Edgar Filing: WATTS WATER TECHNOLOGIES INC

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 29, 2008

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 001-11499

WATTS WATER TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

815 Chestnut Street, North Andover, MA		01845
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (978) 688-1811

(Former Name, Former Address and Former Fiscal year, if changed since last report.)

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 x No o

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 x		Accelerated filer o

	Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

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

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 July 31, 2008
Class A Common Stock, $0.10 par value		29,183,472

Class B Common Stock, $0.10 par value		7,293,880

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WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

INDEX

Part I. Financial Information

	Item 1. Financial Statements

		Consolidated Balance Sheets at June 29, 2008 and December 31, 2007 (unaudited)

		Consolidated Statements of Operations for the Second Quarters Ended June 29, 2008 and July 1, 2007 (unaudited)

		Consolidated Statements of Operations for the Six Months Ended June 29, 2008 and July 1, 2007 (unaudited)

		Consolidated Statements of Cash Flows for the Six Month Ended June 29, 2008 and July 1, 2007 (unaudited)

		Notes to Consolidated Financial Statements

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk

	Item 4.	Controls and Procedures

Part II. Other Information

	Item 1.	Legal Proceedings

	Item 1A.	Risk Factors

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

	Item 4.	Submission of Matters to a Vote of Security Holders

	Item 6.	Exhibits

	Signatures

	Exhibit Index

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share information)

(Unaudited)

	June 29,			December 31,
	2008			2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	109.5		$	290.3
Short-term investment securities	—			22.0
Trade accounts receivable, less allowance for doubtful accounts of $18.4 million at June 29, 2008 and $14.9 million at December 31, 2007	290.8			235.7
Inventories, net:
Raw materials	125.4			108.9
Work in process	53.5			45.7
Finished goods	198.2			187.0
Total Inventories	377.1			341.6
Prepaid expenses and other assets	17.9			18.6
Deferred income taxes	50.8			38.1
Assets of discontinued operations	10.8			10.4
Total Current Assets	856.9			956.7
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost	496.4			437.4
Accumulated depreciation	(236.2		)	(213.7		)
Property, plant and equipment, net	260.2			223.7
OTHER ASSETS:
Goodwill	475.4			385.8
Long-term investment securities	10.3			17.0
Other, net	227.9			146.1
TOTAL ASSETS	$	1,830.7		$	1,729.3

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	149.6		$	108.0
Accrued expenses and other liabilities	112.3			113.6
Accrued compensation and benefits	43.8			38.2
Current portion of long-term debt	9.1			1.3
Liabilities of discontinued operations	29.1			28.6
Total Current Liabilities	343.9			289.7
LONG-TERM DEBT, NET OF CURRENT PORTION	428.4			432.2
DEFERRED INCOME TAXES	72.1			42.9
OTHER NONCURRENT LIABILITIES	48.6			45.6
MINORITY INTEREST	—			3.4
STOCKHOLDERS’ EQUITY:
Preferred Stock, $0.10 par value; 5,000,000 shares authorized; no shares issued or outstanding	—			—
Class A Common Stock, $0.10 par value; 80,000,000 shares authorized; 1 vote per share; issued and outstanding, 29,361,172 shares at June 29, 2008 and 30,600,056 shares at December 31, 2007	2.9			3.1
Class B Common Stock, $0.10 par value; 25,000,000 shares authorized; 10 votes per share; issued and outstanding, 7,293,880 shares at June 29, 2008 and December 31, 2007	0.7			0.7
Additional paid-in capital	383.9			377.6
Retained earnings	451.8			465.4
Accumulated other comprehensive income	98.4			68.7
Total Stockholders’ Equity	937.7			915.5
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,830.7		$	1,729.3

See accompanying notes to consolidated financial statements.

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WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in millions, except per share information)

(Unaudited)

	Second Quarter Ended
	June 29, 2008			July 1, 2007
Net sales	$	389.0		$	350.4
Cost of goods sold	256.3			235.8
GROSS PROFIT	132.7			114.6
Selling, general & administrative expenses	96.5			84.0
Restructuring and other charges	1.0			0.3
OPERATING INCOME	35.2			30.3
Other (income) expense:
Interest income	(1.3		)	(3.6		)
Interest expense	6.7			6.7
Minority interest	(0.7		)	(0.8		)
Other	1.4			0.3
	6.1			2.6
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	29.1			27.7
Provision for income taxes	9.1			10.0
INCOME FROM CONTINUING OPERATIONS	20.0			17.7
Income (loss) from discontinued operations, net of taxes	(0.2		)	0.1
NET INCOME	$	19.8		$	17.8

BASIC EPS
Income per share:
Continuing operations	$	0.55		$	0.46
Discontinued operations	(0.01		)	—
NET INCOME	$	0.54		$	0.46
Weighted average number of shares	36.6			38.7

DILUTED EPS
Income per share:
Continuing operations	$	0.54		$	0.45
Discontinued operations	(0.01		)	—
NET INCOME	$	0.54		$	0.46
Weighted average number of shares	36.8			39.0

Dividends per share	$	0.11		$	0.10

See accompanying notes to consolidated financial statements.

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WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in millions, except per share information)

(Unaudited)

	Six Months Ended
	June 29, 2008			July 1, 2007
Net sales	$	733.0		$	696.5
Cost of goods sold	485.9			467.2
GROSS PROFIT	247.1			229.3
Selling, general & administrative expenses	183.6			168.1
Restructuring and other charges	2.0			0.5
OPERATING INCOME	61.5			60.7
Other (income) expense:
Interest income	(3.6		)	(7.2		)
Interest expense	13.3			13.0
Minority interest	(1.9		)	(1.1		)
Other	3.6			1.1
	11.4			5.8
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	50.1			54.9
Provision for income taxes	16.2			17.2
INCOME FROM CONTINUING OPERATIONS	33.9			37.7
Income (loss) from discontinued operations, net of taxes	(0.4		)	0.1
NET INCOME	$	33.5		$	37.8

BASIC EPS
Income per share:
Continuing operations	$	0.92		$	0.98
Discontinued operations	(0.01		)	—
NET INCOME	$	0.91		$	0.98
Weighted average number of shares	36.8			38.6

DILUTED EPS
Income per share:
Continuing operations	$	0.92		$	0.97
Discontinued operations	(0.01		)	—
NET INCOME	$	0.91		$	0.97
Weighted average number of shares	37.0			39.0

Dividends per share	$	0.22		$	0.20

See accompanying notes to consolidated financial statements.

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WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

	Six Months Ended
	June 29, 2008			July 1, 2007
OPERATING ACTIVITIES
Net income	$	33.5		$	37.8
Less: Income (loss) from discontinued operations	(0.4		)	0.1
Income from continuing operations	33.9			37.7
Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities:
Depreciation	15.5			14.2
Amortization	6.0			5.6
Loss on disposal and impairment of property, plant and equipment and other	0.4			0.5
Stock-based compensation	2.8			3.0
Deferred income tax benefit	(10.8		)	(3.2		)
Changes in operating assets and liabilities, net of effects from business acquisitions and divestures:
Accounts receivable	(26.4		)	(26.0		)
Inventories	(4.7		)	(31.8		)
Prepaid expenses and other assets	4.4			(3.4		)
Accounts payable, accrued expenses and other liabilities	19.7			3.2
Net cash provided by (used in) continuing operating activities	40.8			(0.2		)
INVESTING ACTIVITIES
Additions to property, plant and equipment	(14.7		)	(15.1		)
Proceeds from the sale of property, plant and equipment	0.2			0.4
Investments in securities	(2.6		)	(7.5		)
Proceeds from sale of securities	31.4			0.1
Increase in other assets	—			(0.5		)
Business acquisitions, net of cash acquired	(174.3		)	(4.6		)
Net cash used in investing activities	(160.0		)	(27.2		)
FINANCING ACTIVITIES
Proceeds from long-term debt	14.8			38.3
Payments of long-term debt	(33.0		)	(22.3		)
Payment of capital leases	(0.8		)	(0.9		)
Proceeds from share transactions under employee stock plans	1.3			0.8
Tax benefit of stock awards exercised	—			1.3
Payments to repurchase common stock	(38.3		)	—
Dividends	(8.2		)	(7.8		)
Net cash (used in) provided by financing activities	(64.2		)	9.4
Effect of exchange rate changes on cash and cash equivalents	2.7			3.2
Net cash used in operating activities of discontinued operations	(0.1		)	(0.8		)

DECREASE IN CASH AND CASH EQUIVALENTS	(180.8		)	(15.6		)
Cash and cash equivalents at beginning of period	290.3			343.0
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	109.5		$	327.4

NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of business:
Fair value of assets acquired	$	235.6		$	3.5
Cash paid, net of cash acquired	174.3			4.6
Liabilities assumed (assets acquired)	$	61.3		$	(1.1	)
Issuance of stock under management stock purchase plan	$	1.3		$	1.6

CASH PAID FOR:
Interest	$	14.2		$	13.7
Taxes	$	24.8		$	21.7

See accompanying notes to consolidated financial statements.

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WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the Watts Water Technologies, Inc. Consolidated Balance Sheet as of June 29, 2008, the Consolidated Statements of Operations for the second quarter and six months ended June 29, 2008 and the second quarter and six months ended July 1, 2007, and the Consolidated Statements of Cash Flows for the six months ended June 29, 2008 and the six months ended July 1, 2007.

The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date. The accounting policies followed by the Company are described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007. The financial statements included in this report should be read in conjunction with the financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2007. Operating results for the interim period presented are not necessarily indicative of the results to be expected for the year ending December 31, 2008.

The Company operates on a 52-week fiscal year ending on December 31st. Any second quarter data contained in this Quarterly Report on Form 10-Q reflects the results of operations for the 13-week period ended on the Sunday nearest June 30th of the respective year.

2. Accounting Policies

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.

Goodwill and Long-Lived Assets

The changes in the carrying amount of goodwill by geographic segment from December 31, 2007 to June 29, 2008 are as follows:

	North America			Europe		China			Total
	(in millions)

Carrying amount at the beginning of period	$	211.0		$	162.4	$	12.4		$	385.8
Acquired goodwill during the period	—			74.4		3.3			77.7
Adjustments to goodwill during the period	0.1			—		(0.5		)	(0.4		)
Effect of change in exchange rates used for translation	(0.2		)	11.8		0.7			12.3
Carrying amount at end of period	$	210.9		$	248.6	$	15.9		$	475.4

Other intangible assets include the following and are presented in “Other Assets: Other, net” in the June 29, 2008 Consolidated Balance Sheet:

	Gross Carrying Amount		Accumulated Amortization
	(in millions)

Patents	$	31.6	$	(6.8	)
Customer relationships	126.8		(18.5		)
Technology	7.5		(3.0		)
Other	19.8		(6.3		)
Total amortizable intangibles	185.7		(34.6		)
Intangible assets not subject to amortization	65.6		—
Total	$	251.3	$	(34.6	)

Aggregate amortization expense for amortizable intangible assets for the second quarters of 2008 and 2007 was $3.4 million and $2.8 million, respectively, and for the six-month periods of 2008 and 2007 was $6.0 million and $5.6 million, respectively. Additionally, future amortization expense on amortizable intangible assets approximates $9.3 million for the remainder of 2008, $17.3 million for 2009, $17.2 million for 2010, $16.5 million for 2011 and $14.6 million for 2012. 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

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assets is 10.1 years. Patents, customer relationships, technology and other amortizable intangibles have weighted-average remaining lives of 9.4 years, 9.5 years, 5.7 years and 18.2 years, respectively. Intangible assets not subject to amortization primarily include trademarks and unpatented technology.

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. The Company did not issue any options in the second quarters or first six months of 2008 or 2007.

The Company also grants shares of restricted stock to key employees and non-employee members of the Company’s Board of Directors under the 2004 Stock Incentive Plan, which vest either immediately 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 did not issue any restricted stock in the second quarters or first six months of 2008 or 2007.

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 annually 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. The Company granted 60,128 RSUs and 159,869 RSUs in the first quarters of 2008 and 2007, respectively.

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:

	2008		2007
Expected life (years)	3.0		3.0
Expected stock price volatility	37.2	%	35.3	%
Expected dividend yield	1.5	%	1.0	%
Risk-free interest rate	2.2	%	4.8	%

The above assumptions were used to determine the weighted average grant-date fair value of RSUs of $11.44 and $16.79 in 2008 and 2007, respectively.

A more detailed description of each of these stock and stock option plans can be found in Note 13 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Shipping and Handling

The Company’s shipping costs included in selling, general and administrative expense were $9.6 million and $10.2 million for the second quarters of 2008 and 2007, respectively, and were $18.5 million and $19.7 million for the first six months of 2008 and 2007, respectively.

Research and Development

Research and development costs included in selling, general and administrative expense were $4.7 million and $3.8 million for the second quarters of 2008 and 2007, respectively, and were $9.2 million and $7.6 million for the first six months of 2008 and 2007, respectively.

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.

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New Accounting Standards

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

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

In December 2007, the FASB issued FAS No. 141 (R), “Business Combinations.” (FAS 141R), which replaces FAS 141, “Business Combinations.” FAS 141R establishes new principles and requirements for how an acquiring company 1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree, 2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141R is effective for business combinations occurring in the fiscal year beginning on or after December 15, 2008. The Company expects the adoption of FAS 141R will increase costs charged to its operations for any future acquisitions.

In December 2007, the FASB issued FAS No. 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,” (FAS 160), which requires non-controlling interests (previously referred to as minority interest) to be treated as a separate component of equity, not outside of equity as is current practice. FAS 160 applies to non-controlling interests and transactions with non-controlling interest holders in consolidated financial statements. FAS 160 is effective for periods beginning on or after December 15, 2008. The Company does not expect the adoption of FAS 160 to have a material impact on its consolidated financial statements.

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

In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements,” (FAS 157), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. FAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements and was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB FSP 157-2 which delayed the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. Effective January 1, 2008, we adopted FAS 157 for financial assets and liabilities recognized at fair value on a recurring basis. The partial adoption of FAS 157 for financial assets and liabilities did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. See Note 4 for information and related disclosures regarding the Company’s fair value measurements.

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3. Discontinued Operations

In September 1996, the Company divested its Municipal Water Group businesses, which included Henry Pratt, James Jones Company and Edward Barber and Company Ltd. The discontinued operating expense for the second quarter and first six months of 2008 is related to legal and settlement costs associated with the James Jones Litigation, net of reserve adjustments, which is described in Part I, Item 1, “Product Liability, Environmental and Other Litigation Matters” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

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

	Second Quarter Ended
	June 29, 2008			July 1, 2007
	(in millions)
Costs and expenses - Municipal Water Group	$	(0.3	)	$	0.1
Income (loss) before income taxes	(0.3		)	0.1
Income tax benefit	0.1			—
Income (loss) from discontinued operations, net of taxes	$	(0.2	)	$	0.1

	Six Months Ended
	June 29, 2008			July 1, 2007
	(in millions)
Costs and expenses - Municipal Water Group	$	(0.5	)	$	0.1
Income (loss) before income taxes	(0.5		)	0.1
Income tax benefit	0.1			—
Income (loss) from discontinued operations, net of taxes	$	(0.4	)	$	0.1

	June 29, 2008			December 31, 2007
	(in millions)
Prepaid expenses and other assets	$	(0.1	)	$	(0.3	)
Deferred income taxes	10.9			10.7
Assets of discontinued operations	$	10.8		$	10.4
Accrued expenses and other liabilities	$	29.1		$	28.6
Liabilities of discontinued operations	$	29.1		$	28.6

The assets and liabilities at June 29, 2008 and December 31, 2007 primarily relate to the reserves for the James Jones Litigation.

4. Financial Instruments

We measure certain financial assets and liabilities at fair value on a recurring basis, including available-for-sale auction rate securities and foreign currency derivatives. The fair value of these certain financial assets and liabilities was determined using the following inputs at June 29, 2008:

	Fair Value Measurements at Reporting Date Using :
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
	(in millions)
Assets
Available-for-sale securities (1)	$	10.3	$	—	$	—	$	10.3
Foreign currency derivatives(2)	0.1		—		0.1		—
Plan asset for deferred compensation(3)	3.6		3.6		—		—
Total assets	$	14.0	$	3.6	$	0.1	$	10.3

Liabilities
Plan liability for deferred compensation(4)	$	3.6	$	3.6	$	—	$	—
Total liabilities	$	3.6	$	3.6	$	—	$	—

(1) Included in long-term investment securities on the Company’s consolidated balance sheet.

(2) Included in prepaid expenses and other assets on the Company’s consolidated balance sheet.

(3) Included in other, net on the Company’s consolidated balance sheet.

(4) Included in other noncurrent liabilities on the Company’s consolidated balance sheet.

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The table below provides a summary of the changes in fair value of all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period December 31, 2007 to June 29, 2008.

	Balance		Purchases,			Total realized and unrealized gains (losses) included in:
	December 31,		sales,					Comprehensive
	2007		settlements, net			Earnings		income		Balance June 29, 2008
	(in millions)
Available for sale securities	$	39.0	$	(28.7	)	$	—	$	—	$	10.3

Available-for-sale securities are comprised of auction rate securities. The Company holds a variety of interest bearing auction rate securities, or ARS, that includes $8.3 million in municipal bonds and $2.0 million in student loans at June 29, 2008. These ARS investments are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or sell their interests at par. The recent uncertainties in the credit markets have affected all of the Company’s holdings in ARS investments, and auctions for the Company’s investments in these securities have failed on their respective auction dates. Consequently, the investments are not currently liquid and the Company will not be able to access these funds until a future auction of these investments is successful or a buyer is found outside of the auction process. Maturity dates for these ARS investments range from 2027 to 2036.

All of the ARS investments were AAA rated investment grade quality and were in compliance with the Company’s investment policy at the time of acquisition. The remaining securities are rated AA or higher. The Company currently has the ability and intent to hold these ARS investments until a recovery of the auction process or until maturity. As of December 31, 2007, the Company reclassified $17.0 million of ARS investments from short-term investments to long-term investment securities on its consolidated balance sheet because of the Company’s inability to determine when its investments in ARS would be liquidated.

Typically the fair value of ARS investments approximates par value due to frequent interest rate resets through the auction process. While the Company continues to earn interest on its ARS investments at the maximum contractual rate, these investments are not currently trading and therefore do not currently have a readily determinable market value.

The Company has used a discounted cash flow model to determine the estimated fair value of its investment in ARS as of June 29, 2008. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit quality of the ARS issuer, timing and amount of cash flows, government guarantees related to student loans and expected holding periods of the ARS. Based on this assessment of fair value, as of June 29, 2008 the Company determined that the par value approximated fair value.

The Company reviews its impairments in accordance with FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and related guidance issued by the FASB and SEC in order to determine the classification of the impairment as “temporary” or “other-than-temporary.” A temporary impairment charge results in an unrealized loss being recorded in the other comprehensive income (loss) component of stockholders’ equity. Such an unrealized loss does not affect net income (loss) for the applicable accounting period. An other-than-temporary impairment charge is recorded as a realized loss in the consolidated statement of operations and reduces net income (loss) for the applicable accounting period. In evaluating the impairment of all individual ARS, the Company classified such impairment as temporary. The differentiating factors between temporary and other-than-temporary impairment are primarily the length of the time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase. The remaining balance of cash equivalents consists primarily of money market funds, for which the carrying amount is a reasonable estimate of fair value.

Foreign currency derivatives include forward foreign exchange contracts primarily for Canadian dollars.

The Company uses foreign currency forward exchange contracts as an economic hedge to reduce the impact of currency fluctuations on certain anticipated intercompany purchase transactions that are expected to occur during the next fifteen months and certain other foreign currency transactions. Realized and unrealized gains and losses on the contracts are recognized in other income/expense. These contracts do not subject the Company to significant market risk from exchange movement because they offset gains and losses on the related foreign currency denominated transactions. At June 29, 2008 and July 1, 2007, unrealized gains or losses on the contracts were immaterial.

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5. Restructuring and Other Charges

During the second quarter and first six months of 2008, the Company recorded net pre-tax restructuring and related charges in its geographic segments totaling $1.0 million and $2.3 million, respectively, for ongoing restructuring actions as follows:

	Second Quarter Ended		Six Months Ended
	June 29, 2008		June 29, 2008
	(in millions)
North America	$	0.5	$	1.3
Europe	0.1		0.1
China	0.4		0.9
Totals	$	1.0	$	2.3

The second quarter 2008 net charges included $1.0 million in restructuring and other charges. The six months ended June 29, 2008, net charges included $0.3 million in cost of goods sold and $2.0 million in restructuring related to actions initiated during 2007. The Company also recorded $0.2 million in the six months ended June 29, 2008 in other income to reflect the minority interest portion of the restructuring costs.

2007 Actions

During 2007, the Company initiated a global restructuring program that was approved by the Company’s Board of Directors on October 30, 2007. The program includes plans to shutdown five manufacturing facilities, right size a sixth facility and incur costs to relocate one of its China facilities. In addition, the Company performed an evaluation of certain product lines in 2007. After completing this evaluation, the Company initiated a plan to discontinue certain product lines. In accordance with the restructuring and discontinuance of certain product lines commenced in 2007, the Company anticipated spending $12.9 million. To date, the Company has incurred $7.4 million of costs associated with the plans. Management of the Company is reviewing the status of the program and the timing of charges for the Europe segment. The Company anticipates the restructuring program will not be completed until 2009, with the expectation that Europe will incur most of its costs during 2009. As such, previous estimates of savings from the programs will likely be achieved in 2010 rather than in the second half of 2009. The Company still anticipates capital expenditures in excess of any proceeds from the sale of buildings and other assets as part of the restructuring program.

The following table summarizes the accrual balances and utilization by cost type for the 2007 restructuring actions:

	Severance			Asset write- downs			Facility exit and other			Minority interest			Total
	(in millions)
Restructuring accruals at December 31, 2007	$	2.4		$	—		$	—		$	—		$	2.4
Net pre-tax restructuring charges	0.4			0.3			0.6			(0.2		)	1.1
Utilization	(1.3		)	(0.3		)	(0.6		)	0.2			(2.0		)
Balance at March 30, 2008	1.5			—			—			—			1.5
Net pre-tax restructuring charges	0.5			—			0.5			—			1.0
Utilization	(0.7		)	—			(0.5		)	—			(1.2		)
Balance at June 29, 2008	$	1.3		$	—		$	—		$	—		$	1.3

The following table summarizes expected, incurred and remaining cost for 2007 restructuring actions by type:

	Severance		Asset write- downs		Facility exit and other		Total
	(in millions)
Expected costs	$	4.3	$	5.8	$	2.8	$	12.9
Costs incurred – through December 31, 2007	0.8		4.2		0.1		5.1
Costs incurred – quarter ended March 30, 2008	0.4		0.3		0.6		1.3
Costs incurred – quarter ended June 29, 2008	0.5		—		0.5		1.0
Remaining costs at June 29, 2008	$	2.6	$	1.3	$	1.6	$	5.5

Other consists primarily of relocation costs.

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The following table summarizes expected, incurred and remaining cost for 2007 restructuring actions by segment:

	Expected costs		Costs incurred through December 31, 2007		Costs incurred quarter ended March 30, 2008		Costs incurred quarter ended June 29, 2008		Remaining costs June 29, 2008
North America	$	5.7	$	3.5	$	0.8	$	0.5	$	0.9
Europe	3.9		—		—		0.1		3.8
China	3.3		1.6		0.5		0.4		0.8
Total	$	12.9	$	5.1	$	1.3	$	1.0	$	5.5

6. Earnings per Share

The following tables set forth the reconciliation of the calculation of earnings per share:

	For the Second Quarter Ended June 29, 2008
	Income (Numerator)			Shares (Denominator)	Per Share Amount
	(amounts in millions, except per share amounts)
Basic EPS
Income from continuing operations	$	20.0		36.6	$	0.55
Loss from discontinued operations	(0.2		)		(0.01		)
Net income	$	19.8			$	0.54
Effect of dilutive securities
Common stock equivalents				0.2
Diluted EPS
Income from continuing operations	$	20.0			$	0.54
Loss from discontinued operations	(0.2		)		(0.01		)
Net income	$	19.8		36.8	$	0.54

	For the Second Quarter Ended July 1, 2007
	Income (Numerator)		Shares (Denominator)	Per Share Amount
	(amounts in millions, except per share amounts)
Basic EPS
Income from continuing operations	$	17.7	38.7	$	0.46
Income from discontinued operations	0.1			—
Net income	$	17.8		$	0.46
Effect of dilutive securities
Common stock equivalents			0.3
Diluted EPS
Income from continuing operations	$	17.7		$	0.45
Income from discontinued operations	0.1			—
Net income	$	17.8	39.0	$	0.46

	For the Six Months Ended June 29, 2008
	Income (Numerator)			Shares (Denominator)	Per Share Amount
	(amounts in millions, except per share amounts)
Basic EPS
Income from continuing operations	$	33.9		36.8	$	0.92
Loss from discontinued operations	(0.4		)		(0.1		)
Net income	$	33.5			$	0.91
Effect of dilutive securities
Common stock equivalents				0.2
Diluted EPS
Income from continuing operations	$	33.9			$	0.92
Loss from discontinued operations	(0.4		)		(0.1		)
Net income	$	33.5		37.0	$	0.91

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	For the Six Months Ended July 1, 2007
	Income (Numerator)		Shares (Denominator)	Per Share Amount
	(amounts in millions, except per share amounts)
Basic EPS
Income from continuing operations	$	37.7	38.6	$	0.98
Income from discontinued operations	.1			—
Net income	$	37.8		$	0.98
Effect of dilutive securities
Common stock equivalents			0.4
Diluted EPS
Income from continuing operations	$	37.7		$	0.97
Income from discontinued operations	.1			—
Net income	$	37.8	39.0	$	0.97

7. Segment Information

Under the criteria set forth in FAS No.131 “Disclosure about Segments of an Enterprise and Related Information,” the Company operates in three geographic segments: North America, Europe, and China. Each of these segments 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.

The following is a summary of the Company’s significant accounts and balances by segment, reconciled to the consolidated totals:

	Second Quarter Ended
	June 29, 2008			July 1, 2007
	(in millions)
Net Sales
North America	$	234.6		$	224.5
Europe	139.2			108.2
China	15.2			17.7
Consolidated net sales	$	389.0		$	350.4

Operating income (loss)
North America	$	27.5		$	20.2
Europe	17.7			12.8
China	(2.7		)	4.0
Subtotal reportable segments	42.5			37.0

Corporate (*)	(7.3		)	(6.7		)
Consolidated operating income	35.2			30.3

Interest income	1.3			3.6
Interest expense	(6.7		)	(6.7		)
Minority interest	0.7			0.8
Other	(1.4		)	(0.3		)
Income from continuing operations before income taxes	$	29.1		$	27.7

Capital Expenditures
North America	$	2.4		$	3.3
Europe	3.2			4.0
China	0.8			1.6
Consolidated capital expenditures	$	6.4		$	8.9

Depreciation and Amortization
North America	$	4.8		$	4.3
Europe	5.5			3.3
China	1.2			1.8
Consolidated depreciation and amortization	$	11.5		$	9.4

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	Six Months Ended
	June 29, 2008			July 1, 2007
	(in millions)
Net Sales
North America	$	446.0		$	442.8
Europe	261.9			223.8
China	25.1			29.9
Consolidated net sales	$	733.0		$	696.5

Operating Income (Loss)
North America	$	48.1		$	41.4
Europe	32.1			27.2
China	(4.1		)	6.1
Subtotal reportable segments	76.1			74.7

Corporate (*)	(14.6		)	(14.0		)
Consolidated operating income	61.5			60.7

Interest income	3.6			7.2
Interest expense	(13.3		)	(13.0		)
Minority interest	1.9			1.1
Other	(3.6		)	(1.1		)
Income from continuing operations before income taxes	$	50.1		$	54.9

Identifiable Assets (at end of period)
North America	$	848.2		$	1,062.9
Europe	844.3			532.4
China	138.2			137.5
Consolidated identifiable assets	$	1,830.7		$	1,732.8

Long-Lived Assets (at end of period)
North America	$	97.2		$	99.5
Europe	125.2			81.3
China	37.8			27.1
Consolidated long-lived assets	$	260.2		$	207.9

Capital Expenditures
North America	$	4.3		$	6.2
Europe	7.1			6.6
China	3.3			2.3
Consolidated capital expenditures	$	14.7		$	15.1

Depreciation and Amortization
North America	$	9.4		$	8.7
Europe	9.4			7.8
China	2.7			3.3
Consolidated depreciation and amortization	$	21.5		$	19.8

Corporate expenses are primarily for compensation expense, Sarbanes-Oxley compliance, professional fees, including legal and audit expenses, shareholder services and benefit administration costs. These costs are not allocated to the geographic segments as they are viewed as corporate functions that support all activities.

The above operating segments are presented on a basis consistent with the presentation included in the Company’s December 31, 2007 financial statements included in its Annual Report on Form 10-K.

The North American segment consists of U.S. net sales of $215.7 million and $208.3 million for the second quarters of 2008 and 2007, respectively, and $411.2 million and $412.4 million for the first six months of 2008 and 2007, respectively. The North American segment also consists of U.S. long-lived assets of $89.8 million and $92.5 million at June 29, 2008 and July 1, 2007, respectively.

Intersegment sales for the second quarter ended June 29, 2008 for North America, Europe and China were $1.8 million, $2.3 million and $35.5 million, respectively. Intersegment sales for the second quarter ended July 1, 2007 for North America, Europe and China were $1.7 million, $1.3 million and $47.3 million, respectively.

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Intersegment sales for the first six months ended June 29, 2008 for North America, Europe and China were $3.2 million, $3.6 million and $63.4 million, respectively. Intersegment sales for the first six months ended July 1, 2007 for North America, Europe and China were $3.8 million, $2.6 million and $69.3 million, respectively.

8. Accumulated Other Comprehensive Income

Accumulated other comprehensive income consists of the following:

	Foreign Currency Translation		Pension Adjustment			Accumulated Other Comprehensive Income
	(in millions)

Balance December 31, 2007	$	77.2	$	(8.5	)	$	68.7
Change in period	25.1		0.1			25.2
Balance March 30, 2008	102.3		(8.4		)	93.9
Change in period	4.3		0.2			4.5
Balance June 29, 2008	$	106.6	$	(8.2	)	$	98.4

Balance December 31, 2006	$	38.1	$	(12.7	)	$	25.4
Change in period	3.2		1.5			4.7
Balance April 1, 2007	41.3		(11.2		)	30.1
Change in period	8.4		0.6			9.0
Balance July 1, 2007	$	49.7	$	(10.6	)	$	39.1

Accumulated other comprehensive income in the consolidated balance sheets as of June 29, 2008 and July 1, 2007 consists primarily of cumulative translation adjustments and pension related prior service costs and net actuarial loss. The Company’s total comprehensive income was as follows:

	Second Quarter Ended
	June 29, 2008		July 1, 2007
	(in millions)

Net income	$	19.8	$	17.8
Foreign currency translation adjustments and other	4.5		9.0
Total comprehensive income	$	24.3	$	26.8

	Six Months Ended
	June 29, 2008		July 1, 2007
	(in millions)

Net income	$	33.5	$	37.8
Foreign currency translation adjustments and other	29.7		12.2
Total comprehensive income	$	63.2	$	50.0

9. Debt

The Company’s revolving credit facility provides for multi-currency unsecured borrowings and stand-by letters of credit of up to $350.0 million and expires in April 2011. Borrowings outstanding under the revolving credit facility bear interest at a fluctuating rate per annum equal to an applicable percentage equal to (i) in the case of Eurocurrency rate loans, the British Bankers Association LIBOR rate plus an applicable percentage of 0.625%, which is determined by reference to the Company’s consolidated leverage ratio and debt rating, or (ii) in the case of base rate loans and swing line loans, the higher of (a) the federal funds rate plus 0.5% and (b) the rate of interest in effect for such day as announced by Bank of America, N.A. as its “prime rate.” For the first six months of 2008, the average interest rate under the revolving credit facility for euro-based borrowings was approximately 5.3%. The revolving credit facility includes operational and financial covenants customary for facilities of this type, including, among others, restrictions on additional indebtedness, liens and investments and maintenance of certain leverage ratios. As of June 29, 2008, the Company was in compliance with all covenants related to the revolving credit facility; had $242.6 million of unused and potentially available credit under the revolving credit facility; had no U.S dollar denominated debt and $72.4 million of euro-based borrowings outstanding on its revolving credit facility; and had $35.0 million for stand-by letters of credit outstanding on its revolving credit facility.

As part of the Blücher Metals A/S (Blücher) acquisition (see Note 12), the Company assumed approximately $15.6 million in debt. Debt included a mortgage payable of $6.4 million, which has a variable rate that is adjusted annually. Blücher entered into an interest rate swap in 2008, which effectively fixes the rate at 4%, the swap expires at year-end 2008. Installments on the mortgage are due quarterly through December 2015 and the mortgage is pledged by assets. Blücher also had a line of credit with an outstanding balance of $8.1 million as of June 29, 2008, with interest at a variable rate of CIBOR/EURIBOR plus 0.5% to 0.7%.

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10. Contingencies and Environmental Remediation

As disclosed in Part I, Item 1, “Product Liability, Environmental and Other Litigation Matters” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, the Company is a party to litigation described as the James Jones Litigation and is also engaged in certain environmental remediation. There have been no material developments with respect to the Company’s contingencies and environmental remediation proceedings during the second quarter ended June 29, 2008.

11. Employee Benefit Plans

The Company sponsors funded and unfunded defined benefit pension plans covering 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.

Effective January 1, 2007, the Company early-adopted the measurement date (the date at which plan assets and the benefit obligation are measured) provisions of FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (FAS 158). Under FAS 158, the measurement date is required to be the company’s fiscal year-end. The Company’s pension plans previously used a September 30 measurement date. All plans are now measured as of December 31, consistent with the Company’s fiscal year-end. The non-cash effect of the adoption of the measurement date provisions of FAS 158 at January 1, 2007 was not material and there was no effect on the Company’s results of operations.

The components of net periodic benefit cost are as follows:

	Second Quarter Ended
	June 29, 2008			July 1, 2007
	(in millions)
Service cost—benefits earned	$	0.9		$	1.0
Interest costs on benefits obligation	1.2			1.1
Expected return on assets	(1.2		)	(1.1		)
Prior service costs and net actuarial loss amortization	0.1			0.2
Net periodic benefit cost	$	1.0		$	1.2

	Six Months Ended
	June 29, 2008			July 1, 2007
	(in millions)
Service cost—benefits earned	$	1.8		$	2.0
Interest costs on benefits obligation	2.4			2.2
Expected return on assets	(2.4		)	(2.2		)
Prior service costs and net actuarial loss amortization	0.2			0.4
Net periodic benefit cost	$	2.0		$	2.4

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

	Six Months Ended
	June 29, 2008		July 1, 2007
	(in millions)

Employer contributions	$	0.2	$	—

Expected contributions for the remainder of 2008 are $3.3 million.

12. Acquisitions

On May 30, 2008, the Company acquired all the outstanding stock of Blücher for approximately $182.8 million. The purchase price consisted of $169.4 million in cash and the assumption of debt of $13.4 million, net of cash acquired. Blücher is a leading provider of stainless steel drainage systems in Europe and a worldwide leader in providing stainless steel drainage products to the marine industry. Blücher provides the Company with a new product platform in Europe while allowing the Company to offer a broader product line to its existing customer base. The Company is accounting for the transaction as a business combination under FAS No. 141, “Business Combinations.” The Company completed a preliminary purchase price allocation that resulted in the recognition of $74.4 million in goodwill and $84.8 million in intangible assets. Intangible assets are comprised primarily of customer relationships and patents with estimated lives of 10 years and trade names with indefinite lives. The results of operations include the results of Blücher since the acquisition date of May 30, 2008. Had the Company completed the acquisition at the beginning of 2007, the net sales, income from continuing operations and earnings per share from continuing operations would have been as follows:

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Amounts in millions (except per share information)

	Second Quarter Ended				Six Months Ended
	June 29, 2008		July 1, 2007		June 29, 2008		July 1, 2007
Net sales	$	406.4	$	370.4	$	775.7	$	735.8
Income from continuing operations	$	22.5	$	16.8	$	38.2	$	33.0
Net income	$	22.3	$	16.9	$	37.8	$	33.1
Basic EPS - Net income	$	0.61	$	0.44	$	1.03	$	0.86
Diluted EPS – Net income	$	0.61	$	0.43	$	1.02	$	0.85

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

During the second quarter of 2008, the Company completed the acquisition of the remaining 40% ownership in its joint venture in China for $3.3 million in cash, which was allocated primarily to goodwill. Under the terms of the agreement, the Company is contingently liable to pay an additional $2.2 million to the sellers only upon the receipt of $2.2 million due to the Company under a separate agreement with one of the sellers.

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Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Overview

The following discussion and analysis are provided to increase understanding of, and should be read in conjunction with, the accompanying unaudited consolidated financial statements and notes. In this quarterly report on Form 10-Q, references to “the Company,” “Watts,” “we,” “us” or “our” refer to Watts Water Technologies, Inc. and its consolidated subsidiaries.

We operate on a 52-week fiscal year ending on December 31. Any second quarter ended data contained in this Quarterly Report on Form 10-Q reflects the results of operations for the 13-week period ended on the Sunday nearest June 30 of the respective year.

We are a leading supplier of products for use in the water quality, water safety, water flow control and water conservation markets in both North America and Europe with an emerging presence in China. For over 130 years, we have designed and manufactured products that promote the comfort and safety of people and the quality and conservation of water used in commercial and residential applications. We earn revenue and income almost exclusively from the sale of our products. Our principal product lines include:

·	water quality products, including backflow preventers and check valves for preventing reverse flow within water lines and fire protection systems and point-of-use water filtration and reverse osmosis systems for both commercial and residential applications;

·	a wide range of water pressure regulators for both commercial and residential applications;

·	drainage products for industrial, commercial, 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 solar and heat pump control packages;

·	flexible stainless steel connectors for natural and liquid propane gas in commercial food service and residential applications; and

·	large diameter butterfly valves for use in China’s water infrastructure.

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). Interest rates have an indirect effect on the demand for our products due to the effect such rates have on the number of new residential and commercial construction starts and remodeling projects. All three of these activities have an impact on our levels of sales and earnings. An additional factor that has had an effect on our sales is fluctuation in foreign currencies, as a portion of our sales and certain portions of our costs, assets and liabilities are denominated in currencies other than the U.S. dollar.

Our second quarter results were stronger than we anticipated. Our second quarter results were positively affected by systems sold into the European energy conservation marketplace and from increased sales into the North American retail sector. We believe that the continued pressures on the U.S. and European economies will negatively affect our sales for the remainder of 2008. We believe that our sales in China will continue to be affected by delivery issues in our infrastructure business and by adverse market conditions in our butterfly valve business. We believe that a combination of price increases and cost reductions that will be achieved through the continued implementation of lean manufacturing and six sigma disciplines as well as the restructuring plan will help to partially offset any negative pressures to operating income. These conditions are expected to continue through the remainder of 2008.

We believe that the factors relating to our future growth include the increased demand for clean water around the world, growing regulatory requirements relating to the quality and conservation of water together with continued enforcement of plumbing and building codes, our ability to grow organically in select attractive market segments and to continue to make selective acquisitions, both in our core markets as well as in new complementary markets, and a healthy economic environment. We have completed 32 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 residential and commercial 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

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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. We believe there is an increasing demand among consumers for products to ensure water quality, which creates growth opportunities for our products.

We require substantial amounts of raw materials to produce our products, including bronze, brass, cast iron, steel and plastic, and substantially all of the raw materials we require are purchased from outside sources. We have experienced increases in the costs of certain raw materials, particularly copper. Bronze and brass are copper-based alloys. The monthly average price of copper and pig iron increased approximately 18% and 112%, respectively, from December 31, 2007 to July 31, 2008.

A risk we face is our ability to deal effectively with increases in raw material costs. We manage this risk by monitoring related market prices, working with our suppliers to achieve the maximum level of stability in their costs and related pricing, seeking alternative supply sources when necessary, implementing cost reduction programs and passing increases in costs on to our customers. Additionally from time to time we may use commodity futures contracts on a limited basis to manage this risk. We are not able to predict whether or for how long these cost increases will continue. If these cost increases continue and we are not able to reduce or eliminate the effect of the cost increases by reducing production costs or implementing price increases, our profit margins could decrease.

Another risk we face in all areas of our business is competition. We consider brand preference, engineering specifications, code requirements, price, technological expertise, delivery times and breadth of product offerings to be the primary competitive factors. As mentioned previously, we believe that the product development, product testing capability and investment in plant and equipment needed to manufacture products in compliance with code requirements, represent a barrier to entry for competitors. We are committed to maintaining our capital equipment at a level consistent with current technologies, and thus we spent approximately $37.8 million in 2007 and expect to spend approximately $35.0 million during 2008.

Acquisitions

On May 30, 2008, we purchased all of the outstanding share capital of Blücher Metal A/S (Blücher) located in Vildbjerg, Denmark, for approximately $182.8 million. Blücher is a leading provider of stainless steel drainage systems in Europe and a worldwide leader in providing stainless steel drainage products to the marine industry. Blücher’s main products include push-fit stainless steel pipes and related fittings, light-duty drains for residential, commercial and marine applications, and drains for heavy-duty industrial applications including brewery and pharmaceutical applications.

During the second quarter of 2008, we completed the acquisition of the remaining 40% ownership of our joint venture in China for $3.3 million in cash. Under the terms of the agreement, we are contingently liable to pay an additional $2.2 million to the sellers only upon the receipt of $2.2 million due to us under a separate agreement with one of the sellers.

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

Results of Operations

Second Quarter Ended June 29, 2008 Compared to Second Quarter Ended July 1, 2007

Net Sales. Our business is reported in three geographic segments: North America, Europe and China. Our net sales in each of these segments for each of the second quarters of 2008 and 2007 were as follows:

	Second Quarter Ended June 29, 2008				Second Quarter Ended July 1, 2007							% Change to Consolidated
	Net Sales		% Sales		Net Sales		% Sales		Change			Net Sales
	(dollars in millions)
North America	$	234.6	60.3	%	$	224.5	64.1	%	$	10.1		2.9	%
Europe	139.2		35.8		108.2		30.9		31.0			8.8
China	15.2		3.9		17.7		5.0		(2.5		)	(0.7	)
Total	$	389.0	100	%	$	350.4	100	%	$	38.6		11.0	%

Table of Contents

The increase (decrease) in net sales is attributable to the following:

Change

As a % of Consolidated Net Sales

As a % of Segment Net Sales

North
America