.2 million with a total weighted average remaining term of 3.0 years. For 2010,
2009 and 2008, the Company recognized compensation cost of $1.7 million, $1.7 million and
$2.3 million, respectively, in selling, general and administrative expenses.
The following is a summary of stock option activity and related information:
2010
Weighted
Average
Exercise
Price
Options
Outstanding at beginning of year . . . . . . . . . . 1,300
282
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(94)
Cancelled/Forfeitures . . . . . . . . . . . . . . . . . . .
(185)
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . .
$26.25
33.65
23.33
19.69
Years Ended December 31,
2009
2008
Intrinsic
Value Options
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
(Options in thousands)
1,216
214
(101)
(29)
$26.07
26.34
27.63
14.23
1,168
202
(68)
(86)
$25.32
29.35
31.68
19.08
Outstanding at end of year . . . . . . . . . . . . . . 1,303
$29.00
$7.59
1,300
$26.25
1,216
$26.07
Exercisable at end of year . . . . . . . . . . . . . . .
769
$27.56
$9.02
882
$24.98
800
$23.22
82
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(13) Stock-Based Compensation (Continued)
As of December 31, 2010, the aggregate intrinsic values of exercisable options were approximately
$6.9 million, representing the total pre-tax intrinsic value, based on the Company’s closing Class A
Common Stock price of $36.59 as of December 31, 2010, which would have been received by the
option holders had all option holders exercised their options as of that date. The total intrinsic value of
options exercised for 2010, 2009 and 2008 was approximately $2.7 million, $0.3 million and $0.8 million,
respectively.
Upon exercise of options, the Company issues shares of Class A Common Stock.
The following table summarizes information about options outstanding at December 31, 2010:
Range of Exercise Prices
$10.56–$14.08 . . . . . . . .
$14.09–$17.60 . . . . . . . .
$17.61–$28.16 . . . . . . . .
$28.17–$31.68 . . . . . . . .
$31.69–$35.21 . . . . . . . .
Options Outstanding
Options Exercisable
Number
Outstanding
Weighted Average
Remaining Contractual
Life (years)
Weighted Average
Exercise
Price
Number
Exercisable
Weighted Average
Exercise
Price
(Options in thousands)
6
161
306
156
674
1,303
1.34
2.17
6.60
7.58
7.21
6.46
$10.58
16.78
25.82
29.35
33.44
$29.00
6
161
165
76
361
769
$10.58
16.78
25.37
29.35
33.29
$27.56
The fair value of each option granted under the 2004 Stock Incentive Plan is estimated on the date
of grant, using the Black-Scholes-Merton Model, based on the following weighted average assumptions:
Years Ended
December 31,
2010
2009
2008
Expected life (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.0
6.0
6.0
41.3% 41.2% 35.6%
1.3% 1.7% 1.5%
1.9% 2.8% 3.5%
The risk-free interest rate is based upon the U.S. Treasury yield curve at the time of grant for the
respective expected life of the option. The expected life (estimated period of time outstanding) of
options and volatility were calculated using historical data. The expected dividend yield of stock is the
Company’s best estimate of the expected future dividend yield. The Company applied an estimated
forfeiture rate of 6.75%, 6.75% and 15.0% for 2010, 2009 and 2008, respectively, for its stock options.
These rates were calculated based upon historical activity and are an estimate of granted shares not
expected to vest. If actual forfeitures differ from the expected rates, the Company may be required to
make additional adjustments to compensation expense in future periods.
The above assumptions were used to determine the weighted average grant-date fair value of stock
options of $12.36, $9.70 and $10.10 for the years ending December 31, 2010, 2009 and 2008,
respectively.
83
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(13) Stock-Based Compensation (Continued)
The following is a summary of unvested restricted stock activity and related information:
Years Ended December 31,
2010
2009
2008
Weighted
Average
Grant Date
Fair Value
Shares
Weighted
Average
Grant Date
Fair Value
(Shares in thousands)
$28.20
33.65
28.09
29.24
$31.39
115
86
(16)
(68)
117
$31.28
26.21
29.15
30.62
$28.20
Shares
89
80
(7)
(47)
115
Weighted
Average
Grant Date
Fair Value
$34.05
29.35
33.71
32.92
$31.28
Shares
117
105
(7)
(53)
162
Unvested at beginning of year . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled/Forfeitures . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested at end of year . . . . . . . . . . . . . .
The total fair value of shares vested during 2010, 2009 and 2008 was $1.5 million, $2.1 million and
$1.4 million, respectively. At December 31, 2010, total unrecognized compensation cost related to
unvested restricted stock was approximately $4.1 million with a total weighted average remaining term
of 2.1 years. For 2010, 2009 and 2008, the Company recognized compensation costs of $1.8 million,
$2.0 million and $1.8 million, respectively, in selling, general and administrative expenses. The
Company applied an estimated forfeiture rate of 9.75%, 5.2% and 10.0% for 2010, 2009 and 2008,
respectively, for restricted stock issued to key employees. The aggregate intrinsic value of restricted
stock granted and outstanding approximated $5.9 million representing the total pre-tax intrinsic value
based on the Company’s closing Class A Common Stock price of $36.59 as of December 31, 2010.
Management Stock Purchase Plan
Total unrecognized compensation cost related to unvested RSUs was approximately $1.8 million at
December 31, 2010 with a total weighted average remaining term of 1.9 years. For 2010, 2009 and 2008
the Company recognized compensation cost of $1.2 million, $1.2 million and $1.2 million, respectively,
in selling, general and administrative expenses. Dividends declared for RSUs, that are paid to
individuals, that remain unpaid at December 31, 2010 total approximately $0.2 million.
A summary of the Company’s RSU activity and related information is shown in the following
table:
Years Ended December 31,
2009
2008
2010
Weighted
Average
Purchase
Price
$18.13
19.87
16.68
23.95
Intrinsic
Value
RSUs
Weighted
Average
Purchase
Price
(RSU’s in thousands)
297
150
(7)
(90)
$21.86
13.25
18.08
22.31
$16.92
$19.67
$15.21
$21.38
350
131
$18.13
$21.12
Weighted
Average
Purchase
Price
$18.98
19.09
23.23
22.06
$21.86
$20.27
RSUs
366
60
(19)
(110)
297
133
Outstanding at beginning of period . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled/Forfeitures . . . . . . . . . . . . . . . . . . .
Settled . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at end of period . . . . . . . . . . . . .
Vested at end of period . . . . . . . . . . . . . . . . .
RSUs
350
159
(21)
(127)
361
105
84
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(13) Stock-Based Compensation (Continued)
As of December 31, 2010, the aggregate intrinsic values of outstanding and vested RSUs were
approximately $7.1 million and $2.2 million, respectively, representing the total pre-tax intrinsic value,
based on the Company’s closing Class A Common Stock price of $36.59 as of December 31, 2010,
which would have been received by the RSUs holders had all RSUs settled as of that date. The total
intrinsic value of RSUs settled for 2010, 2009 and 2008 was approximately $0.7 million, $0.1 million
and $0.7 million, respectively. Upon settlement of RSUs, the Company issues shares of Class A
Common Stock.
The following table summarizes information about RSUs outstanding at December 31, 2010:
Range of Purchase Prices
$7.04–$10.56 . . . . . . . . . . .
$10.57–$17.60 . . . . . . . . . .
$17.61–$21.11 . . . . . . . . . .
$21.12–$24.64 . . . . . . . . . .
$24.65–$25.73 . . . . . . . . . .
RSUs Outstanding
RSUs Vested
Number
Outstanding
Weighted Average
Remaining Contractual
Life (years)
Weighted Average
Purchase
Price
Number
Vested
Weighted Average
Purchase
Price
(RSUs in thousands)
22
128
203
5
3
361
2.5
1.2
1.7
2.3
1.1
1.7
$ 9.92
13.25
19.69
22.65
25.73
$16.92
22
43
32
5
3
105
$ 9.92
13.25
19.09
22.65
25.73
$15.21
The fair value of each share issued under the Management Stock Purchase Plan is estimated on
the date of grant, using the Black-Scholes-Merton Model, based on the following weighted average
assumptions:
Expected life (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended
December 31,
2010
2009
2008
3.0
3.0
3.0
45.6% 45.0% 37.2%
1.5% 2.2% 1.5%
1.5% 1.4% 2.2%
The risk-free interest rate is based upon the U.S. Treasury yield curve at the time of grant for the
respective expected life of the RSUs. The expected life (estimated period of time outstanding) of RSUs
and volatility were calculated using historical data. The expected dividend yield of stock is the
Company’s best estimate of the expected future dividend yield. The Company applied an estimated
forfeiture rate of 6.3% of 5.2% and 10.0% for 2010, 2009 and 2008, respectively, for its RSUs. These
rates were calculated based upon historical activity and are an estimate of granted shares not expected
to vest. If actual forfeitures differ from the expected rates, the Company may be required to make
additional adjustments to compensation expense in future periods.
The above assumptions were used to determine the weighted average grant-date fair value of
RSUs granted of $12.81, $8.14 and $11.44 during 2010, 2009 and 2008, respectively.
The Company distributed dividends of $0.44 per share for 2010, 2009 and 2008 on the Company’s
Class A Common Stock and Class B Common Stock.
85
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(14) Employee Benefit Plans
The Company sponsors funded and unfunded non-contributing defined benefit pension plans that
together cover substantially all of its domestic employees. Benefits are based primarily on years of
service and employees’ compensation. The funding policy of the Company for these plans is to
contribute an annual amount that does not exceed the maximum amount that can be deducted for
federal income tax purposes.
The funded status of the defined benefit plans and amounts recognized in the consolidated balance
sheet are as follows:
Change in projected benefit obligation
Balance at beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administration cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2010
2009
(in millions)
$ 96.1
4.6
(1.0)
5.7
10.2
(3.0)
$ 87.1
4.1
(0.7)
5.2
3.2
(2.8)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$112.6
$ 96.1
Change in fair value of plan assets
Balance at beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual (loss) gain on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administration cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 66.6
7.4
20.3
(1.0)
(3.0)
$ 44.9
9.0
16.2
(0.7)
(2.8)
Fair value of plan assets at end of the year . . . . . . . . . . . . . . . . .
$ 90.3
$ 66.6
Funded status at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (22.3) $(29.5)
Amounts recognized in the consolidated balance sheet are as follows:
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2010
2009
(in millions)
$ (0.1) $ (0.1)
(22.2)
(29.4)
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(22.3) $(29.5)
Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service cost
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2010
2009
(in millions)
$39.3
1.7
$41.0
$32.8
2.0
$34.8
86
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(14) Employee Benefit Plans (Continued)
Information for pension plans with an accumulated benefit obligation in excess of plan assets are
as follows:
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The components of net periodic benefit cost are as follows:
December 31,
2010
2009
(in millions)
$112.6
$102.8
$ 90.3
$96.1
$88.2
$66.6
Service cost—benefits earned . . . . . . . . . . . . . . . . . . . . . .
Interest costs on benefits obligation . . . . . . . . . . . . . . . . .
Expected return on assets . . . . . . . . . . . . . . . . . . . . . . . .
Prior service cost amortization . . . . . . . . . . . . . . . . . . . . .
Net actuarial loss amortization . . . . . . . . . . . . . . . . . . . . .
Net periodic benefit cost
. . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2010
2009
2008
(in millions)
$ 4.1
5.2
(4.0)
0.3
3.0
$ 8.6
$ 4.6
5.7
(6.0)
0.3
2.3
$ 6.9
$ 3.4
4.7
(4.9)
0.2
0.4
$ 3.8
The estimated net actuarial loss and prior service cost for the defined benefit pension plans that
will be amortized from accumulated other comprehensive income into net periodic benefit cost over the
next year are $2.3 million and $0.3 million, respectively.
Assumptions:
Weighted-average assumptions used to determine benefit obligations:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.50% 6.00%
4.00% 4.00%
Weighted-average assumptions used to determine net periodic benefit costs:
December 31,
2010
2009
Years Ended
December 31,
2010
2009
2008
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term rate of return on assets . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . .
6.00% 6.00% 6.00%
8.50% 8.50% 8.50%
4.00% 4.00% 4.00%
Discount rates are selected based upon rates of return at the measurement date utilizing a bond
matching approach to match the expected benefit cash flows. In selecting the expected long-term rate
of return on assets, the Company considers the average rate of earnings expected on the funds invested
or to be invested to provide for the benefits of this plan. This includes considering the trust’s asset
allocation and the expected returns likely to be earned over the life of the plan. This basis is consistent
with the prior year.
87
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(14) Employee Benefit Plans (Continued)
Plan assets:
The weighted average asset allocations by asset category is as follows:
Asset Category
December 31,
2010
2009
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42.5% 60.6%
40.2
17.3
33.4
6.0
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0% 100.0%
(a) Allocation as of December 31, 2010 includes in other $10.1 million of cash which was
received and invested on December 28, 2010, but did not settle until January 3, 2011.
The Company’s written Retirement Plan Investment Policy sets forth the investment policy,
objectives and constraints of the Watts Water Technologies, Inc. Pension Plan. This Retirement Plan
Investment Policy, set forth by the Pension Plan Committee, defines general investment principles and
directs investment management policy, addressing preservation of capital, risk aversion and adherence
to investment discipline. Investment managers are to make a reasonable effort to control risk and are
evaluated quarterly against commonly accepted benchmarks to ensure that the risk assumed is
commensurate with the given investment style and objectives.
The portfolio is designed to achieve a balanced return of current income and modest growth of
capital, while achieving returns in excess of the rate of inflation over the investment horizon in order to
preserve purchasing power of Plan assets. All Plan assets are required to be invested in liquid
securities. Derivative investments are not allowed.
Prohibited investments include, but are not limited to the following: futures contracts, private
placements, options, limited partnerships, venture-capital investments, interest-only (IO), principal-only
(PO), and residual tranche CMOs, and Watts Water Technologies, Inc. stock.
Prohibited transactions include, but are not limited to the following: short selling and margin
transactions.
Allowable assets include: cash equivalents, fixed income securities, equity securities, mutual funds,
and GICs.
Specific guidelines regarding allocation of assets are as follows: equities shall comprise between
25% and 75% of the total portfolio, while fixed income shall comprise between 30% and 65%.
Investment performance is monitored on a regular basis and investments are re-allocated to stay within
specific guidelines. An equity/fixed income allocation of 50%/50% is preferred. The securities of any
one company or government agency should not exceed 10% of the total fund, and no more than 20%
of the total fund should be invested in any one industry. Individual treasury securities may represent
50% of the total fund, while the total allocation to treasury bonds and notes may represent up to 100%
of the Plan’s aggregate bond position.
88
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(14) Employee Benefit Plans (Continued)
The following table presents the investments in the pension plan measured at fair value at
December 31, 2010:
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities
Level
1
Level
2
Level
3
(in millions)
Total
$ — $10.1
$ — $10.1
U.S. equity securities(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. equity securities(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.5
9.0
16.9
— — 12.5
— —
9.0
— — 16.9
Debt securities
U.S. government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. and non-U.S. corporate(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.1
— — 10.1
— 26.2 — 26.2
5.5
0.3 —
5.2
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$53.7
$36.6
$ — $90.3
(a) Includes investments in common stock from diverse industries
(b) Includes investments in index and exchange-traded funds
(c)
Includes investment grade bonds from diverse industries
(d) Includes investments in real estate investment funds, exchange-traded funds and commodity mutual
funds
Cash flows:
The information related to the Company’s pension funds cash flow is as follows:
December 31,
2010
2009
(in millions)
Employer Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20.3
$ 3.0
$16.2
$ 2.8
The Company expects to contribute approximately $10.0 million in 2011.
Expected benefit payments to be paid by the pension plans are as follows:
During fiscal year ending December 31, 2011 . . . . . . . . . . . . . . . . . . . . .
During fiscal year ending December 31, 2012 . . . . . . . . . . . . . . . . . . . . .
During fiscal year ending December 31, 2013 . . . . . . . . . . . . . . . . . . . . .
During fiscal year ending December 31, 2014 . . . . . . . . . . . . . . . . . . . . .
During fiscal year ending December 31, 2015 . . . . . . . . . . . . . . . . . . . . .
During fiscal year ending December 31, 2016 through December 31, 2020 .
$ 3.6
$ 4.0
$ 4.4
$ 4.8
$ 5.4
$35.6
(in millions)
89
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(14) Employee Benefit Plans (Continued)
Additionally, substantially all of the Company’s domestic employees are eligible to participate in
certain 401(k) savings plans. Under these plans, the Company matches a specified percentage of
employee contributions, subject to certain limitations. The Company’s match contributions (included in
selling, general and administrative expense) for the year ended December 31, 2010 and 2009 were
$0.5 million in each year, respectively, and for the year ended December 31, 2008 was $0.6 million.
Charges for European pension plans approximated $3.5 million, $2.8 million and $3.3 million for the
years ended December 31, 2010, 2009 and 2008, respectively. These costs relate to plans administered
by certain European subsidiaries, with benefits calculated according to government requirements and
paid out to employees upon retirement or change of employment.
The Company entered into a Supplemental Compensation Agreement (the Agreement) with
Timothy P. Horne on September 1, 1996. Per the Agreement, upon ceasing to be an employee of the
Company, Mr. Horne must make himself available, as requested by the Board, to work a minimum of
300 but not more than 500 hours per year as a consultant in return for certain annual compensation as
long as he is physically able to do so. If Mr. Horne complies with the consulting provisions of the
agreement above, he shall receive supplemental compensation on an annual basis of $0.4 million per
year, subject to cost of living increases each year, in exchange for the services performed, as long as he
is physically able to do so. In the event of physical disability, subsequent to commencing consulting
services for the Company, Mr. Horne will continue to receive this payment annually. The payment for
consulting services provided by Mr. Horne will be expensed as incurred by the Company. Mr. Horne
retired effective December 31, 2002, and therefore the Supplemental Compensation period began on
January 1, 2003. In accordance with GAAP, the Company accrues for the future post-retirement
disability benefits over the period from January 1, 2003, to the time in which Mr. Horne becomes
physically unable to perform his consulting services (the period in which the disability benefits are
earned).
(15) Contingencies and Environmental Remediation
James Jones Litigation
The Company was party to a lawsuit filed by Nora Armenta in California Superior Court against
us, James Jones Company, Mueller Co. and Tyco International (the ‘‘Armenta case’’) and a separate
lawsuit filed in California Superior Court on behalf of the City of Banning, California and 42 other
cities and water districts in California against the Company, James Jones Company and Mueller Co.
(the ‘‘City of Banning case’’). At a mediation session held with the California Superior Court on
June 9-10, 2009, the parties to the Armenta case and the City of Banning case agreed in principle to
settle both cases. An agreement in principle also was reached to settle the related insurance coverage
cases Watts Industries, Inc. vs. Zurich American Insurance Company, et al., and Zurich American
Insurance Company vs. Watts Industries, Inc., et al., pending in California Superior Court; and Zurich
American Insurance Company vs. Watts Industries, Inc. and James Jones Company, pending in the United
States District Court for the Northern District of Illinois, Eastern Division. The settlement of the
insurance coverage cases was effective and binding upon approval of the settlement of the underlying
Armenta case and City of Banning case.
The settlement agreement was approved by the plaintiffs in both the Armenta and City of Banning
cases and, at the fairness hearing held on November 5, 2009, the California Superior Court approved
the settlement of the Armenta case and City of Banning case. Based on the contemporaneous final
settlement of the underlying insurance coverage cases, the Company’s contribution to the settlement
was $15.3 million. As a result of the settlements, all lawsuits and all claims were dismissed. In addition,
90
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(15) Contingencies and Environmental Remediation (Continued)
separate from the settlement, the Company paid its outside counsel an additional $5.0 million for
services rendered in connection with the above described litigation.
As a result of the settlement of the above described litigation, the Company recorded a non-cash,
pre-tax gain in discontinued operations of approximately $9.5 million in 2009 to reduce previously
recorded estimates of the loss and related fees to the amounts noted above.
Foreign Corrupt Practices Act Investigation
In 2009, the Company conducted an investigation into payments made by employees of CWV, at
that time an indirect wholly-owned subsidiary of the Company in China, to individuals associated with
state-owned agencies that may violate the United States Foreign Corrupt Practices Act (FCPA). The
Company voluntarily disclosed this matter to the Securities and Exchange Commission (SEC) and the
Department of Justice (DOJ). The Company had engaged in negotiations with the staff of the SEC and
DOJ to resolve potential violations of the FCPA relating to these payments. Those negotiations reached
a stage at which the Company was able to estimate a probable pre-tax charge in connection with these
matters of approximately $5.3 million, which amount includes estimated disgorgement of profits and
interest. This has been reflected in its results for the year ended December 31, 2010. The Company had
recorded this charge, net of tax, in discontinued operations as these potential violations pertained to
CWV, which had been classified as discontinued operations in 2009. The Company sold CWV in
January 2010. There is currently no definitive agreement with the SEC staff or DOJ for the resolution
of this matter, including with respect to any disgorgement of profits, fines, penalties or interest
payment, and any agreement will be subject to the approval by the Commissioners of the SEC and
senior DOJ personnel. Therefore, there can be no assurance that the Company’s negotiations with the
SEC staff and DOJ will result in a definitive agreement, and the amount of the loss upon final
disposition of these matters may exceed the Company’s current estimate.
Environmental Remediation
The Company has been named as a potentially responsible party with respect to a limited number
of identified contaminated sites. The levels of contamination vary significantly from site to site as do
the related levels of remediation efforts. Environmental liabilities are recorded based on the most
probable cost, if known, or on the estimated minimum cost of remediation. The Company accrues
estimated environmental liabilities based on assumptions, which are subject to a number of factors and
uncertainties. Circumstances that can affect the reliability and precision of these estimates include
identification of additional sites, environmental regulations, level of cleanup required, technologies
available, number and financial condition of other contributors to remediation and the time period over
which remediation may occur. The Company recognizes changes in estimates as new remediation
requirements are defined or as new information becomes available.
Based on the facts currently known to it, the Company does not believe that the ultimate outcome
of these matters will have a material adverse effect on its liquidity, financial condition or results of
operations. Some of its environmental matters are inherently uncertain and there exists a possibility
that the Company may ultimately incur losses from these matters in excess of the amount accrued.
However, the Company cannot currently estimate the amount of any such additional losses.
91
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(15) Contingencies and Environmental Remediation (Continued)
Asbestos Litigation
The Company is defending approximately 101 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, the Company has
obtained a dismissal in every case before it has reached trial because discovery has failed to yield
evidence of substantial exposure to any Watts products. Based on the facts currently known to the
Company, it does not believe that the ultimate outcome of these claims will have a material adverse
effect on its liquidity, financial condition or results of operations.
Other Litigation
Other lawsuits and proceedings or claims, arising from the ordinary course of operations, are also
pending or threatened against the Company. Based on the facts currently known to the Company, it
does not believe that the ultimate outcome of these other litigation matters will have a material adverse
effect on its liquidity, financial condition or results of operations.
(16) Financial Instruments
Fair Value
The carrying amounts of cash and cash equivalents, short-term investments, trade receivables and
trade payables approximate fair value because of the short maturity of these financial instruments.
The fair value of the Company’s 5.47% senior notes due 2013, 5.85% senior notes due 2016 and
5.05% senior notes due 2020 is based on quoted market prices of similar notes (level 2). The fair value
of the Company’s variable rate debt approximates its carrying value. The carrying amount and the
estimated fair market value of the Company’s long-term debt, including the current portion, are as
follows:
Carrying amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$378.7
$407.5
$354.9
$360.9
December 31,
2010
2009
(in millions)
92
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(16) Financial Instruments (Continued)
Derivative Instruments
The Company measures certain financial assets and liabilities at fair value on a recurring basis,
including foreign currency derivatives, deferred compensation plan assets and related liability, and
metal derivatives. The fair value of these certain financial assets and liabilities was determined using
the following inputs at December 31, 2010:
Fair Value Measurements at Reporting Date Using:
Quoted Prices in Active
Markets for Identical
Assets
Significant Other
Observable
Inputs
Significant
Unobservable
Inputs
Total
(Level 1)
(Level 2)
(Level 3)
(in millions)
Assets
Plan asset for deferred compensation(1) . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Foreign currency derivatives(2) . . . . . . . . . .
Plan liability for deferred compensation(3) . .
Contingent consideration(3) . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . .
$3.7
$3.7
$0.4
3.7
1.9
$6.0
$3.7
$3.7
$ —
3.7
—
$3.7
$ —
$ —
$0.4
—
—
$0.4
$ —
$ —
$ —
—
1.9
$1.9
(1) Included in other, net on the Company’s consolidated balance sheet.
(2) Included in accrued expenses and other liabilities on the Company’s consolidated balance sheet.
(3) Included in other noncurrent liabilities on the Company’s consolidated balance sheet.
The table below provides a summary of the changes in fair value of all financial assets and
liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for
the period December 31, 2009 to December 31, 2010.
Balance
December 31,
2009
Purchases,
sales,
settlements, net
Trading securities . . . . . . . . . . . . . .
Contingent consideration . . . . . . . .
$6.5
$ —
$(6.5)
$ 1.9
Earnings
(in millions)
$ —
$ —
Total realized and
unrealized gains
(losses) included in:
Comprehensive
income
Balance
December 31,
2010
$ —
$ —
$ —
$1.9
The Company elected to participate in a settlement offer from UBS, AG (UBS) for all of its
outstanding auction rate securities (ARS) investments. Under the terms of the settlement offer, the
Company was issued rights by UBS entitling the Company to require UBS to purchase the underlying
ARS at par value during the period from June 30, 2010, through July 2, 2012. The Company elected to
exercise this right and, on July 1, 2010 received $6.3 million from UBS in settlement of all outstanding
ARS investments. The Company had previously received $0.2 million from UBS during the first quarter
of 2010. The Company recorded income of approximately $0.1 million and $0.4 million to other
(income) expense in the consolidated statement of operations for its investment in ARS in 2010 and
2009, respectively.
93
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(16) Financial Instruments (Continued)
As discussed in Note 5, a contingent liability of $1.9 million was recognized as an estimate of the
acquisition date fair value of the contingent consideration in the BRAE acquisition. This liability was
classified as Level 3 under the fair value hierarchy as it was based on the weighted probability of
achievement of a future performance metric as of the date of the acquisition, which was not observable
in the market.
Short-term investment securities as of December 31, 2010 consist of certificates of deposit with
remaining maturities of greater than three months at the date of purchase, for which the carrying
amount is a reasonable estimate of fair value.
Cash equivalents consist of instruments with remaining maturities of three months or less at the
date of purchase and consist primarily of U.S. treasury bills and money market funds, for which the
carrying amount is a reasonable estimate of fair value.
The Company uses financial instruments from time to time to enhance its ability to manage risk,
including foreign currency and commodity pricing exposures, which exist as part of its ongoing business
operations. The use of derivatives exposes the Company to counterparty credit risk for nonperformance
and to market risk related to changes in currency exchange rates and commodity prices. The Company
manages its exposure to counterparty credit risk through diversification of counterparties. The
Company’s counterparties in derivative transactions are substantial commercial banks with significant
experience using such derivative instruments. The impact of market risk on the fair value and cash
flows of the Company’s derivative instruments is monitored and the Company restricts the use of
derivative financial instruments to hedging activities. The Company does not enter into contracts for
trading purposes nor does the Company enter into any contracts for speculative purposes. The use of
derivative instruments is approved by senior management under written guidelines.
The Company has exposure to a number of foreign currency rates, including the Canadian Dollar,
the Euro, the Chinese Yuan and the British Pound. To manage this risk, the Company generally uses a
layering methodology whereby at the end of any quarter, the Company has generally entered into
forward exchange contracts which hedge approximately 50% of the projected intercompany purchase
transactions for the next twelve months. The Company primarily uses this strategy for the purchases
between Canada and the U.S. The average volume of contracts can vary but generally approximates $9
to $15 million in open contracts at the end of any given quarter. At December 31, 2010, the Company
had contracts for notional amounts aggregating approximately $9.0 million. The Company accounts for
the forward exchange contracts as an economic hedge. Realized and unrealized gains and losses on the
contracts are recognized in other (income) expense in the consolidated statement of operations. These
contracts do not subject the Company to significant market risk from exchange movement because they
offset gains and losses on the related foreign currency denominated transactions.
In 2008, the Company entered into a series of copper swaps to fix the price per pound for copper
from October 2008 through September 2009 for 1 million pounds to be delivered over 12 months for
one customer. The Company determined that these copper swaps did not qualify for hedge accounting
and accounted for these financial instruments as an economic hedge. Therefore, any changes in the fair
value of the copper swaps were recorded immediately in the consolidated statement of operations. The
Company does not enter into swap or forward contracts for speculative purposes. As of December 31,
2010 and 2009, the Company had no outstanding swaps.
94
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(16) Financial Instruments (Continued)
The following table discloses the fair values of derivative instruments on the Company’s balance
sheet as of December 31, 2010 and 2009:
Liability Derivatives
Balance Sheet Location
Foreign currency derivatives . . . . . . . . . . . . . . . . Accrued expenses and other liabilities
Fair Value
2010
2009
(in millions)
$0.4
$0.9
The following table discloses the impact of derivative instruments on the Company’s operations for
2010, 2009 and 2008:
Derivatives
Location of Gain or (Loss)
Recognized in Income on
Derivatives
Amount of Gain or
(Loss) Recognized
in Income on
Derivatives
2010
2009
2008
(in millions)
$0.5
Foreign currency derivatives . . . . . . . . . . . . . . . . . . . . Other income (expense)
Copper swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense) —
$(1.1) $ 0.1
(1.6)
0.3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.5
$(0.8) $(1.5)
Leases
The Company leases certain manufacturing facilities, sales offices, warehouses, and equipment.
Generally, the leases carry renewal provisions and require the Company to pay maintenance costs.
Future minimum lease payments under capital leases and non-cancelable operating leases as of
December 31, 2010 are as follows:
Capital Leases Operating Leases
(in millions)
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less amount representing interest (at rates ranging from 4.2% to 8.7%) . .
Present value of net minimum capital lease payments . . . . . . . . . . . . . . .
Less current installments of obligations under capital leases . . . . . . . . . . .
$ 1.5
1.4
1.4
1.4
1.4
6.4
$13.5
(1.9)
11.6
(1.2)
Obligations under capital leases, excluding installments . . . . . . . . . . . . .
$10.4
$ 8.2
6.2
5.2
4.0
2.6
3.1
$29.3
95
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(16) Financial Instruments (Continued)
Carrying amounts of assets under capital lease include:
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2010
2009
(in millions)
$17.0
1.7
$18.2
2.3
18.7
(3.7)
20.5
(3.6)
$15.0
$16.9
(17) Segment Information
The Company operates in three geographic segments: North America, Europe, and China. Each of
these segments sells similar products, is managed separately and has separate financial results that are
reviewed by the Company’s chief operating decision-maker. All intercompany sales transactions have
been eliminated. Sales by region are based upon location of the entity recording the sale. The
accounting policies for each segment are the same as those described in the summary of significant
accounting policies (see Note 2).
96
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(17) Segment Information (Continued)
The following is a summary of the Company’s significant accounts and balances by segment,
reconciled to its consolidated totals:
December 31,
2010
2009
2008
(in millions)
Net Sales
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 785.5
468.3
20.8
$ 738.5
466.5
20.9
$ 866.2
532.0
33.2
Consolidated net sales . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,274.6
$1,225.9
$1,431.4
Operating income (loss)
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$ 106.4
43.7
(0.5)
Subtotal reportable segments . . . . . . . . . . . . . . . . . . . . . .
Corporate (*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated operating income . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
149.6
(35.4)
114.2
1.0
(22.8)
2.1
78.6
51.0
(6.6)
123.0
(30.8)
92.2
0.9
(22.0)
1.2
$
67.8
65.7
(7.7)
125.8
(27.2)
98.6
5.1
(26.2)
(9.5)
Income from continuing operations before income taxes and
noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
94.5
$
72.3
$
68.0
Identifiable Assets
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 871.8
692.8
79.7
1.8
$ 804.7
686.0
85.4
23.1
$ 810.1
698.3
99.0
52.7
Consolidated identifiable assets . . . . . . . . . . . . . . . . . . . . .
$1,646.1
$1,599.2
$1,660.1
Long-Lived Assets
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
77.4
104.6
15.5
$
81.5
108.5
16.5
$
92.3
106.0
32.7
Consolidated long-lived assets . . . . . . . . . . . . . . . . . . . . . .
$ 197.5
$ 206.5
$ 231.0
Capital Expenditures
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated capital expenditures . . . . . . . . . . . . . . . . . . .
Depreciation and Amortization
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated depreciation and amortization . . . . . . . . . . . .
$
$
$
$
9.1
14.8
0.7
24.6
17.9
24.9
2.0
44.8
$
$
$
$
9.3
14.4
0.5
24.2
17.9
23.1
5.8
46.8
$
$
$
$
8.3
13.5
4.4
26.2
18.7
20.4
4.6
43.7
*
Corporate expenses are primarily for compensation expense, Sarbanes-Oxley compliance, professional
fees, including legal and audit expenses, shareholder services and benefit administration costs. These
costs are not allocated to the geographic segments as they are viewed as corporate functions that
support all activities.
97
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(17) Segment Information (Continued)
The North America segment consists of U.S. net sales of $712.2 million, $672.6 million and
$798.1 million for the years ended December 31, 2010, 2009 and 2008, respectively. The North
American segment also consists of U.S. long-lived assets of $72.4 million, $74.8 million and
$86.6 million as of December 31, 2010, 2009 and 2008, respectively.
Intersegment sales for the year ended December 31, 2010 for North America, Europe and China
were $3.6 million, $7.6 million and $115.8 million, respectively. Intersegment sales for the year ended
December 31, 2009 for North America, Europe and China were $3.6 million, $5.8 million and
$110.4 million, respectively. Intersegment sales for the year ended December 31, 2008 for North
America, Europe and China were $6.4 million, $6.4 million and $133.1 million, respectively.
(18) Quarterly Financial Information (unaudited)
Year ended December 31, 2010
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per common share:
Basic
Income from continuing operations . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted
Income from continuing operations . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends per common share . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31, 2009
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per common share:
Basic
Income from continuing operations . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted
Income from continuing operations . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends per common share . . . . . . . . . . . . . . . . . . . . . . . . . .
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(in millions, except per share information)
$319.3
117.6
12.2
8.1
$324.0
120.6
22.2
22.1
$314.6
113.8
17.3
17.3
$316.7
112.9
11.4
11.3
0.33
0.22
0.33
0.22
0.11
0.60
0.59
0.59
0.59
0.11
0.46
0.46
0.46
0.46
0.11
0.30
0.30
0.30
0.30
0.11
$290.7
97.0
4.1
3.4
$308.2
109.2
15.2
(3.6)
$303.8
109.4
11.6
3.4
$323.2
119.5
10.1
14.2
0.11
0.09
0.11
0.09
0.11
0.41
(0.10)
0.41
(0.10)
0.11
0.31
0.09
0.31
0.09
0.11
0.27
0.38
0.27
0.38
0.11
98
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(19) Subsequent Events
On February 9, 2011, the Company announced its intention to acquire Danfoss Socla and the
related water control business of Danfoss A/S. This announcement was made in response to the public
disclosure of related regulatory filings made with German merger control authorities. The proposed
acquisition is subject to the signing of a definitive purchase agreement and is conditioned on the
receipt of customary regulatory approvals. The proposed purchase price is expected to be in the range
of A115 million to A120 million.
On February 8, 2011, the Company declared a quarterly dividend of eleven cents ($0.11) per share
on each outstanding share of Class A Common Stock and Class B Common Stock.
On January 26, 2011, Patrick S. O’Keefe resigned from his positions of Chief Executive Officer,
President and Director. In connection with Mr. O’Keefe’s resignation, the Company entered into a
separation agreement with Mr. O’Keefe. Pursuant to the separation agreement, Mr. O’Keefe will
continue employment with the Company from January 26, 2011 through August 3, 2011 and during this
period he will receive the greater of either aggregate compensation of $100,000 or short-term disability
benefits if his claim under our short-term disability plan is approved. Following the termination of
Mr. O’Keefe’s employment with the Company on August 3, 2011, Mr. O’Keefe will be entitled to
receive the following payments and benefits: (i) a cash severance payment of approximately
$2.9 million, equal to two years of Mr. O’Keefe’s 2010 annual salary plus two years of bonus at
Mr. O’Keefe’s target bonus amount for 2010, payable 50% in an initial lump sum payment within ten
days after August 3, 2011 and the balance in monthly installments over the following 24 months;
(ii) accelerated vesting of all unvested stock options and restricted stock awards (effective February 3,
2011), and an extension in the time of exercise for the shorter of three years following Mr. O’Keefe’s
termination date or the original term of the option, such modification of his options and restricted
stock awards will result in a non-cash charge of approximately $3.0 million; (iii) other ancillary costs for
vacation, auto and professional fees which total approximately $0.1 million. Total pre-tax costs under
the separation agreement are approximately $6.1 million and will be recorded in the Company’s
consolidated statement of operations in the first quarter of 2011. In addition, in accordance with the
provisions of the Company’s Management Stock Purchase Plan Mr. O’Keefe will be paid the unvested
portion, including interest and accrued dividends, of his restricted stock units six months after his
termination date. The total amount expected to be paid under the Management Stock Purchase Plan is
approximately $1.5 million.
On January 26, 2011, the Company’s Board of Directors appointed David J. Coghlan to serve as
Chief Executive Officer, President and as a member of its Board of Directors.
99
Watts Water Technologies, Inc. and Subsidiaries
Schedule II—Valuation and Qualifying Accounts
(Amounts in millions)
For the Three Years Ended December 31:
Balance At
Beginning of
Period
Additions
Charged To
Expense
Additions
Charged To
Other Accounts
Deductions
Balance At
End of
Period
Year Ended December 31, 2008
Allowance for doubtful accounts . . . . . .
Allowance for excess and obsolete
$13.3
inventories . . . . . . . . . . . . . . . . . . . .
$24.3
Year Ended December 31, 2009
Allowance for doubtful accounts . . . . . .
Allowance for excess and obsolete
$ 9.6
inventories . . . . . . . . . . . . . . . . . . . .
$26.0
Year Ended December 31, 2010
Allowance for doubtful accounts . . . . . .
Allowance for excess and obsolete
$ 7.5
inventories . . . . . . . . . . . . . . . . . . . .
$25.7
5.1
7.5
0.6
7.8
2.7
4.4
0.4
0.2
(9.2)
$ 9.6
(6.0)
$26.0
(0.6)
(2.1)
$ 7.5
0.5
—
0.4
(8.6)
$25.7
(1.3)
$ 8.9
(6.6)
$23.9
100
Exhibit No.
EXHIBIT INDEX
Description
3.1
3.2
9.1
Restated Certificate of Incorporation, as amended (14)
Amended and Restated By-Laws (1)
The Amended and Restated George B. Horne Voting Trust Agreement—1997 dated as of
September 14, 1999 (15)
10.1*
Supplemental Compensation Agreement effective as of September 1, 1996 between the
Registrant and Timothy P. Horne (9), Amendment No. 1, dated July 25, 2000 (16), and
Amendment No. 2 dated October 23, 2002 (3)
10.2*
Form of Indemnification Agreement between the Registrant and certain directors and
officers of the Registrant
10.3*
1996 Stock Option Plan, dated October 15, 1996 (10), and First Amendment dated
February 28, 2003 (3)
10.4*
Watts Water Technologies, Inc. Pension Plan (amended and restated effective as of
January 1, 2006) and First Amendment effective as of January 1, 2008 (20)
10.5
10.6*
10.7
Registration Rights Agreement dated July 25, 1986 (5)
Executive Incentive Bonus Plan, as amended and restated as of January 1, 2008 (8)
Amended and Restated Stock Restriction Agreement dated October 30, 1991 (2), and
Amendment dated August 26, 1997 (12)
10.8*
Watts Industries, Inc. 1991 Non-Employee Directors’ Nonqualified Stock Option Plan (6),
and Amendment No. 1 (9)
10.9*
10.10*
Watts Industries, Inc. 2003 Non-Employee Directors’ Stock Option Plan (3)
Watts Water Technologies, Inc. Management Stock Purchase Plan (Amended and Restated
as of January 1, 2005), as amended (19)
10.11
Note Purchase Agreement dated as of May 15, 2003 between the Registrant and the
10.12
10.13*
10.14*
10.15*
Purchasers named in Schedule A thereto relating to the Registrant’s $50,000,000 4.87%
Senior Notes, Series A, due May 15, 2010 and $75,000,000 5.47% Senior Notes,
Series B, due May 15, 2013 (7)
Form of 5.47% Senior Note due May 15, 2013 (7)
Watts Water Technologies, Inc. Amended and Restated 2004 Stock Incentive Plan
Non-Employee Director Compensation Arrangements (11)
Watts Water Technologies, Inc. Supplemental Employees Retirement Plan as Amended
and Restated Effective May 4, 2004, First Amendment effective March 1, 2005 and
Second Amendment effective January 1, 2008 (20)
10.16*
Form of Incentive Stock Option Agreement under the Watts Water Technologies, Inc.
2004 Stock Incentive Plan (18)
10.17*
Form of Non-Qualified Stock Option Agreement under the Watts Water Technologies, Inc.
2004 Stock Incentive Plan (19)
10.18*
Form of Restricted Stock Award Agreement for Employees under the Watts Water
Technologies, Inc. 2004 Stock Incentive Plan (Incremental Vesting) (19)
10.19*
Form of Restricted Stock Award Agreement for Employees under the Watts Water
Technologies, Inc. 2004 Stock Incentive Plan (Cliff Vesting) (18)
10.20*
Form of Restricted Stock Award Agreement for Non-Employee Directors under the Watts
Water Technologies, Inc. 2004 Stock Incentive Plan (17)
10.21
Note Purchase Agreement, dated as of April 27, 2006, between the Registrant and the
10.22
10.23
Purchasers named in Schedule A thereto relating to the Registrant’s $225,000,000 5.85%
Senior Notes due April 30, 2016 (4)
Form of 5.85% Senior Note due April 30, 2016 (4)
Subsidiary Guaranty, dated as of April 27, 2006, in connection with the Registrant’s 5.85%
Senior Notes due April 30, 2016 executed by the subsidiary guarantors party thereto,
including the form of Joinder to Subsidiary Guaranty (4)
10.24
First Amendment, dated as of April 27, 2006, to Note Purchase Agreement dated as of
May 15, 2003 among the Registrant and the purchasers named therein (4)
Exhibit No.
10.25
Credit Agreement, dated as of June 18, 2010, among the Registrant, certain subsidiaries of
the Registrant as Borrowers, Bank of America, N.A., as Administrative Agent, Swing
Line Lender and L/C Issuer and the other lenders referred to therein (21)
Description
10.26
Guaranty, dated as of June 18, 2010, by the Registrant and the Subsidiaries of the
Registrant set forth therein, in favor of Bank of America, N.A. and other lenders
referred to therein (21)
10.27
Note Purchase Agreement, dates as of June 18, 2010, between the Registrant and
Purchasers named in Schedule A thereto relating to the Registrants $75,000,000 5.05%
Senior Notes due June 18, 2020 (21)
10.28
10.29
Form of 5.05% Senior Note due June 18, 2020 (21)
Form of Subsidiary Guaranty in connection with the Registrants 5.05% Senior Notes due
June 18, 2020, including the form of Joinder to Subsidiary Guaranty (21)
10.30*
Separation Agreement dated January 26, 2011 between the Registrant and Patrick S.
O’Keefe (22)
11
21
23
31.1
31.2
32.1
32.2
Statement Regarding Computation of Earnings per Common Share (13)
Subsidiaries
Consent of KPMG LLP, Independent Registered Public Accounting Firm
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350
101.INS** XBRL Instance Document.
101.SCH** XBRL Taxonomy Extension Schema Document.
101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF** XBRL Taxonomy Extension Definition Linkbase Document
101.LAB** XBRL Taxonomy Extension Label Linkbase Document.
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document.
(1) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated July 12, 2010
(File No. 001-11499).
(2) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 14,
1991 (File No. 001-11499).
(3) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2002 (File No. 001-11499).
(4) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated April 27, 2006
(File No. 001-11499).
(5) Incorporated by reference to the Registrant’s Form S-1 (No. 33-6515) as part of the Second
Amendment to such Form S-1 dated August 21, 1986.
(6) Incorporated by reference to Amendment No. 1 to the Registrant’s Annual Report on Form 10-K
for year ended June 30, 1992 (File No. 001-11499).
(7) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 15, 2003
(File No. 001-11499).
(8) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 14, 2008
(File No. 001-11499).
(9) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for year ended
June 30, 1996 (File No. 001-11499).
(10) Incorporated by reference to the Registrant’s Form S-8 (No. 333-32685) dated August 1, 1997.
(11) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2009 (File No. 001-11499).
(12) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for year ended
June 30, 1997 (File No. 001-11499).
(13) Incorporated by reference to notes to Consolidated Financial Statements, Note 2 of this Report.
(14) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended July 3, 2005 (File No. 001-11499).
(15) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for year ended
June 30, 1999 (File No. 001-11499).
(16) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for quarter ended
September 30, 2000 (File No. 001-11499).
(17) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended July 4, 2010 (File No. 001-11499).
(18) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended September 26, 2004 (File No. 001-11499).
(19) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended July 1, 2007 (File No. 001-11499).
(20) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2007 (File No. 001-11499).
(21) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated June 18, 2010
(File No. 001-11499).
(22) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 26, 2011
(File No. 001-11499).
* Management contract or compensatory plan or arrangement.
** Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business
Reporting Language): (i) Consolidated Balance Sheets at December 31, 2010 and December 31,
2009, (ii) Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009
and 2008, (iii) Consolidated Statements of Stockholder’s Equity and Comprehensive Income (Loss)
for the Years Ended December 31, 2010, 2009 and 2008, (iv) Consolidated Statements of Cash
Flows for the Years Ended December 31, 2010, 2009 and 2008, and (v) Notes to Consolidated
Financial Statements.
In accordance with Rule 406T of Regulation S-T, the XBRL-related information in Exhibit 101 to
this Annual Report on Form 10-K is deemed not filed or part of a registration statement or
prospectus for purposes of sections 11 or 12 of the Securities Act, is deemed not filed for purposes
of section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.
(This page has been left blank intentionally.)
Executive Officers
Directors
J. Dennis Cawte
Group Managing Director,
Europe
David J. Coghlan
Chief Executive Officer,
President and Director
Robert L. Ayers
Director
Kennett F. Burnes
Director
Richard J. Cathcart
Director
Kenneth R. Lepage
General Counsel,
Executive Vice President of Administration
and Secretary
David J. Coghlan
Chief Executive Officer,
President and Director
William C. McCartney
Chief Financial Officer
and Treasurer
Ralph E. Jackson, Jr.
Director
Kenneth J. McAvoy
Director
Corporate
Information
Executive Offices
815 Chestnut Street
North Andover, MA 01845-6098
Tel: (978)688-1811
Fax: (978)688-2976
Registrar and Transfer Agent
Wells Fargo Bank, N.A.
161 N. Concord Exchange
South St. Paul, MN 55075
Tel: (800)468-9716
Auditors
KPMG LLP
99 High Street
Boston, MA 02110
John K. McGillicuddy
Chairman of the Board and Director
Stock Listing
New York Stock Exchange
Ticker Symbol: WTS
Gordon W. Moran
Director
Merilee Raines
Director
For more information on Watts
Water Technologies, visit our
investor website by scanning the
QR code below or visiting
wattswater.com/investors.
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 “intend”, “believe”, “anticipate”,
“plan”, “expect” 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, 2010 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
W
a
t
t
s
W
a
t
e
r
T
e
c
h
n
o
l
o
g
i
e
s
,
I
n
c
.
A
n
n
u
a
l
R
e
p
o
r
t
2
0
1
0
Annual Report 1115
© Watts Water Technologies, Inc. 2011
www.wattswater.com
WAT1201110K