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 September 28, 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 Organization)		(I.R.S. Employer Identification No.)

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 October 31, 2008
Class A Common Stock, $0.10 par value		29,250,175

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 September 28, 2008 and December 31, 2007 (unaudited)

	Consolidated Statements of Operations for the Third Quarters Ended September 28, 2008 and September 30, 2007 (unaudited)

	Consolidated Statements of Operations for the Nine Months Ended September 28, 2008 and September 30, 2007 (unaudited)

	Consolidated Statements of Cash Flows for the Nine Month Ended September 28, 2008 and September 30, 2007 (unaudited)

	Notes to Consolidated Financial Statements (unaudited)

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 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)

	September 28,			December 31,
	2008			2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	129.4		$	290.3
Short-term investment securities	—			22.0
Trade accounts receivable, less allowance for doubtful accounts of $14.0 million at September 28, 2008 and $14.9 million at December 31, 2007	268.2			235.7
Inventories, net:
Raw materials	121.8			108.9
Work in process	50.2			45.7
Finished goods	194.0			187.0
Total Inventories	366.0			341.6
Prepaid expenses and other assets	16.6			18.6
Deferred income taxes	51.7			38.1
Assets held for sale	9.8			—
Assets of discontinued operations	10.8			10.4
Total Current Assets	852.5			956.7
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost	477.5			437.4
Accumulated depreciation	(229.0		)	(213.7		)
Property, plant and equipment, net	248.5			223.7
OTHER ASSETS:
Goodwill	468.6			385.8
Long-term investment securities	7.9			17.0
Intangible assets, net	184.9			134.0
Other, net	10.0			12.1
TOTAL ASSETS	$	1,772.4		$	1,729.3

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	135.8		$	108.0
Accrued expenses and other liabilities	122.2			113.6
Accrued compensation and benefits	44.1			38.2
Current portion of long-term debt	3.1			1.3
Liabilities to be transferred by sale	9.9			—
Liabilities of discontinued operations	29.1			28.6
Total Current Liabilities	344.2			289.7
LONG-TERM DEBT, NET OF CURRENT PORTION	414.7			432.2
DEFERRED INCOME TAXES	61.9			42.9
OTHER NONCURRENT LIABILITIES	43.5			45.6
MINORITY INTEREST	—			3.4
STOCKHOLDERS’ EQUITY:
Preferred Stock, $0.10 par value; 5,000,000 shares authorized; no shares issued or outstanding	—			—
Class A Common Stock, $0.10 par value; 80,000,000 shares authorized; 1 vote per share; issued and outstanding, 29,250,175 shares at September 28, 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 September 28, 2008 and December 31, 2007	0.7			0.7
Additional paid-in capital	385.8			377.6
Retained earnings	459.4			465.4
Accumulated other comprehensive income	59.3			68.7
Total Stockholders’ Equity	908.1			915.5
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,772.4		$	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)

	Third Quarter Ended
	September 28, 2008			September 30, 2007
Net sales	$	379.3		$	340.5
Cost of goods sold	255.4			230.0
GROSS PROFIT	123.9			110.5
Selling, general & administrative expenses	92.3			78.8
Restructuring and other charges	0.9			1.6
OPERATING INCOME	30.7			30.1
Other (income) expense:
Interest income	(0.8		)	(3.7		)
Interest expense	6.6			6.8
Minority interest	—			(0.8		)
Other	0.7			0.6
	6.5			2.9
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	24.2			27.2
Provision for income taxes	7.4			9.0
INCOME FROM CONTINUING OPERATIONS	16.8			18.2
Loss from discontinued operations, net of taxes	(0.1		)	(0.1		)
NET INCOME	$	16.7		$	18.1

BASIC EPS
Income (loss) per share:
Continuing operations	$	0.46		$	0.47
Discontinued operations	(0.01		)	—
NET INCOME	$	0.46		$	0.47
Weighted average number of shares	36.5			38.7

DILUTED EPS
Income (loss) per share:
Continuing operations	$	0.46		$	0.47
Discontinued operations	(0.01		)	—
NET INCOME	$	0.45		$	0.46
Weighted average number of shares	36.7			39.1

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)

	Nine Months Ended
	September 28, 2008			September 30, 2007
Net sales	$	1,112.3		$	1,037.0
Cost of goods sold	741.3			697.2
GROSS PROFIT	371.0			339.8
Selling, general & administrative expenses	275.9			246.9
Restructuring and other charges	2.9			2.1
OPERATING INCOME	92.2			90.8
Other (income) expense:
Interest income	(4.4		)	(10.9		)
Interest expense	19.9			19.8
Minority interest	(1.9		)	(1.9		)
Other	4.3			1.7
	17.9			8.7
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	74.3			82.1
Provision for income taxes	23.6			26.2
INCOME FROM CONTINUING OPERATIONS	50.7			55.9
Loss from discontinued operations, net of taxes	(0.5		)	—
NET INCOME	$	50.2		$	55.9

BASIC EPS
Income (loss) per share:
Continuing operations	$	1.38		$	1.45
Discontinued operations	(0.01		)	—
NET INCOME	$	1.37		$	1.45
Weighted average number of shares	36.7			38.7

DILUTED EPS
Income (loss) per share:
Continuing operations	$	1.37		$	1.43
Discontinued operations	(0.01		)	—
NET INCOME	$	1.36		$	1.43
Weighted average number of shares	36.9			39.0

Dividends per share	$	0.33		$	0.30

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)

	Nine Months Ended
	September 28, 2008			September 30, 2007
OPERATING ACTIVITIES
Net income	$	50.2		$	55.9
Less: Loss from discontinued operations	(0.5		)	—
Income from continuing operations	50.7			55.9
Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities:
Depreciation	24.3			21.6
Amortization	9.7			7.9
Gain on disposal and impairment of property, plant and equipment and other	0.2			1.6
Stock-based compensation	4.2			4.6
Deferred income tax benefit	(14.9		)	(4.7		)
Changes in operating assets and liabilities, net of effects from business acquisitions and divestures:
Accounts receivable	(16.4		)	(16.1		)
Inventories	(5.3		)	(27.6		)
Prepaid expenses and other assets	6.0			(3.7		)
Accounts payable, accrued expenses and other liabilities	33.0			(17.7		)
Net cash provided by continuing operating activities	91.5			21.8

INVESTING ACTIVITIES
Additions to property, plant and equipment	(21.0		)	(25.3		)
Proceeds from the sale of property, plant and equipment	0.5			0.2
Investments in securities	(2.6		)	(27.5		)
Proceeds from sale of securities	33.3			0.4
Increase in other assets	—			(0.5		)
Business acquisitions, net of cash acquired	(174.6		)	(4.6		)
Net cash used in investing activities	(164.4		)	(57.3		)

FINANCING ACTIVITIES
Proceeds from long-term debt	19.9			43.8
Payments of long-term debt	(51.8		)	(37.7		)
Payment of capital leases	(1.1		)	(1.4		)
Proceeds from share transactions under employee stock plans	1.6			1.1
Tax benefit of stock awards exercised	—			1.0
Payments to repurchase common stock	(44.5		)	—
Dividends	(12.2		)	(11.7		)
Net cash used in financing activities	(88.1		)	(4.9		)
Effect of exchange rate changes on cash and cash equivalents	0.6			5.9
Net cash (used in) provided by operating activities of discontinued operations	(0.5		)	0.2

DECREASE IN CASH AND CASH EQUIVALENTS	(160.9		)	(34.3		)
Cash and cash equivalents at beginning of period	290.3			343.0
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	129.4		$	308.7

NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of businesses:
Fair value of assets acquired	$	235.6		$	3.5
Cash paid, net of cash acquired	174.6			4.6
Liabilities assumed (assets acquired)	$	61.0		$	(1.1	)
Acquisition of fixed assets under capital lease	$	—		$	1.4
Issuance of stock under management stock purchase plan	$	1.6		$	1.7

CASH PAID FOR:
Interest	$	15.4		$	15.7
Taxes	$	31.7		$	34.1

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 September 28, 2008, the Consolidated Statements of Operations for the third quarter and nine months ended September 28, 2008 and the third quarter and nine months ended September 30, 2007, and the Consolidated Statements of Cash Flows for the nine months ended September 28, 2008 and the nine months ended September 30, 2007.

The consolidated 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 consolidated financial statements included in this report should be read in conjunction with the consolidated 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 third 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 September 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 September 28, 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	—			89.3			3.3			92.6
Adjustments and reclassifications of goodwill during the period	0.1			—			(3.8		)	(3.7		)
Effect of change in exchange rates used for translation	(0.3		)	(6.7		)	0.9			(6.1		)
Carrying amount at end of period	$	210.8		$	245.0		$	12.8		$	468.6

Intangible assets include the following at September 28, 2008:

	Gross Carrying Amount		Accumulated Amortization
	(in millions)

Patents	$	18.1	$	(7.0	)
Customer relationships	116.3		(21.6		)
Technology	7.5		(3.3		)
Other	19.2		(6.4		)
Total amortizable intangibles	161.1		(38.3		)
Intangible assets not subject to amortization	62.1		—
Total	$	223.2	$	(38.3	)

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Aggregate amortization expense for amortizable intangible assets for the third quarters of 2008 and 2007 was $3.7 million and $2.3 million, respectively, and for the first nine months of 2008 and 2007 was $9.7 million and $7.9 million, respectively. Additionally, future amortization expense on amortizable intangible assets approximates $4.2 million for the remainder of 2008, $15.3 million for 2009, $15.2 million for 2010, $14.5 million for 2011 and $12.6 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 assets is 10.4 years. Patents, customer relationships, technology and other amortizable intangibles have weighted-average remaining lives of 8.4 years, 9.7 years, 5.5 years and 18.8 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 issued 202,000 and 189,000 options under the 2004 Stock Incentive Plan in the third quarters and first nine months of 2008 and 2007, respectively.

The fair value of each share issued 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:

	2008		2007
Expected life (years)	6.0		5.8
Expected stock price volatility	35.6	%	37.2	%
Expected dividend yield	1.5	%	1.2	%
Risk-free interest rate	3.5	%	4.6	%

The above assumptions were used to determine the weighted average grant-date fair value of stock options of $10.10 and $12.75 in 2008 and 2007, respectively.

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 issued 79,597 and 72,437 restricted stock awards under the 2004 Stock Incentive Plan in the third quarters and first nine months of 2008 and 2007, respectively.

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.

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Assets Held for Sale

From time to time, the Company may dispose of assets or groups of assets by means of sale. When certain criteria are met, the Company records these assets as held for sale in the accompanying consolidated balance sheet. During the third quarter ended September 28, 2008, the Company entered into an agreement to sell its equity interests in one of its China entities to a local company (the buyer). This unit serves the domestic Chinese market and also manufactures products for sale in the U.S. marketplace. The Company evaluated alternatives, including additional restructuring activities and determined the disposition by sale of the domestic Chinese business was the best alternative. The Company will maintain ownership of the assets used to manufacture the products to be sold in the U.S. As such, the Company has determined that this continuing involvement in the business prohibits the recognition of this transaction and the related results from operations of this business as discontinued operations. The results from operations of the domestic Chinese business will continue to be reported in the results from continuing operations until the sale is complete.

The Company anticipates that the sale of this unit will be completed during the fourth quarter of 2008. The major classes of assets and liabilities included in the consolidated balance sheet as held for sale are as follows:

	September, 28
	2008
	(in millions)
Accounts receivable, net	$	2.9
Inventories, net	2.1
Prepaid expenses and other assets	0.6
Property, plant and equipment, net	0.8
Goodwill	3.3
Other, net	0.1
Total assets held for sale	$	9.8

Accounts payable	$	6.0
Accrued expenses and other liabilities	3.6
Accrued compensation and benefits	0.3
Total liabilities to be transferred by sale	$	9.9

Shipping and Handling

The Company’s shipping costs included in selling, general and administrative expense were $11.0 million and $9.3 million for the third quarters of 2008 and 2007, respectively, and were $29.5 million and $28.9 million for the first nine months of 2008 and 2007, respectively.

Research and Development

Research and development costs included in selling, general and administrative expense were $4.0 million and $3.5 million for the third quarters of 2008 and 2007, respectively, and were $13.2 million and $11.1 million for the first nine 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 June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) EITF Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1). FSP EITF 03-6-1 requires that unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents to be included in the two-class method of computing earnings per share as described in Statement of Financial Accounting Standards (FAS) No. 128, “Earnings per Share.” This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Accordingly, we will adopt FSP EITF 03-6-1 in fiscal year 2009. The adoption of FSP EITF 03-6-1 is not expected to have a material impact on the consolidated financial statements.

In May 2008, the FASB issued No. FAS 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 acquisitions made after January 1, 2009.

In December 2007, the FASB issued FAS No. 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 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 will have a material impact on its consolidated financial statements.

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an Amendment to FAS No. 115,” (FAS 159), which permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 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.

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 third quarter and first nine 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.

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

	Third Quarter Ended
	September 28, 2008			September 30, 2007
	(in millions)
Costs and expenses - Municipal Water Group	$	(0.3	)	$	(0.1	)
Loss before income taxes	(0.3		)	(0.1		)
Income tax benefit	0.2			—
Loss from discontinued operations, net of taxes	$	(0.1	)	$	(0.1	)

	Nine Months Ended
	September 28, 2008			September 30, 2007
	(in millions)
Costs and expenses - Municipal Water Group	$	(0.8	)	$	—
Loss before income taxes	(0.8		)	—
Income tax benefit	0.3			—
Loss from discontinued operations, net of taxes	$	(0.5	)	$	—

	September 28, 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 September 28, 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 September 28, 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)	$	7.9	$	—	$	—		$	7.9
Foreign currency derivatives(2)	0.1		—		0.1			—
Plan asset for deferred compensation(3)	3.0		3.0		—			—
Total assets	$	11.0	$	3.0	$		0.1	$	7.9

Liabilities
Copper swap (4)	$	0.4	$	—	$	0.4		$	—
Plan liability for deferred compensation(5)	$	3.0	$	3.0	$	—		$	—
Total liabilities	$	3.4	$	3.0	$	0.4		$	—

(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 accrued expenses and other liabilities on the Company’s consolidated balance sheet.

(5) 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 September 28, 2008.

	Balance		Purchases,			Total realized and unrealized gains (losses) included in:
	December 31, 2007		sales, settlements, net			Earnings		Comprehensive income			Balance September 28, 2008
	(in millions)
Available for sale securities	$	39.0	$	(30.6	)	$	—	$	(0.5	)	$	7.9

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 $6.3 million in municipal bonds and $1.6 million in student loans at September 28, 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 September 28, 2008. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit quality of the ARS issuer, timing and amount of cash flows, government guarantees related to student loans and the expected holding periods of the ARS. Based on this assessment of fair value, as of September 28, 2008 the Company recorded an impairment of approximately $0.5 million to comprehensive income.

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. Metal derivatives include forward contracts for copper.

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 in the consolidated statement of operations. These contracts do not subject the Company to significant market risk from exchange movement because they offset gains and losses on the related foreign currency denominated transactions. At September 28, 2008 and September 30, 2007, unrealized gains or losses on the contracts were immaterial.

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From time to time, the Company enters into swaps or forwards to limit the volatility associated with the purchase of metals, such as copper. The Company typically structures the terms of these financial instruments to coincide with purchases made throughout the year. During the quarter ended September 28, 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 one customer. The Company has determined that these copper swaps do not qualify for hedge accounting and is accounting for these financial instruments as an economic hedge. Therefore, any changes in the fair value of the copper swaps are recorded immediately in the consolidated statement of operations. The Company believes that the use of swap contracts to fix the purchase price of copper allows the Company the ability to provide firm pricing to that one customer. The Company does not enter into swap or forward contracts for speculative purposes. At September 28, 2008, unrealized losses on the copper swaps were $0.4 million and are included in other income/expense in the consolidated statement of operations.

5. Restructuring and Other Charges

During the third quarter and first nine months of 2008, the Company recorded net pre-tax restructuring and related charges in its geographic segments totaling $0.9 million and $3.2 million, respectively, for ongoing restructuring actions as follows:

	Third Quarter Ended		Nine Months Ended
	September 28, 2008		September 28, 2008
	(in millions)
North America	$	0.5	$	1.8
Europe	0.1		0.2
China	0.3		1.2
Totals	$	0.9	$	3.2

The third quarter 2008 net charges included $0.9 million in restructuring and other charges. The nine months ended September 28, 2008, net charges included $0.3 million in cost of goods sold and $2.9 million in restructuring related to actions initiated during 2007. The Company also recorded $0.2 million in the nine months ended September 28, 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 $8.3 million of costs associated with the plans and has successfully shutdown two manufacturing facilities and right sized one of its facilities. Management 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 2010, with the expectation that Europe will incur most of its costs during 2010. As such, previous estimates of savings from the programs will likely be achieved in 2010 rather than in the 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
Net pre-tax restructuring charges	0.4			—			0.5			—			0.9
Utilization	(0.4		)	—			(0.5		)	—			(0.9		)
Balance at September 28, 2008	$	1.3		$	—		$	—		$	—		$	1.3

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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
Costs incurred – quarter ended September 28, 2008	0.4		—		0.5		0.9
Remaining costs at September 28, 2008	$	2.2	$	1.3	$	1.1	$	4.6

Other consists primarily of relocation costs.

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		Costs incurred quarter ended September 28, 2008		Remaining costs September 28, 2008
	(in millions)
North America	$	5.7	$	3.5	$	0.8	$	0.5	$	0.5	$	0.4
Europe	3.9		—		—		0.1		0.1		3.7
China	3.3		1.6		0.5		0.4		0.3		0.5
Total	$	12.9	$	5.1	$	1.3	$	1.0	$	0.9	$	4.6

6. Earnings per Share

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

	For the Third Quarter Ended September 28, 2008
	Income (Numerator)			Shares (Denominator)	Per Share Amount
	(amounts in millions, except per share amounts)
Basic EPS
Income from continuing operations	$	16.8		36.5	$	0.46
Loss from discontinued operations	(0.1		)		(0.01		)
Net income	$	16.7			$	0.46
Effect of dilutive securities
Common stock equivalents				0.2
Diluted EPS
Income from continuing operations	$	16.8			$	0.46
Loss from discontinued operations	(0.1		)		(0.01		)
Net income	$	16.7		36.7	$	0.45

	For the Third Quarter Ended September 30, 2007
	Income (Numerator)			Shares (Denominator)	Per Share Amount
	(amounts in millions, except per share amounts)
Basic EPS
Income from continuing operations	$	18.2		38.7	$	0.47
Loss from discontinued operations	(0.1		)		—
Net income	$	18.1			$	0.47
Effect of dilutive securities
Common stock equivalents				0.4
Diluted EPS
Income from continuing operations	$	18.2			$	0.47
Loss from discontinued operations	(0.1		)		—
Net income	$	18.1		39.1	$	0.46

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	For the Nine Months Ended September 28, 2008
	Income (Numerator)			Shares (Denominator)	Per Share Amount
	(amounts in millions, except per share amounts)
Basic EPS
Income from continuing operations	$	50.7		36.7	$	1.38
Loss from discontinued operations	(0.5		)		(0.01		)
Net income	$	50.2			$	1.37
Effect of dilutive securities
Common stock equivalents				0.2
Diluted EPS
Income from continuing operations	$	50.7			$	1.37
Loss from discontinued operations	(0.5		)		(0.01		)
Net income	$	50.2		36.9	$	1.36

	For the Nine Months Ended September 30, 2007
	Income (Numerator)		Shares (Denominator)	Per Share Amount
	(amounts in millions, except per share amounts)
Basic EPS
Income from continuing operations	$	55.9	38.7	$	1.45
Income from discontinued operations	—			—
Net income	$	55.9		$	1.45
Effect of dilutive securities
Common stock equivalents			0.3
Diluted EPS
Income from continuing operations	$	55.9		$	1.43
Income from discontinued operations	—			—
Net income	$	55.9	39.0	$	1.43

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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:

	Third Quarter Ended
	September 28, 2008			September 30, 2007
	(in millions)
Net Sales
North America	$	218.5		$	215.8
Europe	148.0			110.5
China	12.8			14.2
Consolidated net sales	$	379.3		$	340.5

Operating income (loss)
North America	$	23.4		$	22.6
Europe	16.5			13.9
China	(2.5		)	0.7
Subtotal reportable segments	37.4			37.2

Corporate (*)	(6.7		)	(7.1		)
Consolidated operating income	30.7			30.1

Interest income	0.8			3.7
Interest expense	(6.6		)	(6.8		)
Minority interest	—			0.8
Other	(0.7		)	(0.6		)
Income from continuing operations before income taxes	$	24.2		$	27.2

Capital Expenditures
North America	$	2.4		$	3.1
Europe	3.5			3.2
China	0.4			3.9
Consolidated capital expenditures	$	6.3		$	10.2

Depreciation and Amortization
North America	$	4.9		$	4.4
Europe	6.3			3.9
China	1.3			1.5
Consolidated depreciation and amortization	$	12.5		$	9.8

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	Nine Months Ended
	September 28, 2008			September 30, 2007
	(in millions)
Net Sales
North America	$	664.5		$	658.6
Europe	409.9			334.3
China	37.9			44.1
Consolidated net sales	$	1,112.3		$	1,037.0

Operating Income (Loss)
North America	$	71.5		$	64.0
Europe	48.6			41.1
China	(6.6		)	6.8
Subtotal reportable segments	113.5			111.9

Corporate (*)	(21.3		)	(21.1		)
Consolidated operating income	92.2			90.8

Interest income	4.4			10.9
Interest expense	(19.9		)	(19.8		)
Minority interest	1.9			1.9
Other	(4.3		)	(1.7		)
Income from continuing operations before income taxes	$	74.3		$	82.1

Identifiable Assets (at end of period)
North America	$	856.3		$	1,068.4
Europe	776.9			546.0
China	139.2			133.1
Consolidated identifiable assets	$	1,772.4		$	1,747.5

Long-Lived Assets (at end of period)
North America	$	95.5		$	99.5
Europe	116.6			85.9
China	36.4			30.2
Consolidated long-lived assets	$	248.5		$	215.6

Capital Expenditures
North America	$	6.7		$	9.3
Europe	10.6			9.8
China	3.7			6.2
Consolidated capital expenditures	$	21.0		$	25.3

Depreciation and Amortization
North America	$	14.3		$	13.1
Europe	15.7			11.7
China	4.0			4.7
Consolidated depreciation and amortization	$	34.0		$	29.5

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 $200.4 million and $199.0 million for the third quarters of 2008 and 2007, respectively, and $611.6 million and $611.3 million for the first nine months of 2008 and 2007, respectively. The North American segment also consists of U.S. long-lived assets of $88.4 million and $92.1 million at September 28, 2008 and September 30, 2007, respectively.

Intersegment sales for the third quarter ended September 28, 2008 for North America, Europe and China were $1.7 million, $1.5 million and $34.8 million, respectively. Intersegment sales for the third quarter ended September 30, 2007 for North America, Europe and China were $1.5 million, $2.1 million and $34.7 million, respectively.

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Intersegment sales for the first nine months ended September 28, 2008 for North America, Europe and China were $4.9 million, $5.1 million and $98.2 million, respectively. Intersegment sales for the first nine months ended September 30, 2007 for North America, Europe and China were $5.2 million, $4.7 million and $104.1 million, respectively.

8. Accumulated Other Comprehensive Income

Accumulated other comprehensive income consists of the following:

	Foreign Currency Translation			Pension Adjustment/Other			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
Change in period	(38.7		)	(0.4		)	(39.1		)
Balance September 28, 2008	$	67.9		$	(8.6	)	$	59.3

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
Change in period	16.4			0.3			16.7
Balance September 30, 2007	$	66.1		$	(10.3	)	$	55.8

Accumulated other comprehensive income in the consolidated balance sheets as of September 28, 2008 and September 30, 2007 consists primarily of cumulative translation adjustments, impairment of securities and pension related prior service costs and net actuarial loss. The Company’s total comprehensive income was as follows:

	Third Quarter Ended
	September 28, 2008			September 30, 2007
	(in millions)

Net income	$	16.7		$	18.1
Foreign currency translation adjustments and other	(39.1		)	16.7
Total comprehensive (loss) income	$	(22.4	)	$	34.8

	Nine Months Ended
	September 28, 2008			September 30, 2007
	(in millions)

Net income	$	50.2		$	55.9
Foreign currency translation adjustments and other	(9.4		)	28.8
Total comprehensive income	$	40.8		$	84.7

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 nine 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 September 28, 2008, the Company was in compliance with all covenants related to the revolving credit facility; had $255.7 million of unused and potentially available credit under the revolving credit facility; had no U.S dollar denominated debt and $59.3 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.

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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 $9.2 million as of the purchase date, with interest at a variable rate of CIBOR/EURIBOR plus 0.5% to 0.7%. As of September 28, 2008 this line was approximately $2.3 million.

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 third quarter ended September 28, 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:

	Third Quarter Ended
	September 28, 2008			September 30, 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

	Nine Months Ended
	September 28, 2008			September 30, 2007
	(in millions)
Service cost—benefits earned	$	2.7		$	2.8
Interest costs on benefits obligation	3.6			3.2
Expected return on assets	(3.6		)	(3.2		)
Prior service costs and net actuarial loss amortization	0.3			0.9
Net periodic benefit cost	$	3.0		$	3.7

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

	Nine Months Ended
	September 28, 2008		September 30, 2007
	(in millions)

Employer contributions	$	3.3	$	7.3

The Company does not expect to contribute any additional funds for the remainder of 2008.

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12. Acquisitions

On May 30, 2008, the Company acquired all of the outstanding stock of Blücher 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. Blücher is a leading provider of stainless steel drainage systems in Europe to the residential, commercial and industrial marketplaces and is a worldwide leader in providing stainless steel drainage products to the marine industry. Blücher 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 $64.5 million in intangible assets and $89.3 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 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:

Amounts in millions (except per share information)

	Third Quarter Ended				Nine Months Ended
	September 28, 2008		September 30, 2007		September 28, 2008		September 30, 2007
Net sales	$	379.3	$	364.1	$	1,155.0	$	1,099.8
Income from continuing operations	$	18.5	$	21.3	$	58.6	$	54.8
Net income	$	18.4	$	21.2	$	58.1	$	54.8
Basic EPS - Net income	$	0.50	$	0.55	$	1.58	$	1.42
Diluted EPS – Net income	$	0.50	$	0.54	$	1.58	$	1.41

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

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. See Note 2, Assets Held for Sale for subsequent disposal of this business.

Table of Contents

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 third 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 September 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.

Although we continue to see positive sales trends in the European energy conservation marketplace and in Canada in general, our sales in most other markets during the third quarter of 2008 are unchanged or down when compared to the same period one year earlier. The well publicized credit market crisis creates concerns for our performance into 2009. The worldwide reports of an economic slowdown continue to point toward slower growth for the next several quarters. In response to these concerns, we are taking steps to place the Company on a firm fiscal platform from which these turbulent economic times can be managed. We announced that a reduction of the current United States workforce will be undertaken during the fourth quarter of 2008. We are also evaluating our current manufacturing footprint for opportunities to consolidate operations, thereby reducing overhead costs. Finally, we are implementing a nine-month salary freeze in North America and are reviewing discretionary spending in detail to cut back on operating expenses. We believe that our two primary North American sales channels, retail and wholesale, will both be negatively impacted by the economic downturn and by our customers’ inability to obtain capital to fund projects. We believe that a disciplined approach towards the use of capital combined with cost reductions to be achieved through the continued implementation of lean manufacturing and six sigma disciplines as well as our ongoing restructuring plan will help to partially offset any negative pressures to operating income. We expect these conditions to continue through the remainder of 2008 and believe they are likely to continue throughout 2009.